One of the biggest financial drains on our people are car loans. Part of the reason for this is bad credit, but the other reason is that we constantly trade in older vehicles for newer vehicles. Newer vehicles have higher registration fees, higher insurance fees, and almost always have higher monthly payments.
I’ve driven the same 2000 Ford Expedition since 2005. I just recently bought a new vehicle, a 2013 Chevy Impala, but I didn’t trade in my Expedition because I own it outright. At the time I paid cash for it because I knew I was going to keep it long term and didn’t want to worry about monthly payments. It also decreased the amount of insurance I had to carry by law, which meant lower insurance payments.
Refinancing Your Car
Many of us are aware that we can refinance real estate, but there are many people that aren’t aware that you can refinance your vehicle. If you can afford to pay cash for your vehicle, then that is by far the best option if you plan to keep it longer than 5 years. I stumbled upon this method by accident when I was younger. I bought a Ford Focus at a 19% interest rate. After about 3 months of payments, I went to State Farm to get a quote to lower my insurance.
- They informed me that I could get a quote for a refinance.
- They informed me that refinancing could lower my monthly payment.
- Refinance quotes are almost always free.
I took the lady’s advice and got the quote. It dropped my payments from $383 to $160 per month. That freed up an extra $223.00 per month, just by taking a few extra minutes to provide the necessary information.
How To Pay Off Your Car Super Fast
Let’s use a payment of $383.00 per month as the basis for this section. If you were able to refinance and your payments came down to $160.00 per month, DO NOT change how much you pay per month. Make sure you continue to pay the $383 per month and apply it to the principal.
The Worst Financial Advice Ever
Some people will tell you to pay down the interest first so that your later payments will pay down the principal faster. That is horrible advice. Interest is based on the remaining principal balance and is pure profit for the lender. Always, always, always pay down the principal first. They can’t charge interest on a zero balance principal.
Rinse and Repeat
By continuing to pay the same amount, the extra $223 will reduce your principal by an additional $2,676 per year. If you make all of your payments on time for 6 – 12 months, you can always apply for a refinance for the lower principal amount, even if it’s with a different company. The lower balance will result in lower payments by default, and even lower if you’re able to get a lower interest rate.
- Continue paying the original amount no matter how low your payment gets.
The more money you can pay on the principal, the faster your loan gets paid down, the less interest you pay, and the higher your credit score goes. This method has the potential to shave a couple of years off of your vehicle loan payments. Let’s look at how this could work out.
Refi #1: Reduces your payment by $223 / month which allows you to pay down your principal by an ADDITIONAL $2,676.
We’ll assume that with your normal payments your entire principal amount gets reduced by $3,500 bringing your balance to $8,500. Refinancing again for $8,500 might reduce your payments from $160 to $120.
Refi #2: Reduces your payment by $40.00 / month which allows you to pay down your principal by an ADDITIONAL $3,156.
Working under the same assumption, we’ll round it to $3,700… leaving you a balance of $4,800. Actual results may vary, but you will definitely pay your vehicle off much faster than you would by not refinancing.
It’s important to understand how all of this will affect your credit. Each time you successfully refinance, you will receive an inquiry and your credit report will reflect a new paid off vehicle loan.
- Inquiries WILL lower your credit score slightly.
- Paid off vehicle loans MAY raise your credit score.
Every time you refinance, it will show that your previous loan has been paid off. Some companies won’t refinance under a certain amount, so the number of times you can do this will depend on how much your vehicle was to begin with and how much you’ve paid it down before refinancing. In the above example you’d end up with a total of 3 paid off vehicle loans showing on your credit report.
The Trade Up Trap
As your credit goes up, you’ll be bombarded with all kinds of offers, including offers from your finance company to take on a new vehicle loan. Don’t fall for it. It’s a trap to keep you indebted and lining the pockets of the finance company.
What You Should Do After You Pay Off Your Loan
Many of us will naturally want to save money or do some things we’ve been holding off on doing because we didn’t have the extra cash. While I’m definitely all for enjoying life, you should allocate some of the money to invest. Even if it’s only $100 out of the original $383, it leaves you $283 per month to do with as you please.
Have You Ever Refinanced Your Vehicle?
If you’ve tried anything mentioned on this page, I’d love for you to share it with everyone. Let’s us know what your payments were, how much they are now, and how it affected your credit score. What did you learn from the experience, what would you do the same, and what would you do different?