How to Pay Off Your Auto Loan Early & Save Money
Carrying an auto loan can be a heavy burden on your monthly budget. Because most car loans use a simple interest formula, the interest is calculated based on the outstanding principal balance. This means that every time you make an extra payment, you are directly reducing the principal amount, which in turn reduces the amount of interest you are charged in subsequent months.
Using our Auto Loan Early Payoff Calculator, you can instantly visualize exactly how much money and time you will save by adding just a little bit extra to your monthly payments. Even $50 or $100 extra a month can knock months off your payment schedule and save you hundreds—or thousands—in interest over the life of the loan.
1. The Round-Up Method
If your monthly payment is $345, round it up to $400. It is a small change to your budget that your mind adapts to quickly, but that extra $55 goes straight to the principal.
2. Bi-Weekly Payments
Instead of making one full payment a month, make half a payment every two weeks. You will end up making 26 half-payments, which equates to 13 full payments in a year instead of 12.
3. Apply Windfalls
Use your annual tax refund, a work bonus, or cash gifts to make lump-sum payments directly toward the principal of the loan to make massive dents in your interest.
Beware of Prepayment Penalties
Before you begin aggressively paying down your auto loan, contact your lender to ensure there are no prepayment penalties. While they are less common today, some lenders charge a fee if you pay off the loan before the scheduled term ends. Additionally, when making extra payments, explicitly tell your lender to apply the extra amount to the principal balance, not toward next month's regular payment.