If you're anxious to remove your auto loan from your list of debts, there are ways to do so more quickly. You can pay off your car loan faster by increasing the size or frequency of your payments, refinancing the loan or limiting extra expenses that can increase the size of the loan.
Before deciding to focus on your car loan, check whether you'll be charged a prepayment penalty. That can affect whether and when it's best to pay down your car loan aggressively. Also, make sure you have a sufficient emergency fund to cover costs should an unplanned expense arise.
Once you've decided to pay off your car loan fast, here's how to do it.
5 Ways to Pay Off Your Car Loan Faster
The average car loan term is nearly six years as of the second quarter (Q2) of 2024, according to the Experian State of the Auto Finance Market report. If you'd like to pay off your loan faster, these six strategies can help.
1. Refinance Your Car Loan
First, consider refinancing your car loan to a shorter term, which will likely increase your monthly payment and reduce the amount of interest you pay. It will help you get on a fixed repayment schedule that leads to a paid-off loan in a shorter time. If you qualify for a lower rate than when you first got the loan, you may also be able to keep your monthly payment stable, but pay off the loan faster.
Refinancing will, however, require completing a new loan application and undergoing a hard credit check, and it may also mean paying an upfront origination fee. Compare offers from multiple lenders and make sure the potential savings justify any fees.
Learn more >> When Does It Make Sense to Refinance a Car Loan?
2. Make Biweekly Payments
You could also skip the refinancing route and simply change the way you make payments. Instead of submitting one fixed payment per month, which is standard for installment loans like car loans, split the payment into two and pay every two weeks. Make sure your lender allows this payment structure before moving forward.
You'll end up making one full additional payment per year. This strategy has the added benefit of reducing your principal balance earlier in the month, which means interest then accrues on a lower balance. You can also connect your car payment to receipt of your biweekly paycheck, which can provide clarity when budgeting. It's a sound approach for paying off a mortgage and other types of debt too.
3. Make Extra Lump-Sum Payments
Alternatively, you can make additional payments at certain points in the year—when you receive your tax refund, work bonus or cash gifts from family, for example. You can typically make an additional payment anytime on your lender's online account portal.
If your loan contract specifies that there's a prepayment penalty (more on that below), consider sticking within the guidelines to avoid the penalty. For example, if your loan contract states you'll pay a penalty for paying the loan in full within 36 months, you can plan to pay off the loan after three years are up.
4. Avoid or Cancel Add-On Expenses
Car add-ons are features that are nice-to-haves but not must-haves, like extended warranties or maintenance contracts. Since these costs roll into your car loan, that increases the size of the loan.
Saying no to these additional expenses when you first get a loan is one way to reduce borrowing costs and pay off the loan faster. If you've already opted for certain services, you can cancel them and potentially get a refund, prorated for the remaining time left on your policy. Once the features or services are removed from your loan, you may find your monthly payment is lower. You can then pay extra toward the principal balance as a result, speeding up repayment.
5. Adjust Your Budget
Create a budgeting strategy that will free up enough money for you to make quick progress on your car loan. If you'd like to make biweekly payments to limit the amount of interest you pay, try using the 50/30/20 rule or the pay-yourself-first budget to immediately set aside a certain percentage of your paycheck for car loan payoff. Then set up automatic payments from your bank account to your lender for the amount you've chosen to put toward the debt.
You can also look for ways to increase your income and reduce expenses, including auditing all of your bills and recurring expenses to see which you can cancel or negotiate to a lower price.
Learn more >> How to Stick to a Budget
Should I Pay Off My Car Loan Faster?
It doesn't always make sense to dedicate all, or a large chunk, of your extra funds to paying off a car loan. Here's how to decide if it's the right move for you.
3 Signs You're Ready to Pay Off Your Car Loan Faster
- You have a healthy emergency fund. If you already have at least three months of basic expenses saved up, you have the necessary financial foundation to put more money toward debt. Keeping your emergency fund in an easily accessible place like a high-yield savings account means you're covered in case of a sudden blow to your budget.
- You can comfortably cover bills and meet your other savings goals. Make sure that you'll have enough in your checking account throughout the month to avoid paying overdraft fees or falling behind on bills. It's also important to continue saving for long-term goals like retirement.
- You want to pay less interest. Perhaps you have a variable interest rate that has risen in recent years, or you could not qualify for the lowest rates available upon applying for your loan. High rates provide good motivation to pay off a car loan faster.
3 Signs the Time Isn't Right to Pay Off a Car Loan Faster
- The loan has a prepayment penalty. If your loan comes with a prepayment penalty, check to make sure the savings you'll get are worth the fees you'll incur for paying early.
- Your finances will be strained. While it's a worthy goal to be debt-free, reconsider sending extra to your car loan if you won't be able to save any money as a result.
- Your interest rate is already low. You may be better off paying down high-interest debt, such as credit card debt, if your car loan's interest rate is much lower than your cards' rates.
Frequently Asked Questions
Car loans may come with a prepayment penalty, but it depends on the state you live in, the length of the loan term and your lender.
It's legal in 36 states and Washington, D.C., for lenders to charge prepayment penalties on loans with terms of five years or less. That doesn't mean your lender will charge a fee for paying off the loan early. But if it does, the fee will be outlined in your loan documents and is often about 2% of the loan's outstanding balance. You cannot be charged a prepayment penalty if your loan term is 61 months or more.
You can negotiate with the lender to remove a prepayment penalty, either when you first apply for the loan or when you refinance it.
Generally, extra car loan payments first go toward fees that are currently due, such as late fees; then any interest that has accrued; and then the loan's principal balance. You can ask your lender what its precise policy is. You can also ask to put a larger portion of your extra payment toward the principal, which can reduce the loan's balance faster.
The Bottom Line
Paying off a car loan fast can be wise, since reducing debt not only saves money, but may improve your credit. But it's important to consider potential pitfalls, such as fees you'll pay and whether prioritizing your car loan means deprioritizing other financial goals. With the right amount of planning, you can pay off a car loan faster in the way that makes sense for you.