The average monthly car payment for a new vehicle is $554 and it’s $391 for a used vehicle. Ouch. That’s a lot of money to pay for years at a time when you could be living without a car payment. We’ll give you some tips to help pay off your car loan.
Not having a car loan is the best feeling because it’s a major bill you don’t have to worry about paying. When I financed my car 5 years ago, my monthly payment was around $233. While that was below the average used car payment, paying that amount still stung each month.
Thankfully, I was able to pay off my car loan in 18 months instead of the 5-year term and free up a ton of extra cash flow. If you’re looking to pay off your car loan ahead of schedule, here are some tips and tricks you can start implementing.
Find Out How Much Your Loan is Costing You Per Month
Your car loan is more than just a monthly payment. The amount also includes interest which can eat away at your payment amount. If you want to pay off your car loan ahead of schedule, you’ll need to find out how much your loan is costing you each month in terms of interest.
For example, when I got my car loan, I had a ridiculously high-interest rate of 15.5%. While my monthly payment seemed reasonable, at least $100 was going directly toward interest each month. That money wasn’t helping me pay down the balance and could have basically just been cash thrown out the window.
Once you find out how much of your payment is going toward interest each month, you can determine how much you need to pay to get ahead of it. In my case, paying an extra $100 each month was a good start.
One of the easiest things you can do to pay your car loan off ahead of schedule is round up your payments. If your payment is $429 each month, see if you can round it up to $450 or even $500.
Remember, everything additional that you put toward your loan can go directly toward the principal balance. Think about it this way, with each extra payment (even if it’s small) you will shave off months of your repayment term which can easily add up to years.
Make a Payment Every Two Weeks
If you get paid every two weeks, try to make a car payment each time you get paid. You can split your minimum payment in half, or pay a little extra each time.
This is one of the easiest ways to trick yourself into making an extra payment or two each year. Since some months are longer than others, you will have instances where you get paid three times instead of two.
Using windfalls wisely when you’re paying off debt is so important. Pay attention to any extra unexpected money that you receive so you can throw it toward your car loan.
This can be work bonuses, a tax refund, credits received after canceling a service, birthday gifts, and anything else.
Over the holidays, some of my freelance clients send gifts or bonuses my way. I don’t expect to receive anything but if I do, I count the windfall as a win and try to do something productive with the money.
Budget For Extra Payments
Making regular extra payments is the key to paying off your car loan early. Review your budget and see where you may be able to free up expenses so you can put extra toward your loan. Maybe you can switch to more affordable car insurance, get rid of cable, start bringing your lunch to work, or get rid of some unused subscriptions.
When I first started making extra payments on my car, I was only able to scrape up an extra $70. Still, this was super helpful and over time that amount grew. Plus it helped build the momentum and motivation I needed to keep going.
Earn Extra Money
If you’re unable to cut any more expenses, explore your option of earning extra money. Consider your skills and interests in terms of doing a side hustle or ask if you can pick up overtime at your job.
Depending on what you do at work, you can try to offer that service on the side as a freelancer. I used to work at a web design company and I always felt like some of our designers and programmers could make a killing if they offered that service on the side.
You can also go a completely different route and choose a passion project like photography, consulting, or working with kids or animals.
If you’re looking to make some quick cash, consider side hustles like driving for Uber or Lyft, delivering for Door Dash, tutoring online, or virtual assistant work. Whatever you choose, set a clear income goal for how much you want to make. Then, work backward and determine what you need to do (and when) to earn that extra money each month.
I chose to start freelance writing for extra money because it was something I enjoyed and I was able to do it from home. Eventually, I was able to put $100 extra toward the debt then I doubled my $233 monthly payment. Some months, I even made triple or quadruple payments due to a combination of cutting expenses and making extra money.
Over time, I eliminated my car loan using these tricks and so can you. It just requires some discipline, flexibility, and creativity to make it happen.
Have you ever tried to pay off your car loan ahead of schedule? What tricks and strategies do you think would work best for you?