It’s no secret that cars are expensive. According to an Experian report CNBC cited, the average car loan is $27,430 and the average monthly payment is around $350 per month.
That’s a lot of money to spend on your car especially if you’re not living in it. Not to mention, cars come with a ton of other expenses like gas, full coverage insurance, maintenance, and repairs.
I should know. When I first financed my car, my loan was nowhere near $27,430 but I still spent almost as much money on my car as I did on living expenses the first year. That’s right. With a car loan, my car was the second highest expense out of everything else in my budget.
What really makes costs rise when you finance a car is the interest rate. With an average or high-interest rate, you’ll be spending thousands of extra dollars over the repayment term.
This is a key reason why you should aim to pay your car loan off faster. Here are 5 steps to follow if you’re trying to get rid of your car loan ASAP.
1. Figure Out How Much You’re Paying in Interest Each Month
This is the first step because it’s important to find out how much money is actually going toward paying off your car loan each month. Even though my car payment was lower at about $233 per month, I had a high interest rate of 15.5%.
I paid the minimum payment for a few months, then I realized that my balance was hardly moving. When I took a closer look at my statements, I realized that around $100 of my monthly payment was going straight toward interest and not even being put toward the car.
That’s over $1,000 of my hard-earned money not going toward my loan or anything to benefit myself for that matter.
It’s crucial that you know what your interest rate is and how much of your money interest is eating up each month early on.
2. Consider Refinancing
If you realize that your interest rate is super high, you might want to consider refinancing your loan. You might want to wait until you’ve made a few payments on time and allow your credit score to increase. Then, you can start getting quotes on a refinance so you can lower your interest rate.
With a lower interest rate, more of your monthly payment will go toward the principal balance instead of interest meaning you can pay your loan off faster.
Keep in mind that refinancing will add an extra inquiry to your credit report. Also, focus mainly on lowering your interest rate as opposed to lowering your monthly payment. Lowering your minimum monthly payment may just stretch out your term, causing you to take longer to pay off your car.
3. Lower Your Other Expenses
Next, you want to focus on lowering some of your other expenses to free up more room in your budget so you can make extra payments on your loan. I know it sounds hard to imagine making extra payments when you have a $400 minimum monthly car payment. But, even if you start out making extra payments of $20 each week, it will pay off and allow you to get rid of your loan sooner.
Go through your budget line by line and determine which expenses you might want to cut. Can you stop dining out as much and start packing your lunch for work most days? Can you shop around and obtain lower insurance premiums?
Maybe you can get a roommate to help lower your living expenses? Or lower your entertainment spending? Can you hold off on buying new furniture? Can you live without cable?
If the answer to some of those questions was yes, you can certainly start cutting expenses to free up more money that you could put toward your car loan.
But just reducing or completely cutting out a few of those basic expenses, you should easily be able to free up $100-$200 per month.
Sometimes it may seem like a sacrifice, but consider it as a temporary change until you pay off most of your car loan.Paying off your car loan faster means you'll be able to put your money toward other things sooner… Click To Tweet
4. Focus on Earning Extra Money
What really helped me pay off my 5-year car loan in only 1.5 years was earning extra money on the side of my main job.
You can also get a second job temporarily. Or try something more flexible like freelancing, dog walking, babysitting, or driving for Uber or Lyft.
My husband started driving for Uber last year and he uses the extra money he earns to pay off his car loan. Most months, he makes 1-2 extra payments on his car thanks to the extra money he earns from Uber. He should have the entire loan paid off in as little as two months.
Imagine that you were able to cut some of your expenses and free up $100 extra each month. Then, you get a side hustle that brings in $250 in profit each month. That’s $350 of extra money that you can put toward your car payment monthly. This adds up to $4,224 in extra payments for the year.
Earning extra money combined with saving extra money can allow you to make double payments on your car loan each month. When you make double payments, you can pay your car off in half the time.
5. Use “Found” Money
If you don’t have the time or energy to side hustle or work extra hours so you can pay off your car loan fast, try to make use of the extra money you already have or come across.
If you receive an annual raise, you can pocket the extra money and put it toward your car loan. You can also use your tax refund and other gift money to pay off your car loan faster as well.
Paying off any type of debt ahead of time requires a lot of hard work and discipline, but it’s worth it in the end.
By paying off your car loan early, you can save more money over time, lower your expenses, and be able to enjoy your car to the fullest. Cars depreciate so fast and don’t last forever, so it’s best to avoid spending several years paying off the loan.
Do you have a car loan? Is paying it off fast one of your priorities right now? Why or why not?