How to Pay Off Your Car Loan Early (6 Amazing Ways)

Nobody likes the weight of debt hanging around their neck.

Even when you can afford regular payments without biting your fingernails each month, car loans still likely make up your second-largest bill each month after your mortgage.

But not everyone can afford to buy a car with cash, and unless you live downtown, you probably need a working car. But you can pay off your auto loan early rather than suffering through it for years on end.

Ways to Pay Off Your Car Loan Early

Paying off your car loan early can help you lower your car insurance payment since you no longer have to carry full coverage. It also lets you put more money toward student loans and high-interest debt like credit cards and personal loans. And once you’re debt-free, you can put more money in your emergency fund and retirement accounts.

Once you decide to pay off your auto loan early, it’s just a matter of determining the best quick-loan payoff method for you. And all these tactics work well in helping you knock out your car loan quickly.

1. Automate Higher Monthly Payments

Automating good financial habits and behaviors is always a good idea.

And you can use it to pay off your car loan early by setting up higher automated payments. For example, if your regular monthly payment amount is $350, set up automated payments of $400 or $500 — whatever you want to put toward knocking it out quickly.

The extra money goes straight toward your principal balance and moves you further along the amortization schedule. That helps you skip the early high-interest phase of your loan term.

2. Front-Load Your Extra Payments

At the beginning of a loan, most of your monthly car payments go toward interest rather than principal. Over your loan term, more and more of each car loan payment goes toward paying down your principal balance. It’s called “simple interest amortization,” even though there’s nothing simple about it.

The upshot is that you can skip that initial phase, where most of your monthly payments go to interest, by paying down your balance quickly in the beginning.

You can make double car payments for the first year of your loan, then scale it back. Scaling back could mean paying additional payments of $50 or $100 each month or making the minimum payment. Either way, you skip the worst of the interest payments and pay off your loan faster.

3. Switch to Biweekly Payments

Biweekly payments simply make more sense for the average worker, who gets paid biweekly. You can schedule your payments to coincide with your paychecks.

Specifically, split your monthly payment in half and set up automatic payments every two weeks. It may seem like you’d just be paying the same amount each year. But you really make 26 half-month payments each year, or 13 months’ worth of payments each year rather than 12.

You get to pay off your car loan early without even noticing the impact on your monthly budget.

You could also pay more than a half-month payment every two weeks to pay off your loan even faster.

4. Put All Windfalls Toward Your Car Loan

We all occasionally collect a one-time windfall. They come in the form of things like tax refunds, work bonuses, gifts, and inheritances.

If you don’t want to change your monthly budget in the slightest, you can put all lump-sum payments toward paying down your loan balance. Just ensure you stay disciplined and do it rather than succumbing to the temptation of putting it toward a new TV or a vacation instead.

5. Avoid Skip-Payment Offers

Some lenders let you skip your payment once or twice per year. They may even encourage it to prolong your interest amortization.

But each skipped payment extends your loan by at least one month and tacks on additional interest. If you skip your payment four or five times during the life of the loan, you can add six months to your car term.

Resist the temptation and keep your automated loan payments cranking.

6. Earn More Money

When you aim to put more money toward savings or paying down debts, it helps to earn more money.

Pick up a side hustle to earn some extra cash. That could mean working in the gig economy (think things like Instacart or Doordash) or starting a business on the side of your full-time job. Either way, the extra cash can help you quickly knock out your remaining balance and pay less interest.

Final Word

Beware that some lenders charge prepayment penalties for early payoff. These fees kick in if you pay off your full loan amount earlier than agreed in your monthly payment plan. That’s because early payoff means the lender is losing out on quite a lot of the loan interest you otherwise would have paid, which is how they make a profit lending money.

In many cases, lenders charge prepayment penalties on a step-down basis. For example, if you pay off the loan within the first year, they charge a higher fee (such as 3% of the original loan balance). If you pay it off in the second year, they charge 2%, and in the third year, the fee drops to 1%. After that, you can pay off your installment loan in full at any time with no penalties or fees.

After paying off your car, aim to keep it as long as possible to avoid starting from scratch with a car payment. Avoid thinking of your car as a status symbol and instead think of it merely as a way to get from Point A to Point B.