Paying off your car loan faster can substantially improve your financial position. If you are suffering from poor credit and struggling to access additional credit for future loans, changing the way you pay off your loan can be extremely effective.
According to Statistics Canada, the average Canadian owes $1.50 for every dollar of disposable income. Debt, the contract between lenders and borrowers, is an important part of many Canadian families. New homes, goods and services, education investment and car loans are all types of financing that most Canadians consider an asset to living a comfortable lifestyle. After a mortgage, automobiles are typically the second most expensive investment that a person will make in his or her lifetime.
Buying a vehicle out of pocket isn’t unheard of, however most Canadians don’t have the cash available to buy a used or new car without financing. Lenders will consider a borrower’s income, current debt load and collateral assets before making an approval on a loan. The key to managing a car loan is to find a way to pay it off as effectively as you can. If you’re interested in buying a new car, it’s important to understand the risks involved: potential interest rate increases, personal income complications, property loss if secured with an asset, etc.
READ MORE: How Interest Rates Impact Your Car Loan
Maintaining good financial literacy and practicing money management skills will help you make responsible financial decisions, which could help you boost your credit score, minimize stress and save money. Once you’ve been approved for auto financing, the next steps are learning how to manage your car loan. These strategies will serve as important guidelines to keep in mind throughout your entire car loan journey.
As you enter a new car loan agreement, keep these methods in mind to pay off your car loan faster.
1. INCREASE YOUR MONTHLY PAYMENTS
Increasing the size of your monthly payment is a strategy that can help you pay down your auto loan quickly. Consistently increasing the amount of money that you put towards your loan can significantly reduce the length of your overall loan term.
Making bi-weekly payments instead of monthly payments is another method that cuts the accumulation of interest rates, which can shorten the term of your loan by several months. If you receive additional money during the lifespan of your loan agreement, it’s a good idea to put this extra income towards your loan. By paying off a larger portion of your loan, you will be able to speed up the rate at which you pay. Lump sum payments aren’t set in stone, and for the most part can be made at the convenience of the loan borrower. Speak to your lender to see if you can start, paying bi-weekly, increase your monthly loan payment or make a lump sum payment.
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2. DOWNSIZE YOUR CAR
Perhaps it isn’t your current car loan but the vehicle itself that needs to be adjusted to meet your payment needs. If the size of your loan is too much for you to handle and you are struggling to pay it off, the expense of your car might be to blame. You may want to consider selling or trading in your current car for a more cost-efficient choice. There are a variety of vehicle models that can offer a safe and affordable option while still being attractive to drivers. By switching to a less expensive car, you can take on a smaller car loan to significantly lighten your credit and payment loan. With a smaller loan and consistent monthly payments, you can work towards paying off your loan in a much shorter time frame. If this last concept seems like it may be a better fit for your current situation, downsizing to a smaller, less costly vehicle could help you make a lot more headway on your loan repayment goal.
3. REVIEW YOUR CURRENT BALANCE
Review the loan details with your lender to see if you’re allowed to make bigger monthly payments, as some lenders will charge a payoff penalty if the loan agreement states that you must pay a set amount every month. Before you sign the auto loan contract, ask your lender if there is a fee for early payoff. Making bigger payments on your loan could reduce the interest rate, but it’s important to understand how much of your monthly payment goes towards the loan principal and how much goes towards fees and rates.
If you’re struggling to make your monthly loan payments, snowball your debt by paying off higher interest rate loans first. The average interest rate on a credit card is approximately three times greater than an auto loan. If you hold a lot of credit card debt, it might be a good idea to focus on paying your revolving credit down first. Reviewing your loan details could help you boost your credit score and save money.
If you want to pay down your auto loan faster, making some extra side cash can help contribute to a quicker payoff. A recent report by Equifax states that delinquencies and bankruptcies are down in Canada. Although this is great news, you should always be cautious when taking out a loan. Make sure that you’re comfortable paying your bills and financially prepared for any financial risks.
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