How this man paid off his car loan early and saved hundreds
Knowing how to pay off your auto loan sooner can get you out of auto debt faster and save you money on interest. But unlike student loans, some auto lenders charge a penalty for prepaying your loan. Others will charge you a certain amount of “pre-calculated interest” whether or not you prepay your loan.
Fortunately for Tyler Lenz, neither prepayment penalties nor pre-calculated interest were a problem. He was able to pay off his car loan sooner and save hundreds of interest. To see how Lenz sped up debt repayment – and to see if prepaying a car loan is right for you, too – let’s cover the following topics:
Relying on a car loan to purchase a vehicle can be an expensive gamble. The average amount borrowed by customers for a new car is $ 32,480, according to LendingTree, and the average monthly car payment is $ 550 over 69 months at an APR of 8.06%. If you have other forms of debt, like student loans or credit cards, that’s a big chunk of your income to spend on another installment loans.
If you borrowed the average amount of $ 32,480 and had a repayment term of 69 months at an interest rate of 8.06%, you would pay $ 8,213 in interest. That’s an extra $ 8,213 that you could have used to pay off other goals, like paying off debt, building an emergency fund, or even planning a vacation.
The idea of wasting extra money on interest was a wake-up call for Lenz. Even though he had a low interest rate of 2.19%, Lenz is a Dave ramsey fan. And according to Ramsey, debt – any debt – is an emergency that requires immediate action.
With this in mind, Lenz felt that the loan was a drag on family resources.
“For two years, we did nothing to speed up payments,” he said. “We just paid our regular payments every month. Something clicked about six months ago. When I looked at the numbers, I saw that if we used our extra money – like what we put into savings – we could close the loan in no time.
Avoiding interest charges and having one less financial obligation was a major motivation for Lenz and his family.
“We had experienced the euphoria of not having loan repayments, and we wanted to go back,” Lenz said. “It was the engine to pay [the car loan] disabled. ”
After thinking about how to pay off their car loan early, Lenz and his family implemented an aggressive repayment strategy. Because the car loan was a priority for them, they juggled some of their other financial contributions. They did the math and decided it was worth reducing their contributions to their children’s retirement and education funds.
By stopping their contributions to retirement and college savings, they were able to invest hundreds of additional dollars for their car loan.
They also searched around their house for things they could sell for extra money to use for payments. They sold toys, clothes, and housewares on sites like Craigslist to make more money.
Lenz advised “look[ing] around and figured[ing] what you have that you don’t use. ”
“People have hundreds or thousands [of dollars worth of stuff] they don’t use, and that can give you a good start, ”he said. “It can give you enough momentum to get into the habit of thinking about paying off your debt.”
Lenz and his family focused on paying off the car loan as soon as possible and paid it off in three years. It was way ahead of their scheduled repayment date, which helped them save more money.
Even at such a low interest rate, Lenz’s family saved money by paying off their car loan early. For example, if you had the average car loan of $ 32,480 for an average term of 69 months at 2.19%, you would pay off $ 34,598 in total, or about $ 2,118 in interest.
If, like Lenz, you decided to speed up your repayment and pay off your debt in 36 months instead of 69, you would only pay off $ 33,588. By making additional payments, you could save over $ 1,000 in interest. You can use this calculator to run the numbers on your own loan:
Lump sum additional payment calculator
However, this assumes that your lender does not charge a penalty for prepaying your loan. Moreover, as mentioned, some lenders also require a fixed amount of pre-calculated interest, no matter how quickly you repay your loan.
So before you make any additional payments, contact your lender or check your loan agreement to see if you will need to pay these additional fees. If you do, you might not get the amount of interest savings you hope for.
Many people wouldn’t mind speeding up payments on a low interest loan. Lenz acknowledges that with an interest rate of 2.19%, his family might have made more money by investing rather than paying off their debt.
However, finances aren’t always about what makes sense on a calculator, but what works best for a family’s peace of mind. For Lenz, being debt free was a huge burden on his shoulders.
“Not having monthly obligations is huge,” Lenz said. “It allows me to focus on what is important… like vacations and family travel.”
But whether or not you decide to pay off a car loan early is worth it, critically examining new purchases and loans can help you limit your debt and achieve your future goals.
Are you motivated by Lenz’s story? Before diving, learn the the advantages and disadvantages of prepaying your car loan to see if that’s right for you.
Rebecca Safier contributed to this report.
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