You can pay off a car loan quicker and cheaper than you think. And if you have a car loan that carries a high interest rate, your number one priority should be to pay it off as early as possible. Fortunately, it’s not difficult to do.
1. Determine how much money you need to increase the payments.
If you just start throwing money at the loan without a plan, it will certainly help you pay it off early. But if you do it methodically, the chances are much higher than you’ll actually carry out your plan and get the thing paid off fast. The first thing you need to know is how much to increase your payments by in order to pay off the loan in the time you want to do it.
There are a number of calculators on the web that help you determine this, but you can also use Excel to do the job. Just open Excel, look for the “Present Value” calculator and have at it. Let’s assume you do the calculations and determine that you need to increase your payments by $220 in order to retire the debt two years early.
2. Go through your budget.
At this point, your mission is clear. Get out there and save an additional $220 each month. The best way to find that money is to increase your income, cut your spending or do both. If you want to go the easy route, look through your spending and find a few ways to cut out the $220 you need to send to the lending company. Of course, this presupposes that you indeed track your spending. This is a crucial step towards financial independence, so if you aren’t tracking your spending, start doing so.
3. Make a plan and commit.
At this point you know how much you need to bump up your payments by and how you’re going to do it. All you need now is a commitment to “get ‘er done.” The best way I know how to do that is to make a commitment to another human being. You already know that I am a huge fan of having accountability partners. Tell your accountability partner exactly what you’re going to do, how you’re going to do it and when you’re going to do it by. Then check in with your partner every week or month just to keep yourself on track.
4. What if you can’t do it?
If you can’t come up with the extra cash, you might be able to reduce your interest rate by borrowing money elsewhere and paying off the high interest loan. But if at the end of the day you can’t execute your plan in two years, that’s OK. Let’s say in the above example, you are only able to come up with $100 extra to throw at that loan. That’s fine. You won’t get it paid off two years early but you will get it paid off much earlier than you originally planned. Perfection is the enemy of improvement. Don’t let progress evade you. Go for it.
Have you ever paid off a loan much faster than you thought you could? How did you do that? What is your best tip? If you are interested in other ways to pinch a few pennies make sure to read Pinyo’s post on the subject.
Ronald Dodge says
One thing you did not address is the fact some loans also carry early payoff penalty charges if such loans should be paid off too early.
I had a loan for my van, which we about ended up having to take out in February 2007 after the prior van was totaled by a semi driver in September 2006. It was for $10,500 with an interest rate of 7.59% stated APR over a 5 year period. The BTBEAPR and ATBEAPR worked out to be 7.86%. At the time of this loan take out, our income was very tight
The one major catch to it, if we paid it off entirely at least 6 months earlier than the due date, we would get slapped with an additional $125.00 early pay off charge. As such, I had to plan how I was going to pay down this debt without getting slapped that additional charge.
As for my planner and accountability, I use my own created Excel financial file to hold me accountable. You may say that’s not a good way to hold one accountable. For me, it is cause I have done the various studies leading up to and through retirement years with the various financial aspect and risk factors. Given how things had worked out in life, I have found what I had put into the financial file to also be what has taken place in real life. Obviously, not everything in the file has taken place, but they are shaping out as I have put into the file based on the self studies I have done last decade.
In 2009, I did receive an inheritance, which greatly helped out with this significant goal, but I still had to be very careful with how I attacked the debt. By July 2009, I essentially paid off the debt, though technically it was not wiped out yet. There was only $18.51 left on the debt to make the interest charge negligible. By how I did the planning, I saved myself a tremendous amount of money from the interest. Take my monthly payment amount, multiply it by 5, and that’s about how much interest I saved myself. I used the cash flow management worksheet that was planned out for the next 2 calendar years every August/September to determine when I could make those extra payments. As a general rule, I planned the income on the conservative side when I did my 2 year planning, thus as I had extra income coming in such as from overtime, I also determined when I could make that next monthly payment.
This past August 22nd, I made that very last payment of about $22.00 and got rid of it entirely. paying an interest charge of $3.50 or so was far lower than paying that early payoff charge of $125.00.
