Jennifer Atkins: Smarter Auto Financing: How To Pay Your Car Loan Off Fast

How to pay off your car loan fast. The average price of a new vehicle in the US is about $32,086 which is a lot for a single purchase. While having a car may be crucial to most people who can't rely on others or public transportation to get around, buying a brand new car may be out of the budget.

Even reliable used cars can be a financial stretch, and financing is often necessary. Financing allows you to borrow money so you can buy your car now, while you pay off the loan plus interest over time.

It sounds nice to drive now and pay later, but owing extra money on a depreciating asset like a car may not appeal to you. When I graduated from college and my 17-year-old car died, I had very little savings and no way to get to work. I was caught between an expensive rock and an impossible hard place: I either had to finance a new car or lose my job.

I ended up paying off a 60-month loan in just 18 months, which allowed me to actually enjoy owning my car before it lost a large portion of its value.

There are a few things you can do to finance a car the smart way and pay off the loan fast.

Check your FICO score first

Before you go to the dealership or lender, be sure to check your credit score to make sure you can qualify for a low interest rate. The lower your rate is, the less money you'll have to repay when you take out a loan.

I recommend checking as many of your credit scores as you can (there are often significant differences) and looking closely at the lowest one. This is the score most lenders will probably look at.

A good way to determine how soon you can pay your car loan off before you actually finance it is to calculate your loan amount and potential interest rate along with a repayment term that meets your preferences.

If your credit score is low, financing a car may not be worth it. But if you have a score that's above average, you'll qualify for a low interest rate, and you may be able to take out a smaller loan and pay it back quickly.

My credit score was average when I financed my car, so I didn't receive the best interest rate, but I had a large down payment and kept my loan amount small (just under $10,000) which helped me pay off the loan faster.

Don't extend your term to get a lower monthly payment

When you go to a dealership to finance a car, the sales agent will most likely ask you how much you would like to pay each month. It may sound like they're trying to accommodate your budget and make you feel comfortable with the amount you'll have to borrow, but this may not be true.

While it's important to have an affordable monthly payment, there are other factors to consider, like your interest rate and loan term. If you have a low monthly car loan payment of $200 but a 72-month term and a 10 percent interest rate, you will be spending thousands more over the life of your extended-term loan. You won't be saving any money; you'll just be spreading the loan amount over a longer time.

Don't fall for this trick. Get a reasonable monthly payment with a shorter term or commit to making extra payments on your loan so you can pay it off sooner.

Negotiate the price as if you were paying cash

We just explained how easy it is to manipulate a monthly car payment by making a loan longer. It's a trick dealers love to use to veil the actual price you're paying for the car.

While negotiating may not lead to a significantly lower price, it's worth a try-especially if the timing is right and an opportunity presents itself.

Just like dealership salespeople can try to sell you a more expensive car, you can also try to talk them down on the price or choose a more affordable car on the lot. An important question to ask is how long has the car you're interested in been has sitting on the lot. If the car has been there for a few weeks or months, you may be able to ask for a lower price since the demand obviously isn't too high.

This technique can also work if you're buying a car directly from a previous owner. Even taking $500-$1,000 off the purchase price will allow you to save money and have a smaller car loan to pay back.

Refinance if it makes sense

If you financed a car and you received a high interest rate because your credit wasn't that good (more than 5 or 6 percent for a car loan could be considered high), you can refinance your car loan just like you can refinance a mortgage. If you've been making payments on-time, your credit score might have improved so check it again before applying to refinance.

Refinancing with a lower rate can help more of your money go toward the actual principal balance and not just interest. That saves you money and can either reduce your monthly payment or help you get the car paid off faster.

If your credit has markedly improved, you may be able to refinance with your existing lender. Otherwise, a local credit union is a great choice for auto loan refinancing, or you can visit a site like LendingTree which can help you shop several competing banks to get you the best rate on a refinanced car loan.

Try It Now: Get Free Auto Loan Refinancing Quotes At LendingTree Now

Other ways to pay off your loan fast

To pay off my car loan in one and a half years instead of five, I prioritized the debt by making extra payments. Here are a few specific ways to help you pay off your car loan sooner rather than later:

Make your extra monthly payment amount at least half of the minimum payment amount. If your monthly car note is $200, start by putting an extra $100 toward your loan each month.

Use lump sum payments to rapidly reduce your loan balance: Your tax refund, bonuses at work, or cash gifts.

Ask your employer for a raise or establish some side income, and put the extra earnings toward your debt.

Sell your car for a more affordable vehicle if it makes sense financially. I considered doing this but decided against it after weighing the pros and cons. If your car is worth more than you owe on it and if you can use the difference to purchase another car that would be reliable and have low mileage, this could be an option to get rid of your car loan debt all at once and pay for a new car in cash. If, however, you're upside down on your car loan (meaning you owe more than the car is worth) or you wouldn't be able to find a reliable car for much less than you're currently paying, it's often best to stick it out with your current ride.

Summary

There's a right way and a wrong way to finance a car. Circumstances may force your hand, and you'll have no choice but to finance. If that's the case, monitor your credit so you maintain a high score, and be sure to get a loan you can afford to pay back quickly-not just a loan with an affordable minimum monthly payment. Then prioritize your debt by putting extra money toward the monthly payment each month to shorten your term.