We paid off our car loan last month.
This isn’t a big deal on its own — people pay off car loans all the time. What’s significant is that we made our final payment 14 months early.
We paid off our five-year car loan in less than four years.
And while we made sacrifices to do it, it was not nearly as difficult as I anticipated it would be.
Here are the three steps we took to shave 14 months off our car loan.
The five year plan
We purchased our Toyota Corolla in July 2014.
Before this, we drove a 14-year-old Subaru Impreza. We drove that car for two years until the maintenance costs got too high.
There were three things we wanted in a newer vehicle: reliability, good on gas and inexpensive maintenance. The car we purchased, a pre-owned, dealer maintained vehicle with less than 100,000 km, cost less than $20,000. We sold the Subaru to the dealership as a downpayment, negotiated for new winter tires, and settled into paying $286 a month.
We financed the car over five years. There were other options available that would have brought the cost per month down, but the idea of paying off a depreciating asset over a term longer than five years did not sit well with me.
For the first three years of the loan, we made the $286 payment faithfully each month. In 2018, we decided it was time to tackle it more aggressively.
Between December and April, we put an additional $2,870 on the car loan.
Revising the plan
Four things motivated us to pay off the car loan early.
- We wanted less debt
Paying off debt is a priority for us. We knew shedding the car payment would help us make progress on our financial goals, like paying off the student loan.
- We wanted to own an asset
A car is a depreciating asset, but paying it off means we finally own something.
- We can lower our insurance rate
Financing meant we had to take out full insurance on the vehicle. It makes sense — the bank still owned part of it.
Now that it is ours, we have more control over our coverage. I’m not sure if we will make significant changes at this point, especially since the car is still in good condition, but it is nice to have the option.
- We could
Not only do we have the financial means to make the extra payments at this time in our lives, but our financing agreement allows us to pay it off early without penalty. So…why not?
Making a new plan
So how did we do it? There were three steps we took to pay off the car loan early.
- We made it a priority
We decided this was something we wanted to do so we built it into our budget. Making a big contribution wasn’t always in the cards, but seeing the “extra car payment” line in the spreadsheet encouraged us to consider that when deciding how to allocate our money for the month.
- We paid what we could
Some months, we paid an extra $500; other months, it was an extra $50. Sometimes, we didn’t make an extra payment at all. This budget line did not have a set amount keyed in, but rather, we focused on paying what was realistic for us at the time.This probably was not the fastest way to achieve the goal, but it definitely kept us sane.
- We took advantage of extra cash
In our case, we both have two months of the year where we get paid three times instead of two – and because we get paid on opposite weeks, our three-pay months are different. Whenever we had a three pay month, we made sure some of it went toward the car loan. This could also work with a tax return or any other type of “extra” money that comes your way.
Final Thoughts
I wish I could say we are planning to do something exciting with the money freed up by no longer having a car payment, but we’re not.
That money, along with the funds budgeted as extra payments, will be shifted to the next debt in line: the credit line. It’s not the fun way to spend that money, but it is the way that will get us closer to our goal of being debt free.
Paying off the car early was the right choice for us. I am grateful we had the means to make it happen and I’m looking forward to tackling the next debt in the snowball.
Have you ever paid off a car loan early? How did you do it?
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