When my husband and I moved to California, we only brought his car with us. I sold/donated my car to my brother because we were going to be working together so we figured we’d only need one car between us and it would save us $$$.
In hindsight, this was a mistake, as we only ended up working at the same place for 3 months (a story for another day) and LA is very much a car city. Within 5 months of moving I was starting a new job with a 40 minute commute and would need my own car.
Unfortunately, we quickly learned that no one really wanted to sell (finance) a car to us. We were Canadians with no credit history in the US. We had our pay stubs and job offers and bank accounts ready to show (just like we had to do when trying to find someone to rent to us), but many dealerships turned us away as we didn’t have the funds to pay full cash.
We eventually found a Honda dealership who would work with us.
We purchased a 2013 Civic with low miles (this was in 2016 so the car wasn’t too old). Used civics are a HOT commodity so we purchased it before it even hit the used lot.
In May of 2016 we left the lot with a new-to-us Honda Civic with a 5 year loan (ugh) at a 5.99% interest rate (ugh).
Then a weird thing happened – we got a letter in the mail saying they’d made a mistake and our interest rate would actually be 4.79%… I still have no idea why, but we didn’t ask questions – that’s a difference of approximately $438 in interest over five years. That’s huge!
Our monthly payment was $248.02 and we had 60 payments to make. If you’re crunching the numbers you’ll see that we financed $13,210.04. But with interest, after 5 years, we would have paid $14,881.20. A total of $1,671.16 in interest.
About one year into our payments, I finished paying off my student line of credit and decided to start doubling up on the car payments. Most months I paid an additional $250 against the principal.
So what was the impact of this?
I made our final payment in May 2019 – exactly 3 years after we purchased the car. We paid off the car 2 years early, AND, saved $563.55 in interest.
I know not everyone can double up their car payments, but any additional money you can throw at your principal helps. When I had my car loan I was obsessed with using online loan calculators to see how many payments I would have left if I paid an extra $XXX this month. Using a calculator like this helped me stay motivated as it provided me with a clear visual of how I could be car-payment-free earlier.
For example, say you have a $10,000, 4 year car loan at 5%. If you were to pay an extra $50 each month, you’d save $205 in interest and shorten your loan period by NINE months. Even an additional $25 monthly payment would shorten your loan by 5 months and save you $114 in interest. The extra payments don’t have to be monthly; a larger one-time lump sum will still help to pay the loan off earlier and reduce your interest paid.
Keep in mind the earlier you can make extra payments, the greater the impact will be on your interest paid. I strongly recommend playing around with online loan calculators. For the same reason that I advocate for tracking your spend, having this visual of the impact will help to inspire you to make better financial choices.
And being free of car payments is one of the best feelings.