Having a significant amount of finance owing hanging over your head may seem like a never-ending burden, but by taking the time to understand your loan and options for repayment you may find that paying off a car loan early is easier than you think. In the following blog we will provide you with some helpful tips to accelerate your car loan repayment journey and allow you to unlock financial freedom faster.
Understanding your loan
The key components that make up your loan are:
– the principal amount (e.g. the amount you borrowed);
– interest rate;
– loan term;
– repayment amount; and,
– repayment frequency.
Familiarising yourself with these key components is the first step in understanding how to pay off your car loan faster. By understanding the relationship each of these components have with each other, you will be able to understand how changing one will impact the other. For example, an increase in your repayment amount will likely correspond with a decrease in your loan term.
Once you have taken the time to understand the variables impacting your loan, it’s time to consider your current financial standing. As part of the initial loan application process you would have had to provide your expenses and income, however it’s good to revisit this every 6 – 12 months as circumstances change. What liabilities and expenses do you have outside of your car loan? Have you received a pay rise? Has your phone bill and gym membership gone up? Having a clear overview of your outgoings and incomings is beneficial when making any financial decisions.
Early termination fees
Before deciding if paying off a car loan early will be beneficial, it’s important to read through the terms and conditions of your contract to understand if there are any early termination fees or exit conditions you need to be aware of. It is common for lenders to charge a fee for paying out your loan before the end of the loan term to compensate for the lost revenue. If there are fees associated with terminating the loan you should consider how much you will be saving if you pursue how to pay off your car loan faster.
Tips for how to pay off your car loan faster
– Increase your repayment amount: by increasing the amount you are paying, you’ll reduce the principal amount faster. Even a small increase in the amount repaid will result in interest savings over the loan term.
– Change your repayment frequency: most loans will accrue interest daily, meaning that the more frequently you make a payment, the less principal amount there is for interest to accrue on.
– Make a lump-sum payment: expecting a good tax return or a bonus at work? Instead of blowing it in the EOFY sales consider making a one-off lump sum payment on your car loan.
– Refinance your loan: if your circumstances have changed since taking out the initial loan, it may be worth exploring refinancing to see if you are able to secure a lower interest rate or potentially shorten the loan term. Carefully consider the fees of taking out a new loan and compare offers to ensure it is a beneficial move before pulling the trigger.
– Seek out potential savings opportunities: every dollar you can save on another expense is a dollar that can potentially go towards your car repayment. Shop around to ensure you are receiving the best deal on items such as your car insurance, phone bill, or private health insurance. Look into ways to reduce your grocery bill by buying in bulk or visiting the local fruit shop. Change your weekly brunch date to a free activity instead. Every change no matter how minimal counts.
Paying off a car loan early is an achievable goal with the right strategy and mindset. Understanding how to pay off your car loan faster and implementing just a few of the tips above you will save money in the long run and give you the peace of mind that comes with freedom from debt.