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Last updated: December 21, 2023

What to Know About Accelerated Auto Loans

Find out how much you’ll save if you increase your monthly car payments.

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Increasing the amount you pay toward your auto loan every month means you will pay less in interest over the life of the loan and you will pay off your loan more quickly. Enter the initial amount you borrowed, loan term, interest rate, number of payments already made, and monthly payment increase. Our calculator will tell you how much you can shorten your loan term and save on interest.

How to Use Our Calculator — Key Terms Explained

  • Original loan balance: This is the amount of money you borrowed when you bought the car. For example, if you bought a car for $30,000 with a $6,000 down payment, your original auto loan balance is $24,000.
  • Annual percentage rate: This is the interest rate you agreed to pay on your loan, usually between 5 and 25 percent.
  • Initial loan term: This is the amount of time over which you agreed to pay off your loan, usually between 36 and 72 months, sometimes up to 84 months.
  • Payments made: This is how many monthly payments you’ve made since purchasing the car.
  • Additional monthly payment: This is how much extra you plan to put toward your loan payments every month.

What does it mean to accelerate your auto loan payments?

Accelerating your auto loan means paying more than the required minimum monthly payments in order to pay off the loan faster than the scheduled repayment period.

TIP:

Use our auto loan calculator to estimate your monthly car payments and how much you’ll pay in total interest for a particular vehicle.

Pros and Cons of Accelerating Your Auto Loan Payments

Pros of Accelerating Your Auto Loan Payments

Save on Interest

The faster you pay off your loan, the less you’ll pay in interest over the course of the loan.

For example, if you take out a $24,000 new-car loan at a 10 percent interest rate with a 60-month loan term, your monthly payments will be around $510, and you’ll pay $6,596 in interest over the life of the loan. But let’s say starting two years into your loan, you increase your monthly payments by $150. Your payments will go up to $660, but you’ll save $657 in interest overall and own the car 10 months sooner than you would have.

Factor Amount
Initial loan balance $24,000
Interest rate 10%
Loan term 60 months
Monthly payment $510
Estimated lifetime interest $6,596
Number of payments made at the time of acceleration 24 months
Number of remaining payments 36 months
Monthly payment increase $150
New, accelerated payment amount $660
Total interest saved $657
Loan term reduced by 10 months

RELATED:

Check out our roundup of the best auto loans for 2023.

Own Your Car Sooner

Accelerating your auto loan payments allows you to pay off your loan ahead of schedule.

For example, let’s say you take out a $10,000 loan for a used car at a 15 percent interest rate over 60 months. Your monthly payments will be $238, you’ll pay $4,274 in overall interest, and you will own the car outright in 60 months (five years). Let’s say two years into your loan, you get a raise. If you increase your monthly payments by just $100, you’ll save $598 in total interest and you will pay off the car a full year earlier.

Owning your car outright means you don’t have to worry about car payments, which can provide a sense of financial freedom. It also makes it easier to buy another car, because you won’t have to worry about paying off any outstanding balance or rolling the balance into a new loan.

Factor Amount
Initial loan balance $10,000
Interest rate 15%
Loan term 60 months
Monthly payment $238
Estimated lifetime interest $4,274
Number of payments made at the time of acceleration 24 months
Number of remaining payments 36 months
Monthly payment increase $100
New, accelerated payment amount $338
Total interest saved $598
Loan term reduced by 12 months

Prepare for a “Rainy Day”

Getting ahead on your payments means that if you experience a financial setback — like losing your job or an unexpected expense — you can temporarily pause your car payments. You’ll still accrue interest, but you’ll have some breathing room as you get back on your feet.

DID YOU KNOW?

Financial experts recommend having a cash reserve of three to nine months of expenses.1

Cons of Accelerating Your Auto Loan Payments

Prepayment Penalties

Some lenders impose penalties or fees for paying off the loan early, which may offset potential savings from accelerating your payments. Review the terms of your loan so you’re aware of any penalties ahead of time.

Precomputed Interest

If your loan has precomputed interest, it means the lender calculated the total interest for the loan and added it to the principal at the beginning of the loan term. As a result, accelerating your payments might not save you much in interest, though it can still reduce the overall payment time.

Should I accelerate my loan payments?

Consider the following factors when deciding whether it’s a good idea to accelerate your loan payments

Do you have other outstanding debt?

Prioritize paying off debts with the highest interest rates. Credit cards, personal loans, and private student loans tend to have higher interest rates than auto loans — so if you have extra cash, it makes sense to put it toward those debts first.

Do accelerated payments fit your budget?

Financial experts recommend spending no more than 10 percent of your take-home income on car loan payments, and no more than 15 to 20 percent on overall car expenses (such as fuel, maintenance, and auto insurance). If accelerating your payments will squeeze your budget too tightly, it may not be worth it, especially if you end up falling behind on other bills.

Would making a large one-time payment make more sense?

Instead of increasing your monthly payments, you can put a lump-sum of money toward your auto loan to pay it off more quickly. If you get a tax refund or holiday bonus, consider putting it toward a debt like your car loan.

FAQ

What’s the difference between accelerating loan payments and refinancing?

Accelerating loan payments involves paying more than the required minimum toward your existing auto loan, whereas refinancing involves replacing your current auto loan with an entirely new one.

Accelerating your payments doesn’t change the terms of your original loan, but it can save you on interest and allow you to pay off the loan ahead of schedule. When you refinance a loan, you might get a lower interest rate or change the duration of the loan. Refinancing is a bigger change than accelerating your payments. Sometimes refinancing means you’ll pay more in total interest — especially if you extend your loan term. However, when looking for the best loan refinancing options, keep in mind that taking a longer loan term with more overall interest typically isn’t the wisest decision.

Is it better to have a shorter or longer car loan?

If it’s practical for your budget, a shorter car loan (typically 36 to 48 months) is usually better because you’ll pay less in lifetime interest and you’ll pay the car off sooner. However, shorter loan terms mean higher monthly payments, which isn’t a good idea if it means you don’t have room in your budget for other expenses.

Longer loan terms (typically 60 months or more) mean lower monthly payments and more total interest. Be wary of longer loans — especially 72- or 84-month loans — because, due to factors like vehicle depreciation, you may end up owing more than your car is worth.

How fast can I pay off my auto loan?

You can often pay off an auto loan ahead of schedule — as fast as you like and your budget allows. However, some loan agreements come with prepayment penalties. Check with your lender to understand any fees that apply and decide whether it’s worth accelerating your payments.

Citations

  1. How much should I save each month? TIAA. (2023).
    https://www.tiaa.org/public/learn/personal-finance-101/how-much-of-my-income-should-i-save-every-month