how to pay car loan
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how to pay car loan
There are many benefits of paying off a car loan ahead of its schedule. You can save up some money and use it towards the fulfillment of your other financial goals.
F or those who are having some trouble with their credit history, owing to high debts, paying off an auto loan is a great way to resurrect your Cibil score. If you have no idea where to begin, here are some pointers that are likely to help.
Take the case of 32 year old Debarshi Nag, a diligent employee in a Mumbai headquartered construction firm who has recently been promoted to with a 10 per cent increase in his salary. Debarshi, who is planning to apply for a home loan in the near future is aware of the fact that he needs to maintain, and if possible, improve his Cibil score above 750 in order to have his home loan approved in a hassle free manner.
Towards this goal, he wants to pay off his car loan with a tenure of five years that he had applied for in 2012. Here is what Debarshi can do:
Make one extra payment in a year
Making a payment of one extra EMI in a year may throw your budget haywire, but stretching the same payment over a year will help you achieve this goal with ease.
For instance, if your EMI is Rs 12,000, you divide that by 12. The result is Rs 1000. Add Rs 1000 to each month's payment and you will have paid one whole payment in a year, without feeling the pinch of making one large payment all together.
Rounding up your payment
You can also cheat yourself in making a higher payment towards your car loan by rounding off your payments, depending upon what your budget allows.
For instance, if your loan amount is Rs 11,540 you can round it off to Rs 12,000 each month. This means you are making an extra payment of Rs 460 per month.
This may seem like a small amount, but in a matter of 12 months you will have paid Rs 5,520 in the year, thus taking a slow and steady step closer towards the repayment of your auto loan.
Most banks and financial institutions are a little more flexible with car loans and can give you the opportunity to make out of turn repayments whenever you have some extra money to spare.
Banks call it the 'special tie ups' and may offer it if you are an existing customer or you approach them with a good Cibil score. You can use the extra cash that you get from yearly bonuses etc to make such payments on your auto loan.
However, it is best to discuss such repayment option possibilities before hand with your lender, to ensure that there are no penalties for such pre-payment opportunities.
Ever thought of earning some more money by milking your talent? For instance, if you are a great web designer and have done it for friends for free earlier why not do it professionally in your leisure to earn some extra cash that you can use to make your loan prepayment.
With so many opportunities for freelancers and social media forums, you can definitely try and use your talent to earn this extra cash! It may seem a little daunting at first, but you will soon discover that it is an incredibly satisfying experience!
Having a vehicle of your own is no longer a luxury but a necessity these days, and when you can own it without having to bother about monthly EMI payouts, the drive ahead becomes even more enjoyable!
Now that's a good enough reason to start planning for a prepayment of your auto loan! Don't you think?
Photograph: Todd Lappin/Creative Commons
The author is a credit expert with 10 years of experience in personal finance and consumer banking industry and another 7 years in credit bureau sector. Rajiv was instrumental in setting up India's first credit bureau, Credit Information Bureau (India) Limited (CIBIL). He has also worked with Citibank, Canara Bank, HDFC Bank, IDBI Bank and Experian in various capacities.
how to pay car loan
Have you ever wondered how to make your car payment go down or how to pay off your car loan faster? If you do, you should really check out how the smart people deal with their loans. According to a research, 70% of people sign up for car loans to buy their new cars. Often, these car loans take almost one-third of their monthly income and they last for at least 48 months up to 84 months. If you feel like you are paying a lot of interest for no reason and don’t want to suffer for 84 months, perhaps you should check out these proven methods to pay off your car loan faster.
Instead of making payment every month, you can make bi-weekly payments. This is one of the fastest ways to pay off your car loan early because less interest will be accumulated when payments are applied more often. There are 52 weeks in a year and you will make 26 (or 27) yearly payments using bi-weekly payment method. In fact, you can also shave off the payment for last few months.
Method 2: Make Extra Payment Whenever You Got Extra Cash
Pay more is often the best way to settle your car loan early. You can do this whenever you got extra cash and that could save you a lot of interest. For example, pay $500 instead of $428 every month. At the end of the year, you can see an extra $864 is paid to your car loan in your statement. In order to make extra payment, you need to find extra cash, thus, work harder.
Regardless of when you do it, making a large extra payment can help you to pay off your car loan faster. If your car loan interest rate is 5%, making a $10,000 extra payment could save you $500 dollars in a year. Do no overlook $500 because there are many great cars under $500 dollars.
Round up is one of the best techniques to pay off your car loan faster. The monthly payment for a $22,000 car loan with 5% APR and 84 months term is $310.94. You can actually shave off at least 11 months if you round up the amount and pay $350 every month.
We mentioned about refinancing your car loan in Chapter 4 of our Car Buying Guide, Car Leasing versus Car Buying. Refinancing is the easiest and simplest way to pay off your car loan faster. Do a little research and find out which local banks are offering super low interest rates on car loans. If you are able to refinance your car loan from 6% to 2.5%, that will be a big saving. Refinance is also an awesome way to make your monthly car payment go down too.
Nowadays, a lot of things have gone online. Many banks started to offer additional discounts if you pay your monthly car payment online or sign up for auto payments. Pay online or sign up auto payments is a good practice although it doesn’t help you to save a lot of money compared to other methods above. However, it did bring you convenience as well as little discounts.
How Down Payments Affect Your Monthly Car Loan Payments
Your down payment amount can have a significant impact on your monthly car loan payment. Depending on the interest paid and the length of the loan, making a larger down payment can save you thousands of dollars over the life of the loan. Keeping this in mind can help you to make the best decision possible in determining what kind of car you can afford and should consider.
Straight Loan Reduction
When considering how your down payment will affect your monthly car loan payment, the first step is to understand that a larger down payment reduces the size of the loan. The more you pay now, the less you will have to pay each month. It is easy to let the apparent size of these numbers be deceptive. If, for example, an additional $1000 down would lower your payment by only $30, it might be easy to see this as a poor trade-off. But if the term of the loan is 60 months, the $1000 today, will save you $1800 over the course of the loan. We will address specifics shortly, but it is important to keep in mind that a larger down payment will result in a lower payment.
The Effect of Time
The longer the term of the loan, the more of an impact the down payment amount will have on the total amount of interest paid. Longer loans spread payments out more, so the reduction on a per month basis seems smaller when the loan is longer. What you should remember is that the longer the loan, the more you will pay in interest. If you take a smaller loan (i.e. make a larger down payment), your interest savings is compounded over the term of the loan.
For example, if you are borrowing $15,000 to buy a car and paying 5% interest on the loan, making a $3000 down payment will appear to save you more per month on a 3-year loan than a 5-year because the payment will fall more. In reality, while your monthly payment will see less of a fall off, you will save more in interest making the $3000 on the five year loan. When the money is spread over 5 instead of 3 years, it is less per month, but paying 5% for 5 years instead of 3 is more expensive.
The Effect of Interest Rate
The higher the interest rate that you are paying on your loan, the more of an impact the down payment will have on your monthly payment. As was discussed above, if you reduce the loan amount when the interest rate is higher, you will get a higher net savings. This is true regardless of the term of the loan.
The Cost of Extras
Keeping these rules in mind is important when buying your car. It can also be helpful when the dealer wants to add things into your loan at the end. If you keeps these concepts in mind, you will see that the extra $15 per month the add-on costs has a real cost that is potentially much higher.
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