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Four ways to pay off your car loan faster

Four ways to pay off your car loan faster

Is your car loan weighing down your finances and preventing you from fully enjoying your new wheels? Not only can paying off a loan faster help cut down on your expenses, but it may help you to decrease the amount of interest you’d otherwise pay over the life of the loan.

There are several ways you may be able to take back control and pay off your car loan faster, including:

Extra repayments

Assuming your car loan lender allows you to make extra repayments without penalty, this feature is one of the easiest ways to pay off a car loan faster. You’ll also enjoy the added benefit of reducing the overall interest you otherwise would have paid by chipping away at the loan principal faster.

Perhaps you’ve got cash to donate as a lump sum, such as from a tax return or bonus, or can commit to increased ongoing payments. Either way, making extra repayments on your car loan may help reduce the loan term, freeing you from this debt ahead of schedule.

A balloon payment

A common car loan option offered by dealers, a balloon payment allows borrowers to make smaller monthly repayments over a shorter loan term. Then, at the end of this shorter loan term, you agree to make a one-off lump sum repayment on the remainder of the loan.

The lump sum payment is generally a significant portion of your car loan, so it’s important that borrowers can budget for and afford this final repayment before they apply. If you’re looking for a faster car loan, this is one option that may suit borrowers who will have the funds available to pay off the lump sum or intend to sell the vehicle and use the profits to pay off the loan.

Increasing payment frequency

Another way borrowers may be able to pay off their car loan faster is to increase the payment frequency. Car loan repayments are either monthly, fortnightly or weekly, with most borrowers opting for monthly repayments.

If you chose another option than monthly, you may potentially make an extra month’s worth of repayments. For example, if your monthly repayments were $800 you would pay $9,600 a year. But for fortnightly repayments you would pay $400 over 26 weeks, and weekly repayments you’d pay $200 over 52 weeks; meaning you’d pay $10,400 a year. Use our car loan calculator now to determine how much you may save by refinancing.

This option only works if your lender allows the fortnightly repayments to be exactly half the monthly repayment amount. Be sure to check with your car loan lender what the estimated repayments would be at different frequencies before you opt for this.

Refinancing to a shorter term

Finally, one option car loan borrowers may have to pay their debt faster is to consider refinancing to a shorter-term loan. This option does come with its own risks though, including potential break fees if you’re on a fixed loan, and making higher repayments due to shortening your loan term.

If you had a $20,000, 5-year car loan at a rate of 7 per cent, your repayments would be $397 a month. By refinancing to a 3-year car loan with the same loan balance and at the same interest rate, your repayments would be $618 a month. You would shave two years off your original loan term and save $1,529 in interest charges.

Keep in mind not every car loan provider allows borrowers to make extra repayments or refinance a fixed loan without facing a fee. Be sure to check with your lender and read the terms and conditions of your loan before proceeding.

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Fact Checked -

This article was reviewed by Personal Finance Editor Georgia Brown before it was published as part of RateCity's Fact Check process.

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Learn more about car loans

What is a loan term?

The loan term is the amount of time the lender gives you to repay the car loan. For example, if you take out a $20,000 car loan with a five-year loan term, you would be expected to pay off the entire $20,000 (plus interest) within five years.

How do you get a car loan?

There are four different ways you can get a car loan. You can go straight to a lender. You can get a finance broker to organise a car loan for you. You can get ‘dealer finance’ – which is when the car dealer organises a car loan for you. Or you can organise your own car loan through a comparison website, like RateCity.

Whichever method you choose, you will need to provide proof of identification, proof of income and proof of savings. So you may be asked for any combination of passport, driver’s licence, bank statements, payslips, tax returns and utility bills. You might also be asked to provide proof of insurance.

What is a loan-to-value ratio?

The loan-to-value ratio, or LVR, is a percentage that expresses the amount of money owed on the car compared to the value of the car. For example, if you take out a $15,000 loan to buy a $20,000 car, you have a loan-to-value ratio of 75 per cent. Loan-to-value ratios change over time as you pay off your loan and your car depreciates in value. For example, two years later you might now owe $10,000 on your car, which might now be worth $15,000. In that case, although there would still be a $5,000 difference between the size of the outstanding loan and the value of the car, the loan-to-value ratio would now be 67 per cent.

What is a dealership?

A dealership is a car yard or a place where cars are sold.

Can you refinance a car loan with the same lender?

