7 Proven Ways To Pay Off Your Car Loan Faster

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Get more financial wiggle room by paying off your car loan early.

For many of us, getting an auto loan is unavoidable. The average price for a new vehicle continues to break records. In June 2022 the average transaction price was $48,043, a 12.7% increase from the year before. Even the used car market is competitive.

In other words, buying a new (or new-to-you) vehicle with cash is getting harder to do.

When you sign an auto loan contract with a lender, you agree to pay a monthly amount for the duration of the loan – plus interest – until it’s paid off in full. But most of the time, you could save a considerable amount of money if you decide to pay off that 84-month car loan in 72 or 60 months instead.

If you’re on a mission to be debt-free, there are plenty of good reasons to pay off the car loan early. Here are seven pay-off strategies to help you reach that goal faster.

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Why You Should Pay Off Your Car Loan Early

There are several perks that come with owning your car outright.

Save money on interest

Interest is the cost you pay to borrow money in addition to the purchase price, and it can add up quickly. When you make extra payments toward your principal, you save money on the amount of interest paid.

Using an early payoff auto loan calculator, a $20,000 car loan at a 7% interest rate would cost you $3,761 in interest with monthly payments of $396 over a five-year period. Increasing your monthly payment by $90 will save you $842 in interest over the term and help pay off your auto loan 12 months sooner.

Example: Paying more than the minimum on a 60-month car loan

  • Original loan: $20,000
  • Loan term: 60 months
  • Interest rate: 7%
  • Monthly payment: $396.02
  • Total interest paid: $3,761.44
  • Total amount paid: $23,761.44
  • Original loan: $20,000
  • Loan term: 60 months  (Paid in 48 months) 
  • Interest rate: 7%
  • Monthly payment: $396.02  + $90 
  • Total interest paid: $2,937.22 
  • Total amount paid: $22.937.22 

 Interest saved: $824.22 

Reduce your car insurance cost

Most banks and financing institutions require both comprehensive and collision coverage while you’re making payments on an auto loan. Although paying off your car loan won’t automatically reduce your car insurance premiums, you’ll have some money-saving options to explore, like dropping comprehensive coverage if you’re running an older vehicle.

Lower your debt-to-income ratio (DTI)

Debt-to-income ratio represents the percentage of your monthly income that goes toward monthly debt payments. Paying off your car loan means one less debt obligation, hence a lower (and better) DTI. This puts you in a better position to qualify for a mortgage or car loan.

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Reduce the risk of negative equity

When the amount you owe on the loan is higher than the value of your car, you have negative equity, or are upside down or underwater on your loan. This is risky because if your vehicle is totaled, insurance will only pay to replace your vehicle – not pay off your auto loan.

If you’re upside down on the loan, that remaining auto debt does not just disappear. The lender still needs to be paid, even without a car. This means that unless you have a GAP waiver or insurance policy, you’ll have to pay off this debt yourself.

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Experience financial freedom

Getting that recurring monthly payment out of the way may give your budget some breathing room and help you channel funds to other areas, such as paying off other debt faster or retirement savings. Plus, your now-lower DTI will help improve your odds of getting approved for other credit, like a personal loan or mortgage.

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7 Ways To Pay Off Your Car Loan Faster

While there is no one method that can guarantee success, these strategies are proven to help you pay off your auto loan before your term ends.

1. Make biweekly car loan payments

If you’ve consistently kept up with your monthly payments, it’s time to level up the payment frequency with biweekly or weekly payments. If you pay a loan every two weeks, it equates to 26-half payments or 13 full monthly payments in a year. This means you’re making one additional payment every year.

Paying loan installments fortnightly means you’re continuously reducing your principal, which in turn reduces the interest charged on the remaining balance

For example, let’s go back to our $20,000 loan. Making biweekly payments of $198.01 will pay off the 60-month loan in 54 months and save you $388.80 in interest.

