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Car loans can be a crucial financial tool to help you purchase the vehicle you’re after, but the longer you have them, the more you’ll pay overall. That’s why it’s important to know about how to pay off your car loan faster. Learn about key tips for clearing your debt sooner and how much they can save you right here with Savvy today!
Choose a shorter car loan term
First and foremost, perhaps the simplest way to ensure you pay off your car loan quickly is to choose a shorter car loan term from the outset. This won’t necessarily be an option for everyone, as shortening your term means your repayments will end up being more expensive.
However, doing so will not only clear your debt quicker, but also save you money overall. Here’s how different terms can help you save:
| Loan term | Repayments | Total interest | Total saving |
|---|---|---|---|
|
Five years |
$602 |
$6,069 |
N/A |
|
Four years |
$726 |
$4,818 |
$1,251 |
|
Three years |
$934 |
$3,595 |
$2,474 |
|
Two years |
$1,350 |
$2,400 |
$3,669 |
Calculations based on a $30,000 car loan repaid monthly with a 7.50% p.a. interest rate.
For only around $30 extra per week, you could save $1,250 overall and have your loan paid off a year earlier. The jump to three years is steeper but allows you to reap even more rewards.
Make additional repayments
Another way to pay off your car loan sooner is to make additional repayments towards your debt. This can be from as little as $50 per month to doubling your minimum required instalments. The more you pay, the faster you’ll have your loan in the rear-view mirror and the more you’ll save. The following table demonstrates this:
| Loan term | Extra payment | Total payments | Total interest | Total saving | Total loan term |
|---|---|---|---|---|---|
|
Five years |
$0 |
$602 |
$6,069 |
N/A |
Five years |
|
Five years |
$100 |
$702 |
$5,019 |
$1,050 |
Four years, two months |
|
Five years |
$250 |
$852 |
$3,994 |
$2,075 |
Three years, four months |
Calculations based on a $30,000 car loan repaid monthly with a 7.50% p.a. interest rate.
However, it’s important to note that many car loans come with early break fees, which could reduce or sometimes cancel out the benefit of making additional payments. Check with your lender if you’re unsure about whether they charge fees for early settlement.
Round up your repayments
Rounding up your repayments follow the same principal as additional repayments, but often on a smaller scale. This may mean you’re rounding up to the nearest $50 or $100, which can still make a difference. Using the same loan example as in the above table, this is how rounding up can help you pay off your car loan faster and save:
| Loan term | Extra payment | Total payments | Total interest | Total saving | Total loan term |
|---|---|---|---|---|---|
|
Five years |
$0 |
$602 |
$6,069 |
N/A |
Five years |
|
Five years |
$48 |
$650 |
$5,514 |
$555 |
Four years, seven months |
|
Five years |
$98 |
$700 |
$5,037 |
$1,032 |
Four years, three months |
Calculations based on a $30,000 car loan repaid monthly with a 7.50% p.a. interest rate.
Again, it’s important to check whether early repayment fees will impact your loan before you start rounding up your payments.
Refinance to a car loan with a shorter term
Alternatively, you could refinance your car loan to one with the same or a different lender in order to shorten your term. You can look at the following table to see how refinancing your loan after two years can help you save:
| Loan term | Balance after two years | Interest after two years | Refinanced term | New repayments | Total interest | Total saving |
|---|---|---|---|---|---|---|
|
Five years |
$19,326 |
$3,753 |
N/A |
$602 |
$6,069 |
N/A |
|
Five years |
$19,326 |
$3,753 |
Four years |
$870 |
$5,299 |
$770 |
|
Five years |
$19,326 |
$3,753 |
Three years |
$1,677 |
$4,547 |
$1,522 |
Calculations based on a $30,000 car loan repaid monthly with a 7.50% p.a. interest rate.
Like additional payments, refinancing your loan could result in additional costs due to early break fees, so it’s worth weighing up the benefits of refinancing against the charges you stand to pay for exiting your current loan early.
Increase your repayment frequency
Although you may not realise it, increasing your repayment frequency from monthly to fortnightly or weekly can also help you save and, crucially, may shorten your loan term. This is because while there are 12 months in a year, there are 26 fortnights and 52 weeks, both of which add up to approximately 13 months’ worth of payments per year.
This won’t always reduce the length of your loan term, but paying your instalments on a more regular basis where possible is beneficial for your car finance deal.
Balloon payments: can they help you pay off a car loan faster?
A balloon or residual payment is essentially a deposit that you pay at the end of your loan term, instead of the beginning. These can be added to car loans to reduce the cost of monthly instalments, but they actually cost more money overall. Crucially, though, balloon payments don’t directly help you pay your loan off at a faster rate.
This feature increases the cost of car loans because of the way interest is calculated. It’s based on the ongoing balance of your loan, which reduces to $0 over your term. However, by adding a balloon payment of $3,000, for instance, your balance will decrease to $3,000 instead.
This means your loan’s balance will fall more slowly, which in turn means the interest charged on your repayments will also stay higher for longer. The table below shows how different balloons can affect the cost of your loan:
| Balloon payment | Repayments | Total interest | Total saving |
|---|---|---|---|
|
$6,000 |
$519 |
$7,105 |
N/A |
|
$3,000 |
$560 |
$6,587 |
$519 |
|
$1,500 |
$581 |
$6,328 |
$777 |
|
$0 |
$602 |
$6,069 |
$1,037 |
Calculations based on a $30,000 car loan repaid monthly over five years with a 7.50% p.a. interest rate.
As you can see, not adding a balloon at all can save hundreds of dollars compared to having one worth even 5% of your loan amount.
What to consider before paying off your car loan faster
- Potential savings: think about how much you can save by paying off your loan more quickly with one of the methods listed above.
- How it affects your budget: as shown in the above tables, shorter loan terms usually result in higher repayments, so it’s important to not put your budget under too much stress.
- Any extra fees charged: if you’re paying your loan off ahead of schedule, always check what fees will be charged, if any.
- Know your loan inside and out: being across the terms and conditions of your loan is vital when it comes to considering your options for paying it off faster.
- Compare loan offers: constantly comparing offers on the market will help you keep an eye out for good deals, such as those which could help you pay off your loan sooner.
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This guide provides general information and does not consider your individual needs, finances or objectives. We do not make any recommendation or suggestion about which product is best for you based on your specific situation and we do not compare all companies in the market, or all products offered by all companies. It’s always important to consider whether professional financial, legal or taxation advice is appropriate for you before choosing or purchasing a financial product.
The content on our website is produced by experts in the field of finance and reviewed as part of our editorial guidelines. We endeavour to keep all information across our site updated with accurate information.
Approval for car loans is always subject to our lender’s terms, conditions and qualification criteria. Lenders will undertake a credit check in line with responsible lending obligations to help determine whether you’re in a position to take on the loan you’re applying for.
The interest rate, comparison rate, fees and monthly repayments will depend on factors specific to your profile, such as your financial situation, as well others, such as the loan’s size and your chosen repayment term. Costs such as broker fees, redraw fees or early repayment fees, and cost savings such as fee waivers, aren’t included in the comparison rate but may influence the cost of the loan. Different terms, fees or other loan amounts may result in a different comparison rate.
