If you can afford to make extra payments on your car loan, it's a smart move. Doing so allows you to pay down your principal balance faster and save on interest. The only time it might not be such a good idea is if you have higher-interest debt (maybe credit cards, for example).
Make Extra Payments
Paying Twice A Month: Making two payments that are more than your monthly bill will not only pay off the principal faster but will reduce accrued interest.
Some may have a prepayment penalty — a fee for paying off a loan early or making extra payments. This is especially common with auto loans that use precomputed interest. On average, the penalty is about 2 percent of your outstanding balance. So, if you have $7,000 remaining, you would have to pay $140.
You can reduce the amount of interest on your loan by paying twice as the interest is only calculated once a month. If you get your first payment in before the interest is calculated, it will be on a lesser amount. This is only good on loans that carry interest. If you have a 0% loan, it won't matter.
Paying more on your car loan affects your credit score—and not necessarily in a positive way. Here's what you need to know. If you make an extra car loan payment once or twice, it probably won't impact your credit score at all.
You could save interest and free up room in your budget by paying your auto loan off early. There are several options available — including refinancing, paying biweekly and rounding up payments, just to name a few. Confirm your lender doesn't charge a prepayment penalty since the cost could be more than what you save.
Most states allow lenders to impose a fee if borrowers pay off mortgages before a specific date – typically in the first three years after taking out a mortgage. While Alaska, Virginia, Iowa, Maryland, New Mexico, and Vermont have banned prepayment penalties, other states allow them with certain conditions.
Paying off a car loan early could cause a slight dip in your credit scores. Any credit dip might be temporary as long as you're practicing responsible credit habits with other accounts.
Ideally, you want your extra payments to go towards the principal amount. However, many lenders will apply the extra payments to any interest accrued since your last payment and then apply anything left over to the principal amount. Other times, lenders may apply extra funds to next month's payment.
Keep in mind that having two car loans at once typically means higher auto insurance premiums. Your credit score could also dip when you apply for financing, making it more challenging to qualify for credit in the near future.
By paying half of your monthly payment every two weeks, each year your auto loan company will receive the equivalent of 13 monthly payments instead of 12. This simple technique can shave time off your auto loan and could save you hundreds or even thousands of dollars in interest.
When you make extra payments, you reduce the loan's principal—or the outstanding balance. Paying extra can also lower your future monthly payment amount if you have a variable payment schedule like a line of credit. However, be aware of lenders charging prepayment penalties for repaying a loan earlier.
Your loan term determines how much time you have to repay your debt. The 20/4/10 rule suggests that you should aim to finance your car for no more than four years (48 months). If you take out a short-term car loan, your monthly payments will be higher, but you'll pay less in interest.
Key takeaways. Down payments reduce the amount of money you must borrow and, thus, the interest you pay while repaying your car loan. Experts recommend a down payment of at least 20 percent. Larger down payments may prevent becoming upside-down on your loan.
Prepayment penalties are usually only due within the first few years of the loan, so if you can, try to wait to sell, refinance, or pay off the loan until that time.
In the United States, 36 states and Washington, D.C. allow lenders to charge prepayment penalties on car loans of up to 60 months in length.
The penalty could be equal to a certain number of months' interest. Or some lenders may charge a flat fee. The prepayment penalty details will be detailed in your loan agreement. Remember, federal law prohibits prepayment penalties above 2 percent of the loan amount.
Payments would be around $377 per month. According to the results, it will take you 60 months, an interest rate of 5% of $2,645, to fully pay your $20,000 car loan. However, the monthly cost of a $20,000 car loan will depend on your repayment period and the annual percentage rate (APR).
Making on-time payments to creditors, keeping your credit utilization low, having a long credit history, maintaining a good mix of credit types, and occasionally applying for new credit lines are the factors that can get you into the 800 credit score club.
By making at least one, larger additional payment a year, you'll save even more in interest. Just remember, the earlier you make your big payment the sooner you'll pay off your car loan. The early bird gets the savings, or however it goes. Some lenders will let you skip your payment once or even twice a year.
Why pay extra on car loan principal? Paying extra on your auto loan principal won't decrease your monthly payment, but there are other benefits. Paying on the principal reduces the loan balance faster, helps you pay off the loan sooner and saves you money.