How to pay off a car loan early?

How to pay off a car loan early?

When you take out a car loan, you often sign up for a specific car loan term, whether it’s five years, seven years or some other length. However, you may be able to repay your car loan off early, if you set yourself up with the right car loan to begin with.

How can I pay off a car loan faster?

There are a few options to consider when it comes to paying off your car loan before the loan term. 

  • Make extra repayments

Some car loans come with helpful features, such as a redraw facility or the ability to make extra repayments without penalty. If you can budget to make extra repayments towards your car loan, you may be able to significantly reduce your principal owing, chipping away at your debt a lot faster than your loan term. 

Some lenders allow you to make extra payments, which may help you pay off the car loan faster, without charging you any fees. Other lenders may charge fees for these extra repayments, so it’s best to check these details with your lender. If your lender does charge you a penalty or fees for early repayment, you may want to check that the fees don’t equal the savings you may make by repaying the loan early. To be sure, you can use a car loan calculator and compare your options. 

  • Change your repayment frequency

You may want to consider opting for weekly or fortnightly repayments instead of monthly repayments. When you repay monthly, you make 12 payments a year. However, if you opt for fortnightly repayments with some car loan lenders, you’ll pay half the instalment amount every two weeks. 

You effectively repay more each year, as there are 25 fortnights in a year. Making more repayments throughout the year will mean you can pay off your loan faster without incurring fees. Not every car loan lender will have this fortnightly structure, so it’s best to check with the lender before agreeing. 

  • Round-up your repayments

You could also consider rounding up your payments to the nearest $50 or $100 or even the nearest $5 or $10. Any extra amount you can put into your car loan will help you reduce the debt faster, as long as the lender allows you to make extra repayments.

Check whether you can make lump-sum payments without incurring additional fees or charges with your lender. Any additional funds or windfalls, such as a tax return or lump sum gift, may be used to repay your car loan faster. Generally speaking, a variable rate car loan is more likely to offer this feature than a fixed rate car loan

  • Choose a lower-rate option

Another strategy to help you pay off your car loan faster is to start with a low fixed interest rate. Keeping your debt repayments low may free up more of your budget to put towards extra repayments. It may be easier to chip away at the loan principal if a smaller portion of your budget is spent on interest charges. 

  • Balloon payments

You could also consider a balloon payment for your car, which is a lump sum that you pay your lender at the end of your car loan term. This reduces your monthly repayments and may help shorten your loan term. You could consider this option if you’re confident of having the lump sum handy when you need it, or you may have to refinance. 

  • Refinance to a shorter term

Another option that could help you pay off car debt early is refinancing your car loan to a shorter loan term. If you're thinking about refinancing, first find out whether you can shorten the loan term without increasing your repayment, which may impact your budget. Keep in mind that there are generally costs associated with refinancing your car loan, which could counteract some of your potential savings.


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Product database updated 22 Oct, 2023

This article was reviewed by Personal Finance Editor Alex Ritchie before it was published as part of RateCity's Fact Check process.