Car loans are one of the most ridiculous debts to carry when you consider the full picture. You borrow money at a relatively high rate of interest to purchase a rapidly depreciating asset. From the moment of signing the loan you are paying interest on an auto which you have already lost money on, and in the case of brand new cars a large chunk of money is lost immediately. Hopefully when you realize the benefits of budgeting to pay off your car loan early you will at least have paid a substantial down payment and not signed a loan with early repayment penalties.
In an ideal world you should aim to purchase cars without finance, and if you have bought a car which it will take you five years to pay off then you have obviously purchased more car than you can afford to drive. Fortunately it is no longer fashionable to drive a car to impress. It is far more financially sensible to drive an older car which you can purchase with cash rather than something flashy off the dealers forecourt.
This will bring additional savings in lower insurance premiums. In fact if you can pay off your car loan early the savings you will make in large monthly payments should allow you to save up and purchase your next car in cash and thus rid yourself of expensive loans and break the unnecessary cycle of borrowing for auto purchases.
In order to pay your car loan off early the best way is to ask for the total amount owed now, and pay if off in one full sum. If finances don’t permit this then make additional monthly payments towards the principal of the loan, but be clear that the lender understands that additional payments are not prepayments of instalments due, but intended solely to reduce the principal.
Obviously the quicker you can repay it by making payments towards the principal the less interest you will pay overall, and this could equate to hundreds or thousands of dollars over the lifetime of your loan. Unless you enjoy wasting money on interest payments then you really can’t afford not to clear the loan early.
Firstly ask the lender if they will consider reducing the fixed interest rate. They may be willing to do this if your credit score is good and you hint that you will refinance with another lender at a lower interest rate. It helps if you have details of lenders which do offer lower interest rates when you do so. If the lender is willing to reduce your interest rate then you have already made extra cash flow in your budget to put towards additional payments towards the principal.
A lower interest rate will help your budget but you need to still find the extra cash to make serious inroads into reducing the outstanding amount. If you can estimate the amount of time it will take you to pay off the debt it may be worth considering raising money on an interest free balance transfer credit card and applying it to the principal, if you can be sure of repaying the sum used before the variable interest rate kicks in on the balance transfer card. That way you will be effectively reducing your car loan with an interest free loan. It may be more prudent to wait until the last nine months of the loan to do this if you aren’t certain you could repay the card in full before that.
Additional money to pay the loan early must be found by either increasing your income or budgeting more tightly. There are always ways to squeeze additional funds from your monthly budget by simply doing without anything but the necessities, and delaying any new purchases until the budget once again allows. Prudent budgeting means cutting right back to the core of your spending and only servicing mortgages and rent, essential utilities and food. Reduce the amount you add to your savings plan if the yield is less than the amount of interest you pay on the car loan.
Cut back on regular car expenses such as car maintenance by taking an evening class in car maintenance. Maintain the car to the best possible standard to achieve the highest resale value. Improve your cash flow by sharing car transportation costs with a neighbor who drives the same daily route, or with a work colleague.
Living on a tight budget does not mean living in hardship when there is an end goal in sight which actually represents a total saving gained. The immense satisfaction of freeing yourself from an unnecessary monthly car repayment should hammer home the point that it is possible to live free of car loans in the future and thus achieve a significant saving which you could then use to budget to pay off your mortgage early.