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.