I read an unbelievable statistic the other day. In 2018, 33% of the auto loans written were for terms longer than 6 years. In 2010, only 10% of auto loans had terms longer than 6 years. A three-fold increase in just 8 years! Now, according to the Wall Street Journal, the average auto loan lasts 5 years and 9 months, an all-time high level. The full article provides a cautionary tale on the current state of buying and financing cars. it’s definitely worth the read if you are in the market to buy a new vehicle. While you are researching, read how auto loans affect your financial well-being in my article, The Best Financial Decision I Ever Made.
It’s awesome if you read these articles before you buy a car, but many people do not. That’s ok. If you do not, you are in the same situation as millions of Americans, meaning you owe money on the car you are driving. Let’s take a look at how you can pay off your auto loan before 69 months expires, your car is worth nothing, and you are starting over with a new loan. The best part is that you can start anytime, regardless of where you are with your loan.
What About a Re-Fi?
Before we get started with the strategies, I want to let you know that I will not be talking about refinancing your auto loan. Why? There are a couple of reasons. One, the interest rate is not likely to be your issue. Paying to refinance will not reduce your interest payment by enough to make it worthwhile. Your bigger problem is the principal payment and reducing that number. Refinancing will not change your principal payment whatsoever.
Second, refinancing would likely add more payments to the current term of your loan. Our goal here is to pay it off faster, not slower. Unless you are behind on payments or consolidating credit card debt, refinancing will not help you. If you are in one of these situations, seek help from a qualified debt consolidation expert.
Now, let’s see what we can do to pay off that loan more quickly, while your car still has some value.
Round Up the Minimum Payment
Let’s start with a minor adjustment that will pay large dividends. When you make a payment each month, add some money to the payment to round it up to the next $25, $50, or $100.
For example, a 5% auto loan on a $25,000 purchase is $472 per month for the next 60 months. If you round up the payment by $28 to $500 monthly, you will eliminate 3 payments and $213 in interest. Not bad for adding $1 per day on to your payment.
You can input all payment logistics into this calculator I found at Interest.com. Once you plug in your information, run the report to view your results and savings. The more you round up, the faster your car will be paid off and the more money you will save. The beauty is that you can feel free to change the number each month, depending on your situation.
The other beautiful part about rounding up is you can make small lifestyle changes and apply them directly against your debts. For example, if you skip lunch out and bring your lunch once per week, you likely save at least $6-$7 each time. That will pay for the $28 round up right there. You get the idea.
Leverage your Pay Raise
I think this one works a bit better with payroll deductions directed into 401k plans, but you can do the same thing with any of your debt or saving plans. When you receive a raise, use the % increase to calculate a similar increase to what you are paying for your car. Let me give you an example.
For someone making approximately $50,000 per year, the take home pay will be about $40,000, depending on where you live, or $3,333 per month. If you receive a 3% increase, your take home pay will increase by about $100. Have a plan for that $100 to use part of it as savings, part to reduce debt, and part to use as disposable income.
The easiest way to implement such a plan is to use automatic deductions to direct funds before they get added to your spending account. Once the funds get to your spending account, they get spent. Remember, adding just $28 per month eliminates payments and interest expenses. Most payroll systems or banking accounts have features to help you save money automatically. You just have to use them.
Turn Bonuses into Extra Payments
Many jobs pay bonuses, commissions, or make other periodic payments to incentivize you to achieve certain business results. If you are so fortunate to have this as part of your compensation, use it to your advantage, similar to the pay raise strategy above.
Earmark a percentage of the bonus to make an extra, one-time payment against your car loan. Almost all loan programs allow you to make extra payments at any time. When you receive the funds, simply go in and schedule an extra payment on top of your monthly payment to reduce your loan balance.
Any extra payments you make will reduce the principal (or the amount left to pay on your auto) dollar for dollar to what your send in. None of the money will go toward interest or other fees.
Don’t Forget! Tax refunds count as a bonus and work the same way to reduce your loan and debt payments.
Leave Debt in the Rearview Mirror
Not having an auto loan is a freeing experience. It’s all yours – dings, dents, and that weird smell when it gets really humid outside. You and your car have probably been through a lot together and it’s wonderful when you no longer have to share that with the bank.
The other fantastic thing is that you get to allocate $472 to other financial aspects of your life, at your choosing. It could go to other debt, a vacation, or saving for your next vehicle. It’s up to you. In fact, you probably will have enough to do all 3 things once
One last thing. Once you pay off your auto, you can also make adjustments to your auto insurance to save additional money. You may decide to increase deductibles or eliminate coverages you were required to maintain while you had a loan. Again, it’s your choice and you get decide what is the best strategy for you. Enjoy your new freedom. You earned it!