Brief Summary
This video provides a comprehensive guide on how to save money on your car loan by making extra payments the right way and other effective strategies. It emphasizes the importance of principal-only payments, refinancing, and budgeting to accelerate loan payoff and reduce interest.
- Making principal-only payments significantly reduces the total interest paid over the life of the loan.
- Refinancing to a lower interest rate and making bi-weekly payments can further accelerate loan payoff.
- Budgeting and using lump sum payments like tax refunds can also make a substantial impact.
Introduction: Saving Money on Your Car Loan
The video introduces a simple strategy to save money on a car loan, emphasizing that viewers should stay until the end for additional tips. The most common mistake people make is paying only the agreed monthly amount, but the quickest way to eliminate a car loan is by making extra payments correctly. The video promises to cover five more ways to pay off a loan faster, regardless of financial situation.
Understanding Loan Structure and Interest Rates
When you get a car loan, the monthly payment consists of the principal (borrowed amount) and the interest (cost of borrowing). With average new car interest rates around 7% and used car rates around 11%, and inflation averaging 3%, it's more economical to pay off the loan faster. Paying off the loan quickly saves money due to the high interest rates on car loans compared to the average inflation rate.
The Importance of Principal-Only Payments
Most people make the mistake of paying their monthly payment ahead of time instead of applying extra money directly to the principal. To avoid this, ensure there's an option to make a "principal only payment," or call the lender. Paying down the principal lowers the total loan amount, reducing the interest paid over time. This strategy works if the auto loan does not have a prepayment penalty, which can be verified in the loan agreement or by contacting the lender.
Illustrative Examples of Savings with Extra Payments
The video provides several numerical examples to illustrate the savings from making extra principal payments. For instance, a $40,000 loan at 7% interest over 72 months results in a $681 monthly payment and $9,110 in total interest. Adding an extra $500 per month reduces the payoff time to 46 months and the total interest to $6,295, saving nearly $3,000. Even smaller extra payments, like $200, can significantly reduce the loan term and interest paid.
Personal Experience and Strategy Validation
The presenter shares a personal experience of using principal-only payments to quickly pay off a car loan while in the Marines. By putting every extra dollar towards the principal after deployments, the presenter paid off the car faster and saved a significant amount of money. The strategy's effectiveness hinges on the lender allowing principal-only payments.
Additional Strategies for Faster Loan Payoff
Five additional strategies to pay off a car loan faster, even on a tight budget, are presented:
- Refinancing: Secure a lower interest rate or shorten the loan length by refinancing with a new lender.
- Bi-weekly Payments: Switch from monthly to bi-weekly payments, effectively making one extra payment each year.
- Rounding Up Payments: Round up monthly payments and apply the extra amount to the principal.
- Canceling Add-ons: Cancel additional protections or insurances and apply the pro-rated refund to the loan principal.
- Lump Sum Payments: Use tax refunds, bonuses, or unexpected cash to pay down the car loan.
Budgeting and Financial Discipline
Budgeting is crucial for identifying areas to cut costs and save money, which can then be used to pay down the car loan faster. Tracking spending habits for a couple of months provides a clear picture of where money is going and how much can be saved. While other strategies like velocity banking exist, they don't necessarily make the debt cheaper, and auto loans affect credit differently than credit cards.
Final Advice and Considerations
Avoid putting all savings or emergency funds into paying off the car loan, as unexpected events can occur. The video directs viewers to other videos about paying off credit card debt for those dealing with multiple debts.
