Debt helps facilitate major purchases, but it’s still an obligation that carries risks. Our partners cannot pay us to guarantee favorable reviews of their products or services. Of course, the offers on our platform don’t represent all financial products out there, but our goal is to show you as many great options as we can. We’re the Consumer Financial Protection Bureau (CFPB), a U.S. government agency that makes sure banks, lenders, and other financial companies treat you fairly.
Other times, lenders may apply extra funds to next month’s payment. Bankrate.com is an independent, advertising-supported publisher and comparison service. We are compensated in exchange for placement of sponsored products and services, or by you clicking on certain links posted on our site. While we strive to provide a wide range of offers, Bankrate does not include information about every financial or credit product or service. You might want to pay off your car loan faster if you want to sell it or trade it in so you build equity in the car.
Increasing your monthly payment could be a smart way to save yourself money in the long run. The Bankrate Auto Loan Early Payoff Calculator will help you create the best strategy to shorten your car loan’s term. If you’re curious about how to pay off a car loan faster, regardless of principal-only payments, the work begins before you even send in the first payment. When you’re negotiating your car purchase, use your down payment to cover the taxes instead of financing them. You can also put extra money down to reduce your overall car loan amount. In addition, opting for a cheaper car can also help you pay down the amount faster.
- You should have enough savings in an emergency fund before paying all cash for a vehicle.
- While this may sound like a pipe dream, more frequent principal payments can turn that goal into a reality.
- If you have the means, making principal-only payments on your auto loan is the most effective way to save on your car loan.
Learn about how to get the best deal on your next auto loan and save. It is better to pay the principal so you can reduce the amount of interest you pay in a simple interest car loan. If you can consistently pay as if you had a 60-month payment, you’ll pay off your loan a year early. For example, a $40,000 loan at 5% for 72 months is a $644 month payment. If you calculate the same loan for 60 months, it’s a $755 payment, but you’ll save $1,091 in total interest.
Another way to save on interest without paying off your car loan
Lenders charge interest to increase their returns, but this interest acts as a barrier that makes it more difficult to reduce your principal. Lowering your principal quicker than the traditional payment schedule can help you avoid some of the interest payments. But make sure you allocate extra payments in a way that saves you the most money. If your lender won’t apply extra payments to your principal, you won’t benefit as much.
Want to refinance your auto loan? See if you pre-qualify.
Paying off your car loan early can actually decrease your credit score by a few points. Every lender is different, but many will simply see the extra money and go “gee, thanks! But believe it or not, there are also big advantages to staying on your repayment schedule — even if you’re capable of paying off your loan in full. Affording a car is not the same as affording a reliable car with plenty of miles left under the hood. In other words, if you have long-term aspirations for your next vehicle, it’s probably better to go the financing route versus buying a clunker that’s on life support just to avoid debt. Regardless, dishing out tens of thousands of dollars can drain your liquidity and potentially jeopardize your financial stability.
More frequent principal payments speed up your path to repaying the entire loan. Interest payments represent the return banks make from incurring the risk of giving you a loan. Making interest payments protects your balance from growing, but interest payments do not get you closer to fully paying off your vehicle. This means if you had a 72-month car loan with a $15,000 balance at a 10.19% interest rate, securing 5.59% on a car refinance loan would reduce your monthly payment by $126.74. Some lenders may charge a prepayment penalty fee if you pay the loan off early.
How to Pay Down Loan Principal
We break down how car financing works into four easy-to-understand steps. If you are still building up your emergency fund you also have the option to put the extra money into a savings account. You can obviously mix and match, tossing in $50 here and there and choosing to make biweekly payments rather than monthly.
As long as your lender doesn’t have any restrictions (like charging a prepayment penalty), you can pay off your car loan as soon as you want without penalty. Just make sure to take into account your current budget and cash flow needs in the near future. Most lenders clearly state your monthly payment when you originate your car loan. You can reference the paperwork you received to ensure you pay the right amount. In addition, you can also call your lender to verify the exact amount. The amount of prepayment penalties and how they work can vary by lender.
If that is the case, it may not make sense to pay off the loan early. But if you can land an auto refinance loan with competitive terms and interest rate, it may be enough to cover a prepayment penalty and still save money. paying the principal on a car loan For example, a 60-month, $15,000 car loan with a 5% interest rate will have $1,984 of total interest payments over the life of the loan. On the other hand, paying off a car immediately avoids this cost altogether.
Many or all of the products featured here are from our partners who compensate us. This influences https://adprun.net/ which products we write about and where and how the product appears on a page.
Before making extra payments, ask your lender about their procedures for principal-only payments. Some lenders have specific procedures or payment portals for extra principal payments. If you’re behind on your payments, any extra payment will go toward bringing the account up to date. This is the interest rate and other fees incurred for borrowing the money. While you shouldn’t pay less than what you agreed to for the loan, it’s OK to pay more.
If you pay off your car loan’s principal early, you get out of debt sooner. Some auto lenders may charge penalties for paying off the loan early, but in all cases, you are debt-free sooner. Payment history is the largest credit score category, making up 35% of this critical number. When you pay your auto loan on time, this can help raise your credit score.