How I Paid Off My Car A Year Early (Despite Being Laid Off Twice)

I’ve owned four cars so far in my life. One I won in a contest, the second my parents loaned me the money for, and the third and fourth I took bought using a car loan. When I bought my third car I didn’t want to get a loan and borrowing from my parents again wasn’t an option but I didn’t have enough in the bank to pay all cash.

Because I’m not a fan of holding on to debt I was determined to pay off that car loan early and I worked hard to make that happen. I knew there was no penalty for paying the loan off early so my goal was to pay it off in three years - two years earlier than the end of the loan. I knew if I could do that I would be saving money in the long run.

(I am not a financial expert. All information is based on my own personal experience and research. This information is not meant to be financial advice and is just for educational purposes. This post includes some affiliate links. Should you click an affiliate link and make a purchase I may receive a small commission at no extra cost to you.)

The reason I would be saving money is because I would be paying less interest. It seems people tend to forget when they take out loans that by paying interest you are paying more than the item is worth which really stinks when it’s a depreciating asset like a car.

I learned that most car loans (like the one I had) are calculated using simple interest. This means the interest is calculated each month based on the amount owed or the principal. So the faster I could pay down the principal the less interest I was paying. It became my goal to make extra principal payments each month and get that loan paid off as quickly as possible.

Related read: Track Your Debt Payment With This Free Tracker

Then life happened and I was laid off. I got a new job about four months later, but the salary was about $10,000 less than I was making previously. I changed jobs six months later and a year after that I was laid off again. This time for about seven months. It seemed like my goal of paying off the car loan early would not happen.

Despite all of that, one month after starting my next new job I was able to pay off my car - about a year before the end of the loan.

So how was I able to pay off my car a year early? I’m going to share that with you.

The first thing I did was set some goals that I would be working towards. Having the goals would be the basis for my plan to attack the debt. The two goals I set were 

• When I would pay off the loan
• How much extra I would put toward the principal each month

Using those two goals I created a plan with eight action items to help me achieve that goal.

1. Create and stick to a budget

I had been budgeting before I bought the car so I knew this was the best place for me to start. A budget helps you to see where you are spending your money and where you can find money to make extra loan payments.

To create my budget at that time I used the site mint.com. It allowed me to easily update and adjust my budget as I monitored it weekly. If I saw I was overspending in one area I could adjust and spend less in other areas to make up the difference and still come in at or below my overall monthly budget and hit my extra loan payment goal.

If at the end of the month, I had underspent and had leftover money in my budget I would take those leftover dollars and use them as a second extra payment to pay down the principle of the loan.

2. Live frugally

At the time that I bought my car, I knew that the payments would comfortably fit into my budget but I knew I was going to have to make some lifestyle changes if I wanted to make large enough principal payments to pay off the loan early.

The changes wouldn’t be drastic though. Just small things that would have a big impact financially but not keep me from having fun such as

• Sticking to my budget: As I previously mentioned if I spent more in one area I spent less in another to make up the difference
• Took cheaper vacations: I still traveled just went a cheaper route and I’d look for travel deals.
• Cut down on utilities: I cut off my expensive cable and lowered my Internet speed
• Shopped less: I stopped buying things like clothes, home furnishings, or hair products. If I did buy things I would see what I could get secondhand or get on sale. I also stopped purchasing gifts for everyone I knew and spending a lot on gifts I did buy.
• Ate out less: I kept my eating out to no more than once or twice a month and had a budget for how much I would spend each time.
• Found ways to save: I would find apps for earning gift cards I could use for my regular shopping. I also didn't buy brand name products unless they were on sale and I could coupon stack.
• Lived in a cheap apartment: I moved during this time and selected an apartment that was safe, and nice but cheap for the area.

To determine the areas where I could cut back and be more frugal I used my budget. 

3. Earn extra income

When it comes to budgeting you can reach a point where there isn’t anywhere else you can cut. That’s when you know you need to bring in more income. You can earn more income by getting a raise at work. The downside is that isn’t something you can control and it can also take a bit of time to get one. 

The best way to earn more income is to get another job or have a side hustle. Below are some ideas

• Get a part-time job in retail, a restaurant, or another local business
• Sell items that you don’t use or need anymore online or in a yard sale
• Do a work-