Do you feel like you’re drowning in car loan debt? If so, you’re not alone! The average monthly car payment on a new car is around $500 per month, while used cars come in around $400 per month. Yikes! Today, I’m going to tell you how to pay off your car loan early so you can keep your money for yourself instead of lining your lender’s pockets!
Owning a car to get from point A to point B may be necessary, but suffocating in high interest rates and pricey monthly payments isn’t.
Even with a low interest rate of 4% or less, on a car loan of just $30,000 you would end up paying $2,000-$3,000 extra for the car in interest over the life of the loan because you financed it. With higher interest rates and higher loan amounts, that number goes up and up!
Wouldn’t it feel amazing to eliminate the interest you pay on your car loan and keep that money for yourself?
You can do this by paying off your car loan early!
If you’re ready to be car debt-free, you can pay off your car loan early pretty easily and swiftly and save yourself thousands in interest.
Here Are 3 Steps to Pay Off Your Car Loan Early:
1. Know your numbers
The first step to solving any problem is to acknowledge it and understand the ins and outs of it. That’s why the first step to paying off your car loan early is to know your numbers. This step also sets you up for steps 2 and 3.
- What is your monthly payment?
- What is your current loan balance?
- What is your interest rate?
- How much interest are you charged per month?
Knowing all of these figures will ensure that you know exactly where you stand when it comes to your car loan. For this article, we’ll use a 2015 Mitsubishi Outlander Sport as an example.
- What is your monthly payment?
- $224.60
- What is your current loan balance?
- $9,100.46
- What is your interest rate?
- 4.45%
- How much interest are you charged per month?
- $36.00
You can find all of the information online on your loan providers website. To find the average interest being changed per month, add up the interest rate charges for the past 6 months and divide by 6.
2. Budget, budget, budget
The next step to paying off your car loan early is putting the numbers you now know into your monthly budget. The easiest and simplest way to pay off debt of any kind is to make yourself sit down and create a written budget every month.
I’m not going to lie here and say it’s fun– especially in the beginning, but it is a complete necessity when taking control and starting your journey to financial independence.
Zero-Based Budgets give every single dollar a “job”. Essentially, you take your income minus your expenses and end up with $0. You do this before the month starts so that you have a money plan already in place for the coming month. When you sit down and write out your income and expenses, you will likely have money leftover. You assign the “leftover” money towards savings or paying off your car loan early! The key to Zero-Based budgeting is that each and every cent you make and spend is accounted for.
Related reading: How to Make a Budget: Step-by-Step Guide + FREE Excel Template
By budgeting with the Zero-Based Budget, you will have more power over your money and over your debt. You will be surprised with how much money you have to put towards paying off your car loan early!
[[Check out my FREE Budgeting Spreadsheet to get your Zero-Based Budget started today!]]
3. Use the debt snowball method to make extra payments toward your car loan
Once you have your Zero-Based Budget in place, you can start making headway on your car loan. You’ll do this by using the Debt Snowball Method.
The Debt Snowball Method uses that excess money from your Zero-Based Budget to pay off debt as quickly as possible using momentum!
You use the Debt Snowball Method by listing out all of your debts, ordering them by balance from smallest to largest. Don’t worry about the interest rate or monthly payment. When you use the Debt Snowball Method, you only focus on the balance of each loan.
Once you have your list, you will begin attacking the smallest debt first. You do this by putting all of your “leftover” money on your smallest debt.
For example:
- Cell phone: $213.53
- Mitsubishi: $9,100.46
- Credit Card: $11,540.30
- Student Loan: $17,920.12
In this case, I would use all of my “leftover/excess” money from my Zero-Based Budget to pay off my cell phone loan first. Then, once that cell phone loan is paid off, I would use the “leftover” money from my Zero-Based Budget plus the money I was paying per month on the cell phone loan to pay off my car loan next.
The money you have after paying off each debt builds until you eventually put all of your power that you were using towards each minimum payment on to the last loan.
Using the Debt Snowball Method saved my family’s financial life and helped us pay off our car loan early. It gives you a clear focus on your debt payoff and a plan to get it out of the way quickly!
Related reading: How We Paid Off $71k of Debt in Less Than 3 Years on a Single Income, How to Pay Off Debt Fast With the Debt Snowball Method
[[Ready to know when you’ll be car loan debt free? Check out the Easy Budget Debt Snowball Calculator]]
By knowing your numbers, using Zero-Based Budgeting, and using the Debt Snowball Method, you’ll own the title of your car before you know it!
Good luck, I know you can pay off your car loan early using this as a guide!
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