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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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 3.89% APR (with Auto Pay) to 6.97% APR (with Auto Pay). Variable rate loan rates range from 2.47% APR (with Auto Pay) to 6.23% 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 Month/Day/Year, 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 08/21/18. 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 firstname.lastname@example.org, or call 888-601-2801 for more information on ourstudent loan refinance product.
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2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
Savings example: average savings calculated based on single loans refinanced from 9/2013 to 12/2017 where borrowers’ previous rates were disclosed. Assumes same loan terms for previous and refinanced loans, and payments made to maturity with no prepayments. Actual savings for individual loans vary based on loan balance, interest rates, and other factors.
Application detail: 5 minutes indicates typical time it takes to complete application with applicant information readily available. It does not include time taken to provide underwriting decision or funding of the loan.
Instant rates mean a delivery of personalized rates for those individuals who provide sufficient information to return a rate. For instant rates a soft credit pull will be conducted, which will not affect your credit score. To proceed with an application, a hard credit pull will be required, which may affect your credit score.
Total savings calculated by aggregating individual average savings across total borrower population from 9/2013 to 12/2017. Individual average savings calculation based on single loans refinanced from 9/2013 to 12/2017 where borrowers’ previous rates were provided. Assumes same loan terms for previous and refinanced loans, and payments made to maturity with no prepayments. Actual savings for individual loans vary based on loan balance, interest rates, and other factors.
3 Important Disclosures for SoFi.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
5 Important Disclosures for CommonBond.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.47% – 6.99%3||Undergrad & Graduate||Visit SoFi|
|2.47% – 6.23%1||Undergrad & Graduate||Visit Earnest|
|2.47% – 8.03%4||Undergrad & Graduate||Visit Lendkey|
|2.95% – 6.37%2||Undergrad & Graduate||Visit Laurel Road|
|2.48% – 6.25%5||Undergrad & Graduate||Visit CommonBond|
|2.72% – 8.32%6||Undergrad & Graduate||Visit Citizens|