Pay off your car loan faster
Posted on 02 February 2017
If you have recently bought a car, then there’s a good chance you have a car loan. Car loans are an important tool to give us the funds we need to get on the road. But it’s all too easy to set up your car loan and then forget about it for a few years until it’s finally paid off.
If you want to get the most from your car loan, we recommend carrying out an annual review. Taking the time to sit down and check your budget every 12 months or so could help you to identify ways to pay off your car loan faster. Faster repayment means that you get access to your cash again sooner, and you also reduce the amount you will pay in interest across the life of the loan.
Sound appealing? Then you might like to check out our five steps to paying off your car loan faster. They are packed full of smart ways to reduce the life of your loan and make the most of the money you are putting into it.
1. Time to refinance?
Not all car loans are flexible to you changing your payments or paying more. Even if you like the sound of our suggested ways to get rid of your loan faster, you might find that your car loan has penalties or fees that are incurred if you change your repayments.
Don’t be disheartened. You might just need to renegotiate your car loan before you can proceed to make changes. Refinancing your loan could give you the opportunity to reduce your interest rate; increase your repayment rate; change the restrictions around lump sum payments; or potentially pay off a lump sum and refinance for a smaller amount.
The first step to understanding your options is getting hold of your settlement balance. You can do this with a phone call to your provider. Once you have your balance you can explore your options and work out how quickly you could really pay off your loan.
2. Increase the rate of repayment
Most loan providers offer monthly repayments but the fact is that’s not always the most convenient frequency to use. If you receive your salary weekly or fortnightly, then fortnightly payments are much easier to manage.
The good news is most providers allow you to repay fortnightly. And if you split your monthly payment in two, and use that to calculate your fortnightly repayment level, then you will be making an additional month of payments every year.
So if your car loan is on a five year term, you could expect to pay it off five months earlier than you expected. It also results in less interest for you to pay across the life of the loan.
3. Increase the size of your repayments
If you worked out a budget when you set up your car loan, you probably calculated exactly what you could afford to repay on a regular basis. However, once you’re paying your car loan off it’s not uncommon to discover you actually have more money available.
Even a small addition to your repayment amount can have a big impact across the life of the loan. If you are able to push your budget further and round up your repayments, you could find it yields big results.
Let’s take the example of a $10,000 car loan with a 10% rate of interest over 60 months. With a standard repayment level of $212.47 you will pay $2748.23 in interest over the life of the loan. Round up your payment to $250 and you can reduce your interest by $533.54 and enjoy having your loan repaid 12 months earlier.
4. Make some additional payments
Take some time to review your finances and always put additional funds on the loan with the highest interest rate. Once you’re sure you want to put more money on your car loan, you can choose the way that suits you best.
If you have enjoyed a windfall or find yourself with some spare cash, then you may decide to make a single payment. Alternatively, if you have an annual bonus or an additional stream of income you may choose to make multiple or annual payments.
5. Avoid skipping payments if you can
Most car loan providers will offer you a holiday from your payments at some time during the life of your loan. Payment holidays can be tempting: it’s easy to imagine what you could do with a couple of months worth of loan payments. Especially if you’re overdue a holiday or you have something you want to buy.
However it’s important to be aware of the cost of a payment break before you decide to take one. Stopping your repayments even for a month will cost you additional interest and push back the date your loan is fully repaid. If you want to get rid of your loan as quickly as possible it’s best to request to skip payments only in an emergency when you can’t afford the full amount.
Review your car loan every year and you will probably find you are able to pay a little more and get rid of your loan a little faster. Every bit extra you pay will reduce the amount you are paying in interest which is technically dollars back into your pocket. It’s worth keeping the focus on your loan whether it is large or small. Keeping the pressure on ensures that you save money in the long term and pay your loan off faster than you had first expected.
If you would like to find out more, contact the team at CFS Finance on 0800 88 2000.