How to Pay Off Your Alberta Car Loan Faster
If you’re contemplating how to pay off your Alberta car loan faster, you’re not alone. The sky-high price tags on new vehicles have steered many in Alberta towards financing a used car. While it facilitates a smoother ride off the lot, it can leave you with a monthly financial burden that’s not so smooth.
Car loan interest rates are also a big concern for many Albertans. In an attempt to curb inflation, interest rates have been steadily increasing, making it more expensive to borrow money. We did a deep dive on this topic in our blog post How Rising Interest Rates Affect You and Your Debt.
Should You Pay Off Your Car Loan Before Other Debts?
When considering whether you should pay off your car loan before other debts, there are several factors to evaluate. Understanding the specifics of your personal financial situation and having a well-defined strategy can help you make an informed decision. When it comes to knowing what debt to pay off first in general, we covered all the bases in our blog post Debt Repayment: What Debt Should I Pay Off First?
Factors to Consider
- Interest Rates: One method to prioritize debt repayment is to focus on interest rates. Debts with higher interest rates can accrue costs quickly over time. If your car loan has a higher interest rate than other debts, it may be beneficial to prioritize its repayment.
- Loan Amounts: The “snowball method” of loan repayment emphasizes paying off smaller loans first to gain momentum and a sense of achievement. If your car loan is one of the smaller debts, this approach might encourage you to pay it off sooner.
- Penalties and Fees: Some loans, including certain car loans, may have prepayment penalties. It’s essential to be aware of these when planning repayments to avoid any unexpected costs.
- Emotional Factors: Psychological and emotional factors can play a significant role in debt repayment. If eliminating your car loan offers peace of mind or reduces stress, it may be worth prioritizing, even if it doesn’t align perfectly with a pure numbers-based approach.
If you answer “no” to the following questions, then it might be a good idea to focus on paying off your car loan before other debts:
- Do you have other debts with a higher interest rate than your car loan?
- Will you face a penalty for paying off your car loan early?
- Are there any other reasons why paying off your car loan will impact you negatively?
Five Ways to Pay Off Your Car Loan Faster
Paying off your car loan faster not only saves you money in interest but can also provide peace of mind, freeing you from debt sooner than anticipated. Whether you’ve just driven off the dealership or have been juggling with car loan payments for a while, there are several strategies you can utilize to pay off your car loan faster. From making smarter payment choices to rethinking your financial arrangements, here are five actionable ways to hasten your journey to a car loan-free life.
- Maximize Monthly Payments
- Try Bi-Weekly Payments
- Make a Lump Sum Payment with Windfall Income
- Strategically Tap Into Savings
- Refinance The Car Loan
After completing a detailed budget and figuring out how much money you have left over towards loan payments, consider paying as much as you can each month.
Example: If your monthly obligation is $330, consider rounding up to $400 or $450, depending on your financial comfort.
Benefit: By consistently paying more than the minimum, you reduce the loan’s lifespan. Moreover, if you’re fortunate to get a pay hike, it’s tempting to splurge or upgrade your lifestyle. However, channeling this surplus into your loan can speed up its clearance without creating financial strain.
Instead of the standard monthly payments, consider paying every two weeks.
Example: If your monthly payment is $400, try splitting this amount and paying $200 every two weeks.
Benefit: This bi-weekly approach reduces the principal more rapidly, leading to lower overall interest. It’s especially handy for those on a bi-weekly pay schedule.
Use unexpected large sums of money, like bonuses or commissions, to make a sizable dent in your loan.
Example: If you unexpectedly receive a $2,000 bonus at work, applying this to your loan can significantly reduce your outstanding balance.
Benefit: These lump sum payments, especially when deducted from the principal, reduce the total interest you’ll pay over the loan’s life.
Consider using your savings to tackle the loan, especially if you foresee future payment issues.
Example: If you’ve saved up $5,000 and your outstanding car loan is $4,000, consider clearing it off while retaining $1,000 as an emergency fund.
Benefit: It offers peace of mind from clearing a debt. However, it’s crucial to keep a buffer for unexpected events.
Remember to start paying back into your savings once the loan is paid off!
Refinancing means acquiring a new loan to replace your existing one, aiming for a more favorable interest rate.
Example: If your current loan has a 10% interest rate, but you find a lender offering 8%, refinancing could save you a significant amount over the loan’s tenure.
Benefit: A lower interest rate means you’ll spend less over the lifetime of the loan. However, an excellent credit score will be crucial to secure the best rates.
Try These Strategies if You’re Having Trouble Making Car Payments
Owning a car comes with a sense of freedom, but when those monthly payments become a challenge, that freedom can feel like a weight. If you find yourself struggling to make your car payments, don’t despair. There are several avenues you can explore to ease the burden:
Second Job or Side Hustle
This piece of advice always comes with an important caveat; we understand that many people don’t have the time or energy for a second job or a side hustle. However, in the era of the gig economy, there’s no shortage of opportunities to earn some extra money. Platforms like Uber, DoorDash, or freelancing websites can be great places to start. The additional income can be channeled directly into your car payments, reducing the loan amount faster.
Downsize Your Car
If you’re driving a car that’s beyond what you truly need, it might be time to consider selling your current vehicle and purchasing a more affordable, fuel-efficient one to significantly reduce monthly payments. Opting for a pre-owned car, for example, can offer the utility you need without the hefty price tag.
Evaluate your monthly costs and identify areas where you can cut expenses. Small changes, like dining out less, skipping that daily coffee run, or canceling unused subscriptions, can accumulate into substantial savings. Redirect these savings towards your car loan to alleviate the monthly financial pressure.
Check out this blog post for more tips on Tips to Cut Expenses & Manage Your Money in Difficult Times
Getting Out Of Your Car Loan
If you’ve looked at all the ways to save money and make your car payments, but you are still underwater, you may need to get out of your car loan. Make an appointment with one of our credit counsellors who can help you ask the right questions and understand the consequences of pursuing this option.
Some car owners might find themselves in an “upside-down” loan situation, where the car’s worth is less than the owed amount. For those grappling with such a predicament, several options exist: they can transfer the loan to someone else, sell the vehicle, voluntarily return it, or even consider refinancing.
However, decisions like these come with implications, especially concerning one’s credit score. It’s very important to accurately determine the car’s current market value versus the outstanding loan amount before proceeding.
Canada Loans has a helpful breakdown on How To Get Out Of Your Car Loan.
Get a Second Opinion
Figuring out how to pay off your car loan faster, which debt to pay off first, or how to get out of your car loan, are all difficult problems to solve. Hopefully this blog post has helped you make a more informed decision and left you in a better place to navigate this difficult financial landscape.
However, blog posts can only go so far. At Money Mentors, we provide free financial advice to all Albertans, regardless of their situation. Whether you are considering the Orderly Payment of Debts program to consolidate your debts, or if you just have a quick question about your loan repayments, our non-profit credit counsellors are always here to help. Give us a call today and let us help.