Example: Monthly vs. biweekly payments

  • Original loan: $20,000
  • Loan term: 60 months
  • Interest rate: 7%
  •  Monthly payment:  $396.02 
  • Total interest paid: $3,761.44
  • Total amount paid: $23,761.44
  • Original loan: $20,000
  • Loan term: 60 months  (Paid in 54 months) 
  • Interest rate: 7%
  •  Biweekly payment:  $198.01 + $198.01 
  • Total interest paid: $3,372.63 
  • Total amount paid: $23,372.63 

 Interest saved: $824.22 

2. Use windfalls to pay off principal

You may get a chunk of cash along the way, say through a tax refund, gift, or bonus, you could use toward your loan repayment plan. A large payment toward your loan could significantly reduce your loan balance, which translates to a lower per diem interest accrued. Just be sure the extra payment is going toward the principal and not the interest alone.

3. Make snowball payments

The debt snowball and avalanche methods are two repayment strategies you can use to prioritize eliminating your debt, which can help you allocate more toward your car loan.

The snowball method focuses on paying off the low-balance debt first and working your way up until you’ve paid off your largest balance. In this case, you’ll continue meeting your payment obligations on all debts and allocate any extra cash to pay down your car loan.

You could also incorporate the debt avalanche method that focuses on paying off the highest-interest debt first. The idea is to get off your most expensive debt balances and continually reduce the interest you need to pay.

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4. Round up your loan payments

Most car loan payments are fixed for the life of the loan. Rather than sticking to the minimum monthly payment schedule, rounding up could help you pay off your loan amount faster.

Depending on the capacity, you could round up monthly payments to the next $10, $50, or $100.

5. Review any car loan add-ons

Car loan contracts may include add-on products recommended by your dealer to enhance your vehicle ownership experience. Common add-ons include GAP, extended warranties, and vehicle service contracts. Many, but not all, may issue refunds if canceled within a certain period.

Each of these products serves its own purpose so be sure to assess your needs to determine which add-ons to opt out of. For example, canceling GAP means you take full responsibility for the difference between what your insurance company pays out and your remaining loan balance if your car is totaled or stolen.

6. Refinance your car loan

When you refinance your car loan, the old debt is paid off by the new lender and the new lender issues a new loan with different (and generally better) terms.

There are several ways to save money over the life of the loan when refinancing: You can get a lower auto refinance interest rate and keep the same loan term. You can shorten the loan term to pay it off even faster, but that usually comes with a higher monthly payment.

Bad credit? On-time payments can improve your credit score, so if you didn’t qualify for a great rate at the dealership, try again in a few months. Shop around with multiple banks and credit unions or try an auto refinance marketplace with a large lender network to do the work for you.

7. Make money off your car

Sometimes, your own car might be your quickest ticket to paying it off — by literally making money off your car.

You could rent it out when you’re not using it or join a ridesharing service to earn an extra buck that will get you closer to an auto loan payoff.

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When You Shouldn’t Pay Off Your Car Loan Too Early

Paying off your car loan early carries its fair share of benefits, but there are certain situations where it’s not a good idea. Here are some reasons why you may want to postpone the idea.

Your loan has repayment penalties

Some auto loan contracts include prepayment penalties, fees you pay to a lender if you pay part or your full loan balance early. This is not very common. However, if you think you have a subprime or predatory car loan, you’ll want to read the fine print before making extra payments or refinancing.

It could temporarily hurt your credit

Your credit score may take a small hit if you pay off your car loan early. Paying off debt lowers your total credit mix and open accounts. This means closing out your auto loan account could temporarily impact your score.

While you’ll get credit for the one-time payment, active accounts carry more weight on your credit score than closed accounts. Luckily, this hit is only temporary and your score should be back to normal in a few months.

You can’t afford it

If you’re looking to pay off your car loan early but don’t have the funds to do it, then you’re stretching your budget too far. You don’t want to put yourself in a position of not being able to meet other financial obligations, like rent or other bills.

Should You Pay Off Your Car Loan Early?

Paying off your car loan early is a great idea if you’d like to save on the total amount you’ll pay. Of course, how soon you can get it done will depend on your budget, loan interest rate, and other financial goals.

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About The Author


Caitlin Wrights

Caitlin is a former finance executive and contributor with more than 10 years of experience delivering impactful content and messaging solutions to support midmarket and Fortune 1000 companies. She has written hundreds of articles covering personal finance, insurance, investing, mortgages, and the automotive industry for publications like The Balance, GreedyRates, MoneyWizard, and more.


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