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:
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.