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In September of 2009 I was in a major car crash with two other vehicles. A driver ran a stop sign at 50 miles an hour, smashed into another car that skid into my lane and collided into me.
We all walked away from the accident, but the police officer told me if I didn’t swerve away from the driver’s side, I would have been instantly killed. All three cars were completely wrecked and were unable to be driven again. I traded in my first car to purchase this vehicle, which is now nothing more than scrap metal.
So being forced to go car shopping again was not exciting to say the least. I found out I was unprepared financially for an emergency situation like this. Purchasing another car was definitely not on my to-do list, as I was working to get out from under my consumer debt.
Benefits of car insurance
The one upside is that I had some equity in my vehicle after Youi car insurance sent me a check, so I was able to put some money towards the purchase of a new vehicle. I don’t like having to take out loans, but since I was in the midst of paying off debt I only had a starter emergency fund in place ($1,000) which I wasn’t going to touch.
So with this accident I was left with no car, only $6,000 cash but a fairly decent credit score. I found a new 2010 Scion TC, that stole my heart and I decided I just had to have it.
Fortunately, I was able to put extra towards the principle each month. Here are some of the best methods to pay off your car loan, or any type of debt even faster.
1. Make bi-weekly payments
Submit half the payments to your lender every two weeks instead of the regular monthly payment. This will accomplish three things:
- Less interest will accumulate, because your payments will be applied more often.
- You will pay an extra payment, because there are 52 weeks in a year, which equals 26 yearly payments (or one extra).
- Doing this for the duration of the loan could shave off several months.
Make sure to discuss this with your lender before making bi-weekly payments, because you might be penalized for any extra payments or paying off the loan balance early.
2. Round up the payments
Rounding up your payments is an effortless way to pay extra without even missing the funds. Just like making bi-weekly payments, you don’t need a lot of extra funds to knock a few months off the term of your loan.
For instance, my auto payment was $264.12, but I chose to round it up to $300, which is an extra $35.88 per month. After 12 months that’s an extra $430.56 (or almost two additional payments).
You could even go a step further and bump up your payments by an extra $50 or $100 per month. Over time that adds up to a significant amount, which will save you money on interest and shorten the term of your loan.
3. Look for “found money”
Anytime I sold clothes on eBay, sold books on Amazon, or chose to save extra in Digit instead of impulse buy, I used those extra funds to pay down my loan. Although the small amounts like $20 here and $12 there might not seem like a lot, they definitely add up.
If you have a small part-time job on the side that pays an extra $100 per month, put that toward the loan. Over the course of a year, that’s an extra $1,200.
4. Make one extra payment
If you don’t have the cash flow to commit to bi-weekly payments, you can achieve the same result by making one extra payment per year. Use money from a tax refund or bonus from work to help pay down your loan faster.
Or you can divide your monthly payment by 12 and add this amount to all future payments. For example, with my car payment I can divide $264.12 by 12 months and add $22.01 to each payment. Each payment would be increased to $286.13 equaling one extra payment per year.
5. Refinance your loan
This is one of the easiest ways to lower your payment, save interest, and pay off your loan in half the time (if you have semi-good credit, of course). Many local banks and credit unions are offering super-low interest rates on mortgage loans and car loans.
I was able to cut my 5.75% interest rate to a loan with 3.49% interest rate. Which was very worth the savings (and $75 loan fee) to me. I went from having to pay $1,413.22 interest over the life of the loan, to only $774.85 which is a $638.37 savings.
By leaving the automatic payments the same (paying the same amount as before), I was able to pay off my loan 3 months sooner, all without putting extra money towards it.
6. Take advantage of paperless
Sometimes additional discounts are offered when you sign up for auto payments and paperless statements. It saves the lender money by not having to follow up with paper billing and creates a seamless payment experience, so there are no late fees.
I was able to get an extra 0.25% off my interest rate since taking advantage of online bill pay and paperless statements.
How I paid off my auto loan early
The bottom line is that paying off any kind of loan or credit card debt early will save you money in interest and decrease the overall term of the loan. Just imagine what you could do with your extra money: save for retirement, start a freelance business or pay off other debts.
That is priceless. If everything still goes according to plan, I paid off my car loan in May 2013 and officially became DEBT FREE!!!