How to Pay Off a Car Loan

Owning a car is a fantastic feeling

Happy to Have No Car Payments

I talked about why I regretted ever having a car loan and how I plan on not being stuck for 5 years with car payments.  The good news, as you may have noticed from last month’s net worth review, is that we don’t have any car loans for either one of us. It’s a great feeling and the truth is it took time to knock it out. We don’t make six figures, but the good news is we didn’t need to have that to reach this goal. Paying off the car loan didn’t happen by accident, we came up with a plan and followed through.

With the average car loan being around $26,300 or as Comerica Bank frames it, that’s 22 weeks of an average person’s annual income. that $26,000 car has a monthly payment of around $464. You can be stuck with a lot of debt quickly if you don’t handle your transportation costs. If you’re looking at paying off your car loans, saving money on interest, and developing a plan for your next cars, I hope you’ll find a useful tip or two from our experience.

Paying Off Our Car Loan: Find the Money

Here is how we paid the car loan off ahead of time. I’m sure you heard ‘spend less than you earn‘ and ‘cut your expenses’ , so I’ll just show you what we actually did.

Developed a realistic budget.

Having a joint budget gave us a clear picture of where our money was coming and where went. I think the key for us with budgets is to make it easy to use and easy to change, so we use a Google Spreadsheet. We budgeted a car payment slightly higher than the required payment.

We looked at our budget line by line and sought ways to cut bills and allocate the money for car payments. We were willing to cut down since we had a goal and we knew it was temporary. Here are some areas we worked on:

Created Our Own Cable, Phone, and Internet

Sometimes the deal they advertise on TV isn’t the best deal. We called Time Warner Cable to see if they could quote a better rate. Since they didn’t, we went ahead and created own bundle with Time Warner for limited cable and high speed internet and Skype for our land line number. The monthly costs went from around $140/month to $48/month.

Upgraded our text plan my cell phone.

By spending $5/month to upgrade our text plan, we saved money. It worked out well and I don’t have to keep track of every text message I send or receive. Spending some money to save more is a good idea.

Compared Auto Insurance Rates

We cut our auto insurance premiums in half by switching providers. By using our costco membership our car insurance premiums went from $118/month to $58/month. Since we have Executive membership at Costco, we also get free towing and jump starts included. Since we had that coverage, we allowed our AAA to lapse.

When you compare car insurance companies, have a copy of your current policy to make sure you’re comparing apples to apples. I’d also ask from friends what they think of their insurance. going with the cheapest may not be the smartest option.

Adjusted Eating Out

Just eliminating this wouldn’t have been sustainable. So instead we decide to tweak it a bit and save some money. We look for happy hour deals around town. Some places here are some great food for $5 or less and drinks are half as well. If you don’t go overboard you can have a great evening without spending a ton of money. Another great plan is checking if your city has a restuarant week where you can get appetizer to dessert at some fantastic places for $20.

I’d also suggest using an Entertainment book for deals and Restaurant.com for some of their specials.

Snowflaked Extra Payments into the Car Payment Schedule

We wanted to pay the car off faster, so we started making extra payments. Our tax refunds and stimulus check went to lower the principal. We also took any small wins, like selling items on Ebay.  It didn’t matter how small the amount was, we went ahead and used our bank’s online bill pay feature to send in an extra $50 or $100 to the car loan in between payments.

Listened to Those Who Did It

This is such a good resource and motivator for us. People who have actually reached the goal you’ve achieve gain offer some invaluable advice. If you’re looking for some more stories to help keep you focused, here are some of my favorites:

• Don’t Laugh, It’s Paid For!
• A Few Details Once You Pay Off Your Car Loan
• Four Years Without A Car Payment
• My Plan For Purchasing An Automobile With Cash
• First Automobile Paid Off
• Second Automobile Paid Off

I also included some posts on happens after you pay off your loan because that extra money can easily wasted in another way if you don’t plan.

What to Do with No Car Payments

First off, we’re trying to maintain our cars as best as possible. We’d like for them to last some more years. I check my car’s fluids and take it to the mechanic’s as needed. The longer we can go without car payments, the better. We’re hoping they last another 3-5 years (or more) for my husband’s car. It’s in decent shape right now and it just needs some cosmetic work done. I’m hoping my car can last 5 more years.

The money has been redirected to our emergency fund and other bills as needed . The budget has been adjusted and during the next few months, we’re building the emergency fund. We had some dental work needed and the cat was ill and having that money available was fantastic.

Check and see if your car insurance coverage fits your needs. Depending on your car’s value and insurance costs, you could drop comprehensive. Check with your auto insurance company to run the numbers.

Buy Your Next Car with Cash

Buying a used car in many(but not all) cases can make financial sense. If you buy a new car, be aware that cars depreciate around 60%-70% in the first 5 years.

Eventually, we’ll need to get another car when one or both breaks down. Once the emergency fund is big enough, some of that money will be put into a specific car fund account. Having money in general savings didn’t help; having a specific savings account to replace the car is a great motivator personally. We’ll sell the car being replaced for as much as we can and then we’ll go ahead and buy whatever we can get with that cash.

Your Take

How do you plan on buying your next car?

Photo Credit: stevoarnold