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Gary Wollenhaupt
Gary Wollenhaupt is a freelance writer specializing in planes, trains, automobiles, ships and other cool industrial stuff. People have been paying him to put the right words in the right order since 2003.
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Sarah Fisher
Sarah Fisher is a deputy editor at LendingTree. She has several years of experience as a personal finance writer and editor, and previously worked at The Balance and SmartAsset.
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Janet Schaaf
Janet Schaaf is a freelance writer, editor and proofreader who considers reader advocacy to be her calling. After taking a few roads less traveled, Janet completed a bachelor’s degree in English Literature from the University of Missouri-Kansas City, with English Department Honors. She has been correcting grammar and checking facts since she could string a sentence together. For the past three years, Janet has focused on making personal finance topics understandable and relatable. Loan terms and credit card agreements can look overwhelming, but understanding what you’re agreeing to is paramount in grasping the impact debt can have on your life.
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The average new car loan is just over 68 months, and loans are available for up to 96 months, which means you could be making car payments for eight years. Long-term financing means more interest payments, so paying it off early can save you money over the life of the loan.
While that may seem like a great idea, make sure you know the ins and outs of your loan and your financial situation first.
In many cases, paying off your car loan early will lower the amount you pay in interest. First make sure you know your current balance and APR. Then, review the loan terms to see how your lender handles extra payments and prepayment penalties.
When it makes sense to pay off your loan faster
- You have extra cash: You can put extra cash from a tax refund, a work bonus or another windfall towards the loan. Ask your lender if you can put the money towards the loan principal.
- You want to get out of debt: Paying off debt may help reduce stress and can free up money for other purposes. If you’re thinking about buying a house, paying off the car loan early could help by giving you a better credit utilization ratio and debt-to-income ratio.
- You have a high interest rate: If you have a high interest rate, you could refinance your car loan at a lower rate or just pay off the loan faster. That way you won’t have to pay as much in interest.
When it doesn’t make sense to pay off your loan faster
- Your lender charges a prepayment penalty: Compare the prepayment penalty with the amount of interest you could save. If the interest savings don’t outweigh the prepayment penalty, it would make sense to stick to the loan schedule.
- Your other debt has higher interest rates: If your highest-interest debt is a credit card, personal loan or something else, put any extra cash towards that before focusing on your car loan. That way, you’ll save more on interest payments.
- You can’t afford it: Keep up with monthly bills like rent, utilities and any other regular debt payments. If you don’t have an emergency savings fund, you may consider putting money there before paying off the car loan.
Use our auto loan calculator to see how much you could save by paying off your car debt faster.
5 ways to pay off a car loan faster
Paying off debt can provide you with peace of mind and save you money. You don’t have to do it all at once — here are ways to pay off your car loan faster to reduce the amount of interest you pay.
1. Consider refinancing your current car loan
If interest rates have gone down or your credit score has gone up since you took out the original loan, consider refinancing or taking out a new loan to pay off the old one. Make sure any refinancing fees don’t wipe out your interest savings, and consider a shorter loan term to reduce interest costs.
2. Make biweekly instead of monthly payments
By changing how often you make payments, you could make one extra payment a year. There are 52 weeks in a year, and not every month has four weeks. So if you pay 50% of your car payment every two weeks, you’ll end up effectively making one extra payment over the course of the year. Below is an example of potential savings using this method on a $25,000 loan at 6% APR with an initial loan term of 72 months.
| Monthly payments | Biweekly payments | |
|---|---|---|
| Payment amount | $414.32 | $207.16 |
| Payments in a year | 12 | 26 |
| Annual payment | $4,971.84 | $5,386.16 |
| Total interest paid | $4,831.20 | $4,335.54 |
| Interest savings | N/A | $495.66 |
| Payoff | 72 months | 65 months |
3. Round up your payments
Round up your payment to the next $50 or $100 each month. You set the amount, so you can vary it based on your cash flow for the month. If you do it consistently, you can cut months off the life of the loan.
If you borrow $25,000 at a 6% APR for 72 months, the monthly payment is $414.32 per month. If you add $50 per month, you’ll shorten the loan term by 9 months and save $633.42 in interest.
4. Find extra money for payments with a budget
When budgeting to pay off debt, first determine if you can reduce the amount you spend on non-essential items. If you get a tax return, bonus or a cash gift, put the funds toward the car loan. It can be tough to put off spending money on more enjoyable things, but paying off the loan faster will free up the budget for more enjoyable expenses.
If you get a raise, commit it to the car loan rather than losing the income boost to lifestyle creep. Even small boosts in the monthly payment will make a difference over time.
To meet your goal, you can look for ways to make more money. Pick up extra work if you are able to, or sell or rent personal items.
5. Review your car add-ons
Some of your loan repayments may be going to extra fees and dealer add-ons that were rolled into your loan contract. Dig into your loan paperwork and sales documents to see if you are paying for things like:
- Guaranteed asset protection (GAP) coverage
- Service contract
- Extended warranty
- Tire and wheel warranty
- Exterior and interior protection package
Reach out to your dealership or lender to see if you can cancel any unwanted add-ons. You may be able to get a partial refund or credit for some of the payments you have already made.
If there are no prepayment penalties, you can pay off a car loan as fast as you want. If you’re refinancing, you should wait 60 to 90 days for the title and financing paperwork to be completed for the original loan before you can go forward with the new loan. If you’re refinancing, it might be wise to wait six months to a year for your credit score to recover from the original car loan.
After your car is paid off, the lender will send a new title in the owner’s name or a statement of lien release, depending on your state. In states where the lender holds the title until the loan is paid off, the lender will send the title marked clear of any liens. In states where you hold the title, the lender will send a notice of lien release, and the owner can have a new title issued when needed. Some states are using an electronic lien and title system, and the release is stored digitally and can be accessed at any time.
Pay the principal first whenever you can. The monthly interest charges are based on the principal you owe each month. Reducing the principal will decrease the interest you pay each month. With many lenders, your loan has to be current on interest and other fees before your payments will be applied to the principal.
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- Should you pay off your car loan faster?
- 5 ways to pay off a car loan faster
- Frequently asked questions
