It’s a good practice to stick to your payment period when you get a car loan. This will save you from mounting interests and conflict with your lenders. But an even wiser thing to do is to pay off your loan earlier.
Why Should You Pay off Your Loan Earlier?
Paying off your loan earlier will save you money from interest rates, but that is not the major reason. Paying off your loan earlier will mean earlier freedom for you to do what you want with your money.
When you get a loan, it costs you more than money. It also costs you financial freedom. According to Experian Automotive, a research agency that conducts researches on vehicles, the average monthly loan payment for brand new cars in 2014 was $482.
When you have monthly payments, it costs you the freedom to use the money for other purposes. How else can you spend $500 a month? If you invest that amount in the stock market for just 5 years in 6% interest, it can grow to about $35,000. So paying off your car loan earlier gives you more freedom to invest your money elsewhere.
With that said, what are the things you can do to pay off your loan earlier?
1. Make one large extra payment every year. Your 13th-month bonuses can very well serve this purpose. You can also save up for this extra payment.
For example, if you have a $10,000 loan payable over 60 months at 10% interest, and you make an extra payment of $500 per year, you can finish paying off the loan in 49 months. This will save you money on interest and will give you your freedom that is 11 months earlier than planned.
2. Round up your payment. Instead of paying the exact amount in each monthly payment, round your payment up. This is an easy way of shortening your payment period. For instance, in the above sample scenario, the monthly payment amounts to $212.47. If you round that up to $250 a month, instead of paying it off in 60 months, you’ll get to finish it in 47 months. This will also lessen the interest you’ll pay.
3. Pay biweekly. Car loans will require you to pay once every month so you would normally have 12 full payments annually. However, since there are 52 weeks in a year, you can have one extra payment per year if you will pay half payments every two weeks. So instead of having 12 full payments, you’ll have 13 full payments in a year. This will deduct several months from your payment period.
4. Don’t skip payments. While some lenders encourage skipping your payments a few times, this actually extends your payment period. Each skipped payment can add at least a month. Skipping four to five payments in the entire loan period and you’ll have six more months in your car loan term. This prolongs your agony and adds up to interest rates. So pay biweekly and never skip any payment.
Now imagine with me if you did all these four tips – how many months can you know off from your payment period? Shortening your payment period is doable. It just takes careful planning, research, discipline, and commitment to your goal.