How you can pay off your car loan sooner

Paying off a car loan sooner can save you thousands of dollars in interest payments.

Having a car loan during the cost-of-living crisis isn’t an ideal position to be in, however, it’s a reality for many Australians. Market interest rates for a secured car loan are currently between eight and 11 per cent.

There are ways you can pay off a car loan sooner which will save on interest repayments.

Read your contract for early exit fees

Ensure you read your contract to determine if there are penalties for paying your car loan out early.

These fees can add up quickly and it is this clause of the contract that needs to be understood before you sign on the line.

When paying out a loan early, any outstanding interest isn’t payable so if you break that contract, the lender will recover the cost by charging an early exit fee. The cost of these fees varies from lender to lender.

However, it’s worth doing the calculations to determine if the early exit fee is less than the remaining interest payments.

Increase payment frequency

A car loan that’s debited monthly equals 12 repayments a year.

However, if you change your payments to fortnightly or weekly, you’ll be increasing the number of repayments throughout the year and will be paying off the loan faster.

It’s a good idea to line up the debit to come out of your account as close as you can to payday as it ensures that the funds for the car loan will be in your account.

Altering loan terms

Depending on the lender, you might be able to change the terms of your contract. A standard car loan is five years, but you should contemplate reducing it to 36 or 48 months.

The repayments will be higher, but you’ll be making savings on about 12 months’ worth of interest.

Refinancing the loan

If you’re a homeowner with some equity in your home loan, you should consider refinancing and rolling your car loan over into your home loan to pay your car off in full. Home loans will usually have a lower interest rate than car loans which means saving right away.

It’s important to comb over your calculations stringently. If you turn a three-year loan into a 30-year one, the repayments are longer which means you’ll be extending the frequency of payments. While you might be paying less interest, over 30 years means that you’ll pay a lot more back.

To circumvent this, incorporate your car repayment into your home loan repayment. As an example, if your car loan repayment is $700, once you’ve rolled your car repayment over to your home loan, your minimum payments might change from $2,500 to $2,510 a month.

It’s important to pay more than the minimum. Increase your home loan repayment by the $700 you’re saving on the car loan to pay off the extra on your home loan in a shorter time. Doing this allows you to get the full benefit of saving with some flexibility so in the event of a financial change, you can pay the minimum repayments if necessary.

Rounding up

Think about rounding up your regular payment amount, if it’s within your budget, as it’s a guaranteed way to finish paying off the loan faster.

Say your car loan is $558 a month. If you round up to a whole number like $600 a month, which is an extra $42 a month, it means you’ll be making an additional payment of $504 a year.

Using your car to pay it off

For those who have extra time, you might want to use your car to have an additional income.

There are many platforms available that allow you to rent your car out to others when you’re not using it. Alternatively, you can do deliveries or join a ridesharing service and work in your spare time.

It’s good to read through your car’s warranty as some car manufacturers have different terms for vehicles used for ride-sharing or delivery purposes. It’s good to read and understand the fine print so you know what is and isn’t covered.

Making additional payments when you can

If you come into some extra funds, like a tax refund, put it straight onto your car loan.

Looking around at your house or garage, you might be able to make some money selling items that are no longer being used and use that cash to go into your car loan.

Get pre-approved

Before you go to the dealership, make sure you get pre-approved.

This ensures that you can make a calculated decision when shopping for a car and won’t be disheartened when your dream car might not be within reach.