In some ways, I did pay it off earlier than expected, but then that was only due to the inheritance I got from a good friend who was more like a big brother to me. As for the majority of that inheritance went to, part of it went into the emergency fund and part of it went to paying down the mortgage.
Given the debt was based on 100% simple interest rule, none of it based on the rule of 7/8 rule as I told them straight up, I refused to take any debt that is based on rule of 7/8 rule. That’s cause with rule of 7/8, any extra money you pay towards it, you get no credit for it at all other than a lowered principle amount. But as for the interest charge, you still get charged the interest based on the scheduled principle amount, not based on the actual principle amount. That’s my single biggest reason why I refused to take out a 7/8 rule debt.
As for mortgages, they generally are a hybrid of rule of 7/8 and simple interest. The rule of 7/8 part is based on the fact, regardless of what date you actually pay the extra amount, it’s assumed to be paid as of the payment due date the regular monthly payment is due on. The simple interest rule part, it does lower the interest charge unlike the rule of 7/8 as it’s based on current principle amount, not based on scheduled principle amount.
Now that the MIP is gotten rid of (I accomplished that in October of this year), the next thing to focus on will be to work on building the emergency fund back up. However, that may not be happening until I get employed on a full time basis or find some other work (self employment).
Currently, I am going to college full time while on unemployment and I look to be finishing this quarter with a GPA of about 3.5 for 18 credit hours, which the last time I was in school has been 15 years. I essentially built up 246 quarter hours worth of high education in Accounting in the early 1990’s. Yet, the first 93 quarter hours got vaporized by the first school going belly up and the state board has no record of it. Xavier University (Ohio) didn’t accept any of those credits either, so I ended up having to repeat so much stuff learning practically nothing new given I already had it in high school at the Genesee Area Skill Center (GASC) in Flint, MI and at the first college. The 246 quarter hours doesn’t even count the time at GASC since the time at GASC was in high school.
This time around, Xavier University (Ohio) would have required me to start from scratch all over again, and I’m like, no way. As such, I’m going to University of Cincinnati, which currently looks like I will be required to take up about 75 quarter hours more that include the current 18 hours. As such, I will have built up about 321 quarter hours just for that 4 year Accounting degree. That’s almost doubled of what a 4 year degree should only require.
The unemployment office want me to go to some local community college to get the degree, but after what happened to my credits and Associates Degree in Accounting with a GPA of 3.87 from Cincinnati Metropolitan College, I’m like, No way. I am not risking my stuff to the financial health of those colleges only to lose that too. While no college is immune to going belly up, some are a lot less likely to happen to than others.
In some regards, I’m not sure how I managed to make it this long having only pulled about $400 from the emergency fund, which the emergency fund already recovered that amount, but here’s the things my wife and I have done:
My wife working nights, which has helped with the bills. Her income alone wouldn’t do it, but with her income, it does help.
My unemployment income does help, but that by itself wouldn’t cover the bills either.
We got our settlement money back in the month of September given it’s been 5 years now. That is expected to help last us into the month of January, which then I will have other funds to get us through the rest of January and into February until we get our tax refund from Additional Child Tax Credit and most likely also from the Earned Income Tax Credit (this will be my first time ever to be able to claim that). That money will help fund the ROTH IRAs (the amount needed to max out the retirement saver’s credit). The rest of it should last us at least through the month of June. Hopefully, by that time, I will have found something.
Every step of the way, I use this cash flow management worksheet. Of all the worksheets I have in the file, this is the one worksheet I use quite extensively.
As for 2 of my worksheets, they have on them dealing with networth values for the household. One is the balance sheet and the other measures progress. This year, our networth value is taking a beating by way of increased debt overall (student loans), long-term assets depreciation (this would have happened, even if we were bringing in sufficient income), and lack of sufficient earned income.
I could have said not to go to college cause of having to take debt out to go to college, but then again, I wouldn’t get the chance to make at least $70,000 annually after I get that 4 year degree and could very well be stuck with $30k-$40k annual income, which that won’t suffice. This is based on the IRS’s auditor’s job that would only pay $41k annually without the degree vs $71k with the degree. Not only that, but to keep doing the same thing expecting a different result is insanity.