We did it! We’re a low-income family. But we financed a car and paid off the loan in 12 months.
That was 5 years early.
Our lender projected it would take 6 years to pay off our high-interest car loan.
Here’s what we did instead:
- Early payments with auto-pay
- Extra payments to hit the principal
- Adding a little more to the minimum monthly payment
Two-Prong Attack For How We Paid Off A High-Interest Car Loan Early
Paying off our car loan early was death by a thousand cuts.
Or if you’re a boxing fan, it’s the Swarmer boxing technique.
This type of boxer just pummels their opponent.
It’s a simple technique.
Easy to understand. But hard to do.
You have to just keep hitting it.
It has to be relentless.
It doesn’t necessarily need to be super-calculated.
Just constant pressure.
First and foremost, we kept up with our regular monthly payments.
But any extra money we had, we threw at the car loan.
The other part of attacking our car loan was this:
You have to pay off the car loan as fast as you can if you want to save the most money.
Financial expert Dave Ramsey talks about this in his Total Money Makeover book where he outlines his 7 baby steps.
Step 2 is about paying off all debt.
But not just get out of debt.
It’s getting out of debt with what Dave calls a “gazelle intensity.”
Again: paying off a car loan as fast as you can is key to getting out of car loan debt.
According to credit organization Experian, the average car loan in 2020 totaled $35,228 with an average interest rate of a little over 5 percent.
Here’s what you need to know about interest:
Interest adds up every day.
Weekends and holidays included.
So if you decrease the principal – the total amount you owe – you will decrease the interest.
Because the interest amount is based on the principal amount.
The longer you are carrying around that principal, the longer you will have to pay interest.
We didn’t have a strategy when we first started paying off our car loan. We just knew that we wanted to pay it off early.
But looking back, those two techniques — extra payments and often payments — are what ultimately helped us pay off our car loan early.
Our Car Loan Rate, Terms, and Other Details
We bought a used 2011 Toyota RAV4 in February 2020. We bought it from a car dealership in our city and it had about 60K miles on it.
Our first payment was due April 2020 and we paid off the car loan April 2021.
(Though, we technically could have paid it off a month earlier)
Here’s the breakdown of where the payoff money came from:
What was our interest rate?
Let me first say: our credit was shot when we financed this car. We’re talking low 600s and upper 500s.
(Thanks to default student loan accounts, charged-off accounts, collections accounts, the whole nine.)
It was a mess, y’all.
So, we could only work with a subprime auto lender.
The interest rate for our car loan was nearly 18 percent.
And we accepted it.
Because bad credit = high interest
Our original loan amount was $13,920.14 with a $1,000 down payment.
(The car’s sale price was $11,170. But dealer fees and taxes bumped it up a couple thousand dollars.)
Our loan term was 76 months at 17.82 percent. The expected payoff was June 1, 2026.
The monthly payment was $311.26.
We paid a total of $15,818.48 when we finally paid off the car loan. That was the total principal, plus $1,898.34 in interest during the life of the loan.
Our 2020 gross income was $51,886, according to our income tax return.
Peanuts when you consider the two small children we have and that we live in one of the highest cost of living cities in the country.
So how’d we pay off the car loan early on a low income?
A chunk came from federal stimulus payments. That government money was a major launchpad.
Another chunk from extra payments from taking on extra jobs.
And then, another chunk was just staying current on our regular monthly payments.
Our Car Loan Payment History:
- 3/31/2020 – $311.26
- 4/20/2020 – $311.26
- 5/1/2020 – $311.26
- 5/9/2020 – $2,000 (principal payment) first stimulus
- 5/22/2020 – $311.26
- 6/19/2020 – $1,032 (principal payment)
- 8/1/2020 – $311.26
- 9/1/2020 – $311.26
- 9/30/2020 – $312
- 11/2/2020 – $310.52 (past due; when we set up automatic payments)
- 11/4/2020 – $1,199.61 (principal payment)
- 11/5/2020 – $854.19 (principal payment)
- 12/1/2020 – $311.26
- 1/1/2021 – $311.26
- 1/2/2021 – $311.26
- 1/7/2021 – $2,400 (principal payment) second stimulus
- 2/1/2021 – $311.26
- 3/1/2021 – $311.26
- 4/1/2021 – $311.26
- 4/2/2021 – $868 (principal payment)
- 4/3/2021 – $2,935 (principal payment)
- 4/20/2021 – $172.04
Are Extra Payments The Way To Pay Off a Car Loan Early?
The secret to paying off a car loan early really is just hitting it with extra payments.
It’s a tactic that I’ve heard works when it comes to paying off your house early, too.
Some would say to just pay more than the minimum payment every month. Say, make it double your monthly payment or as little as an extra $50 per month.
