It’s one of the questions we get asked the most often: how can I pay off my loan faster?
There’s no magic wand to making a loan disappear, but there are some ways you can pay off your loan sooner. We’ll look into those (with examples) below.
Just remember that some lenders charge fees for extra repayments or early termination. If this is something important to you, tell our brokers when you’re organising your loan and we’ll make sure to find you an appropriate lender.
Establishing your example loan
For the purpose of this article, we’re going to assume that you’re taking out a $50,000 car loan over seven years (84 months) at a 7.29% rate with no balloon payment.
Obviously with all things financial, individual circumstances will change things, so this is for illustrative purposes only.
Using our (free) car finance calculator, we can see that a $50k loan like that would likely default to a $761.74 monthly payment which would lead to someone paying $13,986.33 in interest over those seven years.
Paying off that loan quicker would mean less interest paid, so how do we go about that?
Read more: See how balloon payments impact your loan repayments
Strategies to pay off your loan quicker
We’re going to look at a few different ways to pay off your loan early. These include the frequency of your payments, the amount you repay, making extra repayments and refinancing your loan.
Pay weekly
If you’re paying $761.64 a month, multiplying that by 12 works out to $9140.88 a year. If we then divide that by 52, it works out to $175.79 a week.
You might think that changing how often you pay doesn’t really make an impact, but by switching to weekly repayments you’ll cut down on the interest you pay over the term of the loan.
By making the simple action of changing your direct debits to go out weekly, you’ll save money.
But things don’t stop there. Most people think that there are ‘about four’ weeks in a month. If you divide your monthly repayment by four ($190.41), in most months you won’t notice a difference in your outgoings.
However, because the calendar wasn’t created in the days of spreadsheets, it’s not quite that neat. With this payment routine, you’ll be making the equivalent of 13 monthly payments in a year. Doing this over seven years means you’ll be paid off more than six months early – saving even more money on interest charges.
Read more: Find out about different budgeting techniques
Make bigger payments, make extra payments
It’s not exactly rocket science, but the more you can pay off your loan, the quicker you’ll be done.
A simple way to do this is to round up from the minimum payment – going from $761.64 to $800 a month (or going from $190.41 to $200 a week) is close to an extra $500 a year. So long as you can comfortably make these payments, you’ll reap the benefits of paying off your loan sooner.
Another option is to make extra payments when you can. This works well for people in sales. When you have a good month for commission, put a bit extra towards your loan and you’ll notice the total tumble down more quickly.
Use your tax return
According to HR Block, the average Australian gets a tax refund of $2576 (self-prepared) or $3550 (using a tax agent).
Lots of people have their own traditions for how they use this money, but if you’re paying off a loan it can make a huge difference. Stretch those numbers out seven years and you’re looking at $18,000 to $24,850.
Using your tax return to pay off your car loan, especially in the first few years, will have a huge impact on how quickly you pay it off.
Refinance your loan
If your financial situation changes over the term of your loan, you might be eligible for a better rate. Once you have a lower interest rate, if you can keep your repayments the same, you’ll be paying off more of your principal.
Likewise, if you have multiple loans you’re paying off, reconsolidating these into a single loan can get you a better rate, may reduce fees and make it easier for you to manage your repayments.
While everyone’s situation is different, a good rule of thumb is to think about refinancing a year or two into your loan.
Want to know if you’re eligible? Call our team on 1300 28 57 67 and we’ll see if we can find you a better deal.
