If you have an auto loan, your car payment may be one of your largest monthly expenses. Plus, it’s a long-term financial obligation. Some lenders have terms that stretch out for 66, 72, or even 84 months. With longer repayment periods, you end up spending a lot in interest. As a result, working to reduce your balance quickly is a smart idea. If you want to pay off your car in one year, here’s how to go about it.
Know Your Principal and Interest Rate
First and foremost, you need to look at your auto loan balance and interest rate. By knowing how much remains and the APR, you can calculate what you’ll need to pay to finish up within a year.
It’s important to recognize that the remaining principal isn’t a reflection of how much money you’ll need to pay off your loan. That number doesn’t include the interest that will accrue as you work to reduce the balance.
Additionally, you need to check and see if you are subject to an early payoff penalty. While most lenders don’t assess an early payoff penalty, some do. That fee compensates them for some of the interest they are missing out on because you paid your loan off faster. If your lender has one, then make a note of that amount.
Factor in Interest
Calculating interest on a car loan can be a bit challenging. Luckily, there are plenty of tools that can show you just what it will take to pay off your loan in 12 months.
Now that you know the remaining principal amount and your interest rate, head online and find a loan calculator. Input your remaining principle into the loan amount section and set your term to one year or 12 months. Then, type in your interest rate into the appropriate blank and hit calculate.
When the calculation is complete, you’ll see what you would need to pay each month to finish up your auto loan in a year. This can give you a better picture of how much it will cost overall, as it at least takes interest into account.
However, it’s important to note that this approach divides your loan into 12 equal installments. If you pay more or less in any given month, you may need to redo the calculation to see how much it will cost to repay your loan in the remaining time. Additionally, if you have a payoff penalty, that’s an additional amount you need to be ready to pay.
Plan for Extra Principle Payments
Once you decide to pay off your loan in 12 months, you don’t necessarily want to change anything about the regular payment schedule. Instead, you should make extra principal payments, allowing you to chip away at your balance.
Contact your lender or look at the company’s website to see how principle payments have to be submitted. Making a principal-only payment might involve a different process, so you need to find out what is required.
Gather Up the Funds
Now that you know how to money you need to apply directly to the principal, you have to gather the funds. Precisely what that will entail depends on your personal financial situation.
If your regular income is enough to cover that additional amount, then you won’t need to do anything but submit the extra principal payments every month. However, if your salary isn’t enough, then you’ll need to find other sources for the money.
One great option is small windfalls. If you get quarterly or annual bonuses at work, consider directing those to your car loan. Sending your tax refund to your car loan could also be a smart move.
If you have items around the house you don’t need, why not sell them? Then, you can put the money you make to your auto loan. You can have a yard sale, use a consignment shop, or sell items through apps like Letgo.
Increase Your Income
Increasing your income may also be a great approach. Find a part-time job that lets you earn enough to pay off your car loan in one year. Try freelancing as a side hustle. Rent out a room on Airbnb. Sign up as a pet sitter on Care.com or advertise your services at a local coffee shop. Any potential income stream could be worth exploring, so consider what fits into your schedule and give it a try.
Finally, work to reduce your other expenses. If you can save money on groceries, utilities, entertainment, or anything else, you can use the extra cash to pay down your car loan. While it might feel like a big sacrifice, remember, you only have to do it for a year. Then, once your auto loan is paid off, you can adjust your budget again.
Ultimately, paying off a car loan in a year might be challenging, but it is possible. Just use the steps above and see if you can make it happen.
Do you have any tips that can help buyers pay off their cars in one year? Share your thoughts in the comments below.
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Tamila McDonald has worked as a Financial Advisor for the military for past 13 years. She has taught Personal Financial classes on every subject from credit, to life insurance, as well as all other aspects of financial management. Mrs. McDonald is an AFCPE Accredited Financial Counselor and has helped her clients to meet their short-term and long-term financial goals.