Quick tip: You will need to make sure that the extra money is specifically allocated to the principal. Not every lender applies extra payments to the principal, so make sure you check with your lender.
(Remember, this is not certified financial advice. Just sharing how we did it.)
Now, we didn’t just consistently throw an extra 50 bucks every month.
You saw some months we threw an extra grand or two.
Fifty dollars isn’t anything to sneeze at.
Definitely start where you are.
But if you want to pay off the loan fast, you will need to throw some big blows every now and then to knock it out.
We could have put that money to work in other areas to meet other financial goals.
But our priority was getting rid of the car loan (namely because the interest rate was so high).
The key word there is priority.
If you want to pay off your car loan early on a low income, you have to make it a priority.
And I want to challenge you in something.
We didn’t have a lot of extra money from our jobs. So where’d we get this extra money for extra payments?
We got extra jobs.
There was no way around it for us.
There are some months where we could only make the minimum monthly payments.
But when we had the extra money, we dumped it.
And we did it as soon as we got it and as often as we got it.
A lot of times there was no strategy to it.
We didn’t wait until the beginning of our payment cycle, near the end of month, or anything like that.
We needed the momentum.
We needed to get in the routine of attack.
Still, there is a mathematical strategy to paying off a car loan with a high interest rate.
When is the best time of the month to make an extra car loan payment?
Definitley check with your financing institution.
But our lender actually answered this question in its app.
To understand their answer, you have to understand how interest really works.
You are in a race against interest.
You want to prevent interest from getting ahead.
That said, the best time to make an extra payment is before interest can accrue.
And interest accrues daily, remember?
So paying down your loan means you are saving on the interest that would have accrued in the days ahead.
Here’s The Reason Why You Should Pay Off Your Car Loan Early:
You avoid giving away more of your hard-earned money.
That’s the main reason you should pay off your car loan early.
Interest makes you pay more. It’s how interest works, essentially. You’re paying for the service of borrowing money.
But what if you have a low or no-interest car loan payment? Does that make it better?
Well, I actually bought a no-interest car before. It was my first car, bought new and financed for 72 months.
(Just weeks after I finally paid it off, a drunk driver hit me on my way to see my little brother graduate from Army training. My insurance company declared the car a total loss. So I didn't even get to enjoy having a paid off car.) Bummer is an understatement.
In those cases of no-interest car loans, paying it off early is mainly on principle.
You don’t own the car.
You ain’t got no title.
The bank does.
It’s years of a ball and chain.
My husband is a high school math teacher, certified in some pretty advanced math.
He understood the compound interest math as soon as we signed the loan.
And it frightened him.
That means our car loan would have cost us an extra $8,000 in interest.
So, we saved thousands of dollars by paying it off early.
Who wouldn’t want that?
Don’t know about you, but no amount of the so-called convenient monthly payments would ever outweigh that cost.
Disadvantages Of Paying Off A Car Loan Early
Our credit score shot up while we were paying on our car loan.
Making regular on-time payments month after month put positive marks on our credit. Those positive marks eventually outweighed those old, negative marks.
(Plus, we got a collections account deleted off our report during that time.)
So having the car loan helped to build our credit and improve our credit score.
Turned out that our credit score was a big deal when it came to trying to find a new home.
Even if a credit score wasn’t a big deal to us.
We monitor our credit score through a service provided by one of our banks.
The month after we paid off the loan, we noticed our credit score dipped a few points.
That’s probably because we weren’t making those consistent monthly payments anymore.
Still, I wouldn’t say it was a disadvantage to paying off the car loan early.
I’d much rather be free from that monthly obligation and free up money in our monthly budget.
Do We Regret Paying Off Our Car Loan Early?
Like I said, this wasn’t my first car loan.
Everyone in my family had car loans.
On the other hand, this was my husband’s first car loan.
He never financed cars.
He and his family always bought their cars, used and outright.
My first car was brand-new and I financed close to $20,000.
(And my first job after college while carrying that car loan was a newspaper reporter with a starting pay at $9 per hour. But that’s another story…)
It NEVER occurred to me that I could pay off my first car loan early.
And guess what?
I’m not the only one.
Most people are comfortable with their car loan.
The monthly payments are comfortable on their wallet.
They believe they are building their credit.
It’s a risk.
A huge risk.
It puts a huge strain on your monthly budget.
You don’t have a lot (or any) of leveraging power when you are low income.
The saying “Beggars can’t be choosers,” is true.
You forfeit your right to choose.
We got the worst deal because of our current financial situation.
You can avoid this by just improving your financial situation.
That’s what we’re working on here during our journey.
We’re working to pay off debt, save for retirement, and build wealth.
You can do it, too.