A simple change to the way you pay can cut hundreds of dollars (or more) off your auto loan and even help you pay it off faster. We’ve got an auto loan hack that can save you money.

Auto loan hack: Splitting your payment

On an auto loan, interest compounds daily. That means every day, the amount you owe in interest increases. Here’s how to use that knowledge to your advantage:

Split your regular monthly payment in half, and pay half of the payment twice per month (semi-monthly). For example, let’s say you owe $700 monthly, due on the last day of the month. With this auto loan hack, you’ll make a payment of $350 halfway through the month — so, typically the 15th day of the month — then pay the remaining $350 on the regular due date. By paying half your payment earlier in the month, you’ll cut down the principal faster, which reduces the corresponding compounding interest you owe.

Plus, as always, any extra amount you can kick in toward your loan beyond what you regularly pay, even if that’s only $25 or $50 here and there, will save you big on interest over time and trim down your timeline to paying off the loan completely.

What’s the catch?

If we’ve made this sound too good to be true, we promise it’s not. It’s just how the math of daily compounding interest works. Before taking this advice, make sure you’re aware of two important things:

1. Some lenders charge prepayment penalties. This isn’t as common on auto loans as other types of loans, but some lenders may charge fees when you pay off your loan early. We don’t, but if your lender does, do the math first to determine if the money you’ll save on interest will be worth the fee you might incur for paying early.
2. If you opt to pay extra toward your loan balance, make sure it’s applied toward the principal. Lenders may hold any funds paid beyond the amount due as a prepayment for a future month. If that’s the case, let your lender know that you want the extra payment to be applied to the principal while retaining your next scheduled payment. Remember to check your monthly statements to be sure your lender applies the payments correctly.

How extra payments work on Grow Financial auto loans: When you pay extra, your payment satisfies the daily interest accrued since your last payment, and then, the rest of the amount paid automatically goes toward the principal balance. This may advance your next due date, but don’t worry, the principal balance of your loan still drops! Continuing to make extra payments toward the principal can knock time and money off your loan.

Stuck with another lender that doesn’t want you to get out of debt? Learn more about refinancing your auto loan with us.

Refinance Your Car

Subject to credit approval.

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Posted In:

• Auto Education