In many parts of the country, getting to and from work is virtually impossible without access to an automobile. If you have less than stellar credit and could only qualify for a high-interest car loan, don’t despair. There are ways to pay off that debt that can have you owning your car outright more quickly or at least paying less in interest.
One caveat: Before determining the best way to pay down your car loan, read your loan agreement carefully. Your lender may require a prepayment fee, which affects the amount you can save when paying down your loan.
Pay More Than the Minimum
Perhaps the easiest way to make a dent in your car loan payments is by paying more than the minimum each month. Every little bit helps to pay down the principal, but a technique called "rounding up" makes it easier to figure out how much you will take off the loan annually.
For example, if your monthly payment is $265, round it up to $300 by making an extra $35 payment. In one year, you’ll have paid off an additional $420 of the principal. If you took out a five-year loan, that’s $2,100 more you can take off over the loan’s life, and the car is paid off seven months earlier. If you can’t afford to round up every month, pay more than the minimum amount when you have the funds.
However, it is essential that any additional money goes toward paying off the principal, not interest. That’s why you must speak with a lender’s representative before making extra payments to ensure the money is used to pay down principal. Check your balance each month and contact the lender immediately if the extra money was not allocated properly.
Make Smart Use of Windfalls
If you receive an unexpected windfall, such as a tax refund, birthday cash or holiday bonus, use it to pay down a high-interest loan instead of splurging. In the long run, when your debt is paid off, you’ll be glad you did.
Make Twice Monthly Payments
Rather than pay your loan off monthly, as is typical, make a half payment every two weeks. What’s the advantage of that? Instead of making 12 payments annually, with this method you’re making 13 yearly payments. Over the course of a five-year loan, you’re subtracting five months of loan payments without spending additional funds.
Refinance Your Car Loan
Another option is refinancing your high-interest loan to one you can handle more readily. What you don’t want to do is take out another five-year loan, since you could end up making payments for much longer than under your current loan. Your credit score may reflect the fact that you have been paying off your current loan on time, so lenders are more likely to work with you to refinance your loan at a lower rate and for a shorter term.
- If you decide to throw extra money at the loan, tell your lender you want the extra money to go toward the principal on the loan. If you don't, the lender may apply the extra cash toward the following month's payment.
- Also, you can make two separate payments each month and make a notation on each such as "regular payment" and "pay toward principal only."
- Eyeball your car's sales contract to determine if there are early payment penalties. If there are, it may be worthless to pay the loan off early. For example, you may have to pay all the interest due under the original contract.
A graduate of New York University, Jane Meggitt's work has appeared in dozens of publications, including PocketSense, Zack's, Financial Advisor, nj.com, LegalZoom and The Nest.