Having a car loan is a serious financial obligation, and paying off the loan as quickly as you can will save you money by paying less interest. When buying a new or used car you need to understand the fees and interest rates you’re going to be paying if you finance the purchase.
The tricky thing is that most car finance conversations start after you’ve found the car you want, which can add pressure to making a purchase decision and you run the risk of rushing into a financing plan without considering all your options. Before making any big financial decisions like taking out a car loan, remember to read the fine print and understand exactly what you are getting into. It's also a very good idea to seek independent financial advice before signing on the dotted line, making sure you completely understand your obligations under a finance contract.
Here are some tactics you can use to pay off your loan faster, and we’ve included some basic calculations to give you an idea of the impact each tip will have on your loan.
Instead of just paying the minimum recommended amount, round up and pay slightly more with each payment.
Let’s say you borrow $10,000 at a 10% interest rate for 60 months, your monthly payment would be $212. At that rate, you’ll repay your car loan in 60 months having paid $2,748 in interest.
If you decide to round up your payments and pay $250 a month, you’ll be able to repay your car loan in 49 months and pay only $2,209 in interest - saving you almost a year of repayments and $539!
This is an easy adjustment to make to your loan repayments and the higher you can round up to, the greater an impact it will have. Every bit counts, and even rounding up to the nearest $10 is better than nothing. If you’re making electronic payments automatically, it’s likely you won’t even remember you’re paying that little bit extra.
Make one large extra payment per year
This tactic is basically the one-time version of rounding up - it doesn’t matter when you do it during the year, but you’ll be better off financially when making bonus payments on your car loan as an annual ritual.
For example, you borrow that same $10,000 over 60 months at a 10% interest rate. If you make an extra payment of $500 a year, you’ll repay your loan in 49 months and save $469 in interest.
If you’re not sure how much to aim for with your extra repayment, try to make one whole additional car payment each year. For some people, pulling together one lump sum at a time of year when you might be spending less than usual is going to be easier than increasing your regular payments.
You will need to check with your loan provider if this option is available and how much of an additional payment is allowed.
Pay weekly instead of fortnightly or fortnightly instead of monthly
While not necessarily helping to pay off your loan faster, paying smaller amounts more regularly is going to make it easier to work your loan payments into the regular ebb and flow of your finances. By breaking it down into weekly or fortnightly payments, the commitment is likely to feel less overwhelming enabling you to stay on top of your loan and avoiding costly late payment penalties.
Take advantage of unexpected income
Every so often you might find yourself with a little bit of extra cash in your pocket than you were expecting to. While it’s tempting to spend this on treating yourself to those new shoes or phone, applying that money to your car loan is going to help you get out of debt faster.
If you don’t want to throw all your bonus money into your loan, set yourself a rule that 50% of any unexpected income goes towards your loan, and 50% is for you to do whatever you want with!
Again, check up front with your loan provider what options are available should you wish to make extra payments and make sure that your extra efforts are going towards the loan principal.
Interest accrues based on the remaining principal you owe on your loan, so reducing the principal balance as fast as possible will reduce accumulating interest. Contact your lender before making extra payments and ensure you are getting the most bang for your additional bucks.
Never skip payments
We can’t stress this enough - avoid skipping a payment at all costs! And if you are given the opportunity to skip a payment, don’t do it! Skipping a payment will just lengthen the term of your loan and cost you more in interest. You always want to be heading in the right direction towards paying off your loan, not extending it and putting yourself further and longer in debt.
If you miss payments then this will be reflected on your credit rating and will potentially prevent you from being able to secure a loan in future. So it is important to always make all your scheduled payments.
Take the time to investigate where you would like to borrow the money from as various lenders have different interest rates and terms. Often new cars are available at low interest rates that are subsidised by the vehicle brand. This can make the interest rate lower than what can be secured through a personal loan.
Bank mortgage rates are lower than bank personal loan rates so adding onto your mortgage may seem like an easy and affordable option. However, you normally pay your mortgage off over a long period of time and, as we outlined earlier, if you can pay off your loan faster you will save on the total amount of interest you have to pay.
Used vehicle dealerships typically offer finance at higher interest rates. Which means it can be just as cost-effective to buy a new car through a new car dealership at a lower interest rate, compared to purchasing a cheaper used car at a higher interest rate from a used car dealership. To see Suzuki’s affordable finance options try our new vehicle finance calculator.
Finance contracts can be set up in a number of ways and you want to be sure that you understand how the loan is structured. Some loans have a balloon payment requirement at the end, which means you will need to be prepared to pay a lump sum after a period of time. Other loans spread the full payment for the car over a set term. Review the new car manufacturer’s websites of the cars you are interested in or call your local new car dealership to see what finance specials they have on offer to make sure you get the deal that best suits you.
The bottom line
As a general rule, you want to keep debts to an absolute minimum. As your financed car depreciates in value over time, you don’t want to get stuck owing more than it’s worth. Using the tactics above will help you to pay off your car loan faster, and the faster you pay off your car loan, the sooner you’ll be free to put that money towards your next financial goal.
If you’re feeling financially prepared to get a new car, you need to check out our ultimate guide to buying a new car.