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.
Interested in refinancing student loans?Here are the top 6 lenders of 2020!
|Lender||Variable APR||Eligible Degrees|
|1.99% – 5.64%1||Undergrad & Graduate|
|1.89% – 5.90%2||Undergrad & Graduate|
|2.25% – 6.09%3||Undergrad & Graduate|
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|2.39% – 6.01%||Undergrad |
|1.99% – 5.41%5||Undergrad & Graduate|
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1 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 2.98% APR (with Auto Pay) to 5.79% APR (with Auto Pay). Variable rate loan rates range from 1.99% APR (with Auto Pay) to 5.64% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of July 31, 2020, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 7/31/2020. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at [email protected], or call 888-601-2801 for more information on our student loan refinance product.
© 2020 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.
2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
All credit products are subject to credit approval.
Laurel Road began originating student loans in 2013 and has since helped thousands of professionals with undergraduate and postgraduate degrees consolidate and refinance more than $4 billion in federal and private school loans. Laurel Road also offers a suite of online graduate school loan products and personal loans that help simplify lending through customized technology and personalized service. In April 2019, Laurel Road was acquired by KeyBank, one of the nation’s largest bank-based financial services companies. Laurel Road is a brand of KeyBank National Association offering online lending products in all 50 U.S. states, Washington, D.C., and Puerto Rico. All loans are provided by KeyBank National Association, a nationally chartered bank. Member FDIC. For more information, visit www.laurelroad.com.
As used throughout these Terms & Conditions, the term “Lender” refers to KeyBank National Association and its affiliates, agents, guaranty insurers, investors, assigns, and successors in interest.
Assumptions: Repayment examples above assume a loan amount of $10,000 with repayment beginning immediately following disbursement. Repayment examples do not include the 0.25% AutoPay Discount.
Annual Percentage Rate (“APR”): This term represents the actual cost of financing to the borrower over the life of the loan expressed as a yearly rate.
Interest Rate: A simple annual rate that is applied to an unpaid balance.
Variable Rates: The current index for variable rate loans is derived from the one-month London Interbank Offered Rate (“LIBOR”) and changes in the LIBOR index may cause your monthly payment to increase. Borrowers who take out a term of 5, 7, or 10 years will have a maximum interest rate of 9%, those who take out a 15 or 20-year variable loan will have a maximum interest rate of 10%.
KEYBANK NATIONAL ASSOCIATION RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE.
This information is current as of September 9, 2020. Information and rates are subject to change without notice.
3 Important Disclosures for SoFi.
4 Important Disclosures for Splash Financial.
Splash Financial Disclosures
Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet applicable underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates are reserved for the highest qualified borrowers. If approved, your actual rate will be within a range of rates and will depend on a variety of factors, including term of loan, a responsible financial history, income and other factors. Refinancing or consolidating private and federal student loans may not be the right decision for everyone. Federal loans carry special benefits not available for loans made through Splash Financial, for example, public service loan forgiveness and economic hardship programs, fee waivers and rebates on the principal, which may not be accessible to you after you refinance. The rates displayed may include a 0.25% autopay discount.
The information you provide to us is an inquiry to determine whether we or our lenders can make a loan offer that meets your needs. If we or any of our lending partners has an available loan offer for you, you will be invited to submit a loan application to the lender for its review. We do not guarantee that you will receive any loan offers or that your loan application will be approved. Offers are subject to credit approval and are available only to U.S. citizens or permanent residents who meet applicable underwriting requirements. Not all borrowers will receive the lowest rates, which are available to the most qualified borrowers. Participating lenders, rates and terms are subject to change at any time without notice.
To check the rates and terms you qualify for, Splash Financial conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, the lender will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
Splash Financial and our lending partners reserve the right to modify or discontinue products and benefits at any time without notice. To qualify, a borrower must be a U.S. citizen and meet our lending partner’s underwriting requirements. Lowest rates are reserved for the highest qualified borrowers. This information is current as of September 10, 2020.
5 Important Disclosures for CommonBond.
Offered terms are subject to change and state law restriction. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900), NMLS Consumer Access. If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 0.16% effective August 10, 2020.