Like millions of other Americans, Tyler Lenz took out a car loan to buy a new vehicle for his growing family. However, he was determined to get out of debt as quickly as possible so he could focus on his other financial goals.
“We never wanted to have a car loan,” Tyler says. “But we ended up buying a Nissan Armada sooner than we wanted to because we needed a family vehicle.”
Through hard work and discipline, Tyler paid off his car loan ahead of schedule, freeing up money in his budget each month. Find out how he accelerated his debt repayment and see if paying a car loan off early is right for you, too.
Paying a car loan off early
Relying on a car loan to buy a vehicle can be an expensive gamble. The average amount customers borrow for a new car is $30,314, according to Edmunds. The average monthly car payment is $510 over 69.1 months with 5% interest. If you have other forms of debt, such as student loans or credit cards, that’s a large chunk of your income to spend on another loan.
For Tyler, the interest charges were a big problem. If you borrowed the average amount of $30,314 and had a 60-month repayment term at 5% interest, you’d pay $4,010 in interest. That’s an extra $4,000 you could have used to pay for other goals, such as paying down debt, building an emergency fund, or even planning a vacation.
The thought of wasting extra money on interest was a wake-up call for Tyler. Even though he had a low interest rate of 2.19%, Tyler is a Dave Ramsey fan. According to Ramsey, debt — any debt at all — is an emergency that requires immediate action.
With that mindset, Tyler felt like the loan was a drag on the family’s resources.
“For two years, we didn’t do anything to accelerate payments,” he says. “We just paid our regular payments every month. Something just clicked about six months ago. When I looked at the numbers, I saw that if we used our extra money — like what we put towards savings — we could hammer out the loan in a short time.”
Avoiding interest charges and having one less financial obligation was a major motivator for Tyler and his family.
“We had experienced the euphoria of not having loan payments, and we wanted to get back there,” says Tyler. “That was the driver for paying [the car loan] off.”
Accelerating debt repayment
Tyler and his family set up an aggressive repayment strategy. Because the car loan was a priority to them, they juggled some of their other financial contributions. They did the math and decided it was worth it to cut back on contributing to their retirement and kids’ education funds.
By pausing their retirement and college savings’ contributions, they were able to put hundreds extra towards their car loan.
They also looked around their home for things they could sell for extra money to use for payments. They sold toys, clothes, and household items on sites like Craigslist to make more money.
“[L]ook around and figure out what you have that you don’t use,” says Tyler. “People have hundreds or thousands [of dollars worth of stuff] they don’t use, and that can give you a good start. It can give you enough momentum to build the habit of thinking about paying off debt.”
How much money could you save?
Tyler and his family focused on paying off the car loan as soon as possible and paid it off in three years. That was well ahead of their scheduled repayment date, helping them save more money.
Even at such a low interest rate, Tyler’s family saved money by paying off their car loan early. If you had the average car loan of $30,314 at 2.19% for 60 months, you’d pay back $32,031 in total. That’s about $1,700 in pure interest.
However, if you decided to accelerate your repayment like Tyler and pay off your debt in 36 months instead of 60, you’d pay back just $31,349. By making extra payments, you could save nearly $1,000 in interest.
Should you pay off your car loan early?
Many people wouldn’t worry about accelerating payments on a low-interest loan. Tyler acknowledges that, at 2.19% interest, the Lenz family might have made more money by investing rather than paying off debt.
However, finances aren’t always about what makes sense on a calculator, but what works best for the family’s peace of mind. For Tyler, being debt-free was a huge weight off his shoulders.
“Not having monthly obligations is huge,” Tyler says. “It allows me to focus on what’s important … like family vacations and trips.”
Whether or not you decide paying a car loan off early is worth it, looking at new purchases and loans critically can help you limit debt and afford your future goals.
Are you motivated by Tyler’s story? Before diving in, learn the pros and cons of paying off your car loan early to see if it’s right for you.
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