You may be looking to refinance your car loan to get lower interest rates or reduce the total monthly amount you have to pay. Often, this leads to the question ‘can I refinance a car loan with the same bank?’

While it’s always worth shopping around for a better deal or at least to compare offers from other lenders, you can sometimes refinance to a different loan with the same lender. It may be simpler,  as the lender already has your details and knows your repayment history. 

Having said that, knowing the terms offered by other lenders may help you negotiate a better deal with your current lender.

What is a car loan?

A car loan, also known as vehicle finance, is money that a consumer borrows with the express purpose of buying a vehicle, such as a car, motorbike, van, truck or campervan. Car loans can be used for both new and used vehicles.

What is vehicle finance?

Vehicle finance, also known as a car loan, is money that a consumer borrows with the express purpose of buying a vehicle, such as a car, motorbike, van, truck or campervan. Vehicle finance can be used for both new and used vehicles.

What is dealer finance?

Dealer finance is a car loan organised through a car dealer – as opposed to car loans organised by a finance broker or directly by the lender.

Should I service my own car?

There are also costs associated with vehicle ownership, such as paying for petrol and the obligatory ongoing maintenance. But should you cut down on costs by servicing your own vehicle?

If you’re considering getting out the tool box, spanner, and grease-laden towel, you need to carefully weigh up the risks and benefits. A trained mechanic will need to complete certain tasks, while you may be perfectly capable to handle other aspects yourself.

If you’re short on time, it may be worth paying for the convenience of a full vehicle service. However if you’re trying to slash your expenses, there are some basic maintenance tasks that you can complete yourself.

You should call a mechanic if you’re unsure about a vehicle maintenance task you’re about to take on. However there are a number of maintenance tasks that you may be able to complete with your own two hands including:

  • Replacing your car battery
  • Changing the oil
  • Replacing worn windscreen wipers
  • Replacing blown fuses

Remember to keep your car’s body in good condition, by washing and applying a protective wax on a regular basis, too.

Always check your car warranty agreement as some new car purchases come with an extended car warranty provided your services are conducted at the vehicle service centre where you purchased the car. In these circumstances, you may find the service fee is capped, alleviating some of the maintenance woes.

What are loan repayments?

Loan repayments are the regular payments you make to pay off your car loan. Loan repayments generally occur on a monthly basis, although many lenders will also give you the option of making fortnightly or weekly loan repayments.

Where can I get a student car loan?

Student car loans are not a necessarily a product in and of themselves, but what you may be looking for is a guarantor car loan.

A guarantor car loan has a third-party act as a form of guarantee for your loan application, telling the bank or lender that if you default on your loan, someone will pay the loan repayments.

Going guarantor on a car loan is no new thing, and before internet-based credit scores, guarantor car loan applicants would apply for loans with a guarantor or property owner who could vouch for the person borrowing the loan.

To get a guarantor car loan, you’ll need someone willing to act as a guarantor for your car loan.

What is a secured car loan?

A secured car loan is a loan that is connected to a form of security, or collateral. Generally, the security for a car loan is the car itself. If you fail to repay the loan, the lender might seize your car, sell it and then use the proceeds to recover their debt.

What are repayments?

Repayments are the regular payments you make to pay off your car loan. Repayments generally occur on a monthly basis, although many lenders will also give you the option of making fortnightly or weekly loan repayments.

How to find a great car loan

Historically, finding a great car loan would require excess research ranging from visiting an excess of websites or making phone calls, but technology has moved on. Using RateCity, Australia’s leading financial comparison service, you can check out great deals from a range of lenders on the one site.

To start, select the amount you want to borrow and the length of the loan, narrowing your search to show just fixed or variable interest rate results.

Once you’ve indicated your search criteria, you’ll see an immediate list of lenders, ranked by interest rate or application fees. You’ll also be able to view the monthly repayment amount for each result, helping you to know what you can afford.

Up to six products can be compared side-by-side, complete with more information about each car loan, giving you more information about your options.

When comparing your car loan options, it’s ideal to keep in mind some points find a great car loan for your needs. Consider the following:

  • Choosing a low interest car loan can reduce costs
  • Selecting an option with low fees and charges is ideal, because these can really add up
  • Be aware of penalties, such as early exit penalties if you pay off the loan sooner than expected
  • Consider the features that best suit your situation

There are many ways to ensure that you get a great car loan. Ultimately, you’ll end up with the best deal by doing your research and selecting the most suitable product for you.