What to Know About Accelerated Auto Loans

• Original loan balance: This is the amount of money you borrowed when you bought the car. For example, if you bought a car for $30,000 with a $6,000 down payment, your original auto loan balance is $24,000.
• Annual percentage rate: This is the interest rate you agreed to pay on your loan, usually between 5 and 25 percent.
• Initial loan term: This is the amount of time over which you agreed to pay off your loan, usually between 36 and 72 months, sometimes up to 84 months.
• Payments made: This is how many monthly payments you’ve made since purchasing the car.
• Additional monthly payment: This is how much extra you plan to put toward your loan payments every month.

Accelerating your auto loan means paying more than the required minimum monthly payments in order to pay off the loan faster than the scheduled repayment period.

Pros of Accelerating Your Auto Loan Payments

Save on Interest

The faster you pay off your loan, the less you’ll pay in interest over the course of the loan.

For example, if you take out a $24,000 new-car loan at a 10 percent interest rate with a 60-month loan term, your monthly payments will be around $510, and you’ll pay $6,596 in interest over the life of the loan. But let’s say starting two years into your loan, you increase your monthly payments by $150. Your payments will go up to $660, but you’ll save $657 in interest overall and own the car 10 months sooner than you would have.

Consider the following factors when deciding whether it’s a good idea to accelerate your loan payments

Do you have other outstanding debt?

Prioritize paying off debts with the highest interest rates. Credit cards, personal loans, and private student loans tend to have higher interest rates than auto loans — so if you have extra cash, it makes sense to put it toward those debts first.

Do accelerated payments fit your budget?

Financial experts recommend spending no more than 10 percent of your take-home income on car loan payments, and no more than 15 to 20 percent on overall car expenses (such as fuel, maintenance, and auto insurance). If accelerating your payments will squeeze your budget too tightly, it may not be worth it, especially if you end up falling behind on other bills.

Would making a large one-time payment make more sense?

Instead of increasing your monthly payments, you can put a lump-sum of money toward your auto loan to pay it off more quickly. If you get a tax refund or holiday bonus, consider putting it toward a debt like your car loan.