The best way to pay off a car loan faster involves making extra principal payments through methods like bi-weekly payments, rounding up monthly payments, or using lump sums from bonuses/refunds, alongside exploring refinancing for a lower interest rate; consistently putting extra funds toward the principal saves significant interest and shortens the loan term.
Strategies to pay off your car loan faster
You'll save money.
Unless your loan has precomputed interest (more on that below), extra principal payments can help reduce the total amount of interest you'll pay.
The 50/30/20 rule is a simple budget guideline: 50% of your after-tax income for needs (like housing, groceries, and car payments/expenses), 30% for wants (dining out, entertainment), and 20% for savings and debt repayment. For a car payment, this means your total monthly car expenses (loan, insurance, gas, maintenance) should ideally fit within the 50% "Needs" category, with some experts suggesting car costs shouldn't exceed 10-15% of your income overall, making a modest car a "need" and luxury vehicles a "want".
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.
Dave Ramsey's core car rules emphasize paying cash, avoiding new cars (unless you're a millionaire), keeping your total vehicle value under half your annual income, and using a strict budget, often suggesting the 20/4/10 rule (20% down, 4-year loan, 10% total car expenses) as a guideline if financing, but preferring no debt at all to avoid depreciating assets trapping you. He stresses buying reliable, used vehicles to prevent debt and build wealth.
How to pay off your car loan faster
Input a monthly payment amount
Take-home pay is the amount you make each month after taxes, so if you bring home $3,000 monthly after taxes are deducted, it's likely you can comfortably afford a $300 car payment.
Debt-to-income ratio: Lenders will look at your monthly debt payments and how they compare to your income. Debt-to-income ratio, or DTI, shows how much of your pretax monthly income goes toward debt, such as credit card or loan repayment. In general, auto lenders prefer that applicants have a DTI of 50% or less.
There are several ways to pay off your loan — like refinancing, paying biweekly or rounding up your payments to the nearest $100. Confirm your lender doesn't charge a prepayment penalty since the cost of an early payoff could be more than what you save.
Pay Off the Highest Interest First
If you want to save money in the long run, paying off the debt with the highest interest rate is often the best strategy. By eliminating the most expensive debt first, you'll reduce the total amount you pay in interest over time.
The 20/3/8 rule is a car-buying guideline suggesting you put 20% down, finance for 3 years or less, and keep your total monthly car expenses to 8% or less of your gross income, helping to ensure you buy reliable transportation without overspending and can still invest in other goals like retirement. It's a tool to avoid being "underwater" on your loan (owing more than the car's worth) and to prioritize financial health over luxury vehicles.
It may be easier to secure a loan for a new car than it is for a used car, and new car loans often come with lower interest rates. Used cars can be a good fit if you're on a budget and they generally cost less to insure; however, interest rates for used car loans are often higher than for new car loans.
Save money on interest
The more money you add to your payments and the higher your loan amount, the more you can save. Paying off your car loan in a lump sum will save the most in interest, but even an extra payment here and there can make a difference.
Leasing a car is much cheaper than buying it outright, because you're only paying a percentage of the total price. You won't have to worry about fetching a good price or finding a buyer for it when you're done, as the dealership will take it back from you.
Do you have a 15- or 30-year fixed-rate loan that you'd like to pay down faster? You might find that making extra payments on your mortgage can help you repay your loan more quickly, and with less interest than making payments according to loan's original payment terms.
An auto loan can stay on your credit report for up to 10 years after you pay off the loan. Closed accounts are supposed to stay in your credit file, as they can help creditors understand your history with credit cards and loans.