While working toward becoming debt-free, I wanted to use every trick in the book to save money, increase my income, and pay down my debt faster.
After paying off all my credit cards, my auto loan was the only thing between me and complete debt freedom. Below are some of the best methods to pay off your car loan, credit cards, or any type of debt even faster.
1. Make Bi-Weekly Payments
Submit half the payments to your lender every two weeks instead of the regular monthly payment. This will accomplish three things:
- Less interest will accumulate, because your payments will be applied more often.
- You will pay an extra payment, because there are 52 weeks in a year, which equals 26 yearly payments (or one extra).
- Doing this for the duration of the loan could shave off several months.
Make sure to discuss this with your lender before making bi-weekly payments, because you might be penalized for any extra payments or paying off the loan balance early.
2. Round Up the Payments
Rounding up your payments is an effortless way to pay extra without even missing the funds. Just like making bi-weekly payments, you don't need a lot of extra funds to knock a few months off the term of your loan. For instance, my auto payment was $264.12, but I chose to round it up to $300, which is an extra $35.88 per month. After 12 months that's an extra $430.56 (or almost two additional payments).
You could even go a step further and bump up your payments by an extra $50 or $100 per month. Over time that adds up to a significant amount, which will save you money on interest and shorten the term of your loan.
3. Find Extra Money
Anytime I sold clothes on eBay, sold books on Amazon, or chose to ImpulseSave instead of impulse buy, I used those extra funds to pay down my loan. Although the small amounts like $20 here and $12 there might not seem like a lot, they definitely add up. If you have a small part-time job on the side that pays an extra $100 per month, put that toward the loan. Over the course of a year, that's an extra $1,200.
4. Make One Extra Payment
If you don't have the cash flow to commit to bi-weekly payments, you can achieve the same result by making one extra payment per year. Use money from a tax refund or bonus from work to help pay down your loan faster. Or you can divide your monthly payment by 12 and add this amount to all future payments. For example, with my car payment I can divide $264.12 by 12 months and add $22.01 to each payment. Each payment would be increased to $286.13. equaling one extra payment per year.
5. Refinance Your Loan
This is one of the easiest ways to lower your payment, save interest, and pay off your loan in half the time (if you have semi-good credit, of course). Many local banks and credit unions are offering super-low interest rates on mortgage loans and car loans. I started off paying an interest of 5.75 percent but was able to refinance to 3.16 percent. Recently I've seen auto-loan interest rates as low as 2.25 percent, which is crazy good. So if you haven't refinanced your loan (or taken advantage of 0-percent interest), now is the the perfect time to do it.
6. Take Advantage of Paperless
Sometimes additional discounts are offered when you sign up for auto payments and paperless statements. It saves the lender money by not having to follow up with paper billing and creates a seamless payment experience, so there are no late fees. I was able to get an extra 0.25 percent off my interest rate since taking advantage of online bill pay and paperless statements.
The Benefits of Paying Off Any Loan Early
The bottom line is that paying off your loan or credit card debt early will save you money in interest and decrease the overall term of the loan. Just imagine what you could do with your extra money: save for retirement, make home improvements, or pay off other debts.
There are lots of benefits to paying off your loans early, but one of the biggest is less stress and less risk, because you won't be a slave to the lender anymore!
What techniques do you apply to pay off your loans faster?