A Simple How To That Will Pay Off Your Loan Quicker
If you get paid on a bi-weekly basis (every two weeks) I’m sure you’ve planned your budget around two paychecks each month. There are actually two months during the year when you will receive three paychecks. It’s like having a paycheck not earmarked for anything. In our Simply Frugal Life, every dollar has its place. Here is a suggestion that will allow you to pay off your car loan several months early. You’ll be making extra payments that won’t seem like extra payments.
Let’s assume that you have a $15,000 car loan. The rate is 3.9% and the term is 48 months. That would give you a monthly payment of about $340.00. When planning your budget, put aside $170.00 from each paycheck towards your car payment. Let’s assume that you make a $170.00 payment every two weeks. When you first start doing this, make sure that your second of the two payments is before the due date of your monthly payment. This will ensure that your payment is on time each month. It will also avoid unnecessary late fees and interest accrual. Continue making your $170.00 payment every two weeks. At the end of the year, you have made an extra full monthly payment. All without making any other adjustments to your monthly budget. So, what does this mean? You will pay off your loan in 44 months instead of 48 months and save yourself $116.00 in interest.
We’ve found a quick and easy way to pay off your car loan early without making any adjustments to your budget. Now, let’s take a look at the biggest mistakes people make when taking out a car loan.
Negotiating a Monthly Payment vs. a Purchase Price
You should go into the process knowing what you can afford. You should also decide how much you are willing to pay for a car. Dealerships are often willing to give you terms of up to 84 months. If the dealer is trying to fit you into a monthly payment, you may lose track of the cost of the car. Don’t offer your payment budget to the salesperson up front.
Rolling “Negative Equity”
Negative equity is when you owe more than the car is worth. This often happens when the dealer rolls the balance on the current loan into the new loan. So you are not only paying interest on the new car, but you’re still paying interest on the old car. This is also referred to as being “upside down”.
Not Knowing Your Credit Score or Credit Worthiness
Your credit score will determine the rate of your loan. Know going into the process where you stand. Credit Karma is a great tool to use to keep track of your credit. There is no cost to you and no credit card required to sign up. Credit Karma will offer suggestions to build your credit worthiness. The loan payment in our example goes from $340.00 per month to $380.00 per month if our rate goes up to 9.9%
Financing Add-ons That You Can Buy Separately
Do your research ahead of time to see if purchasing add-ons like an extended warranty is more cost effective if you buy it yourself. Remember, anything that the dealer ads on to the loan is something that you are financing for the term of your loan.
Think about this the next time you finance a car. You’ll be one step closer to living the Simple Life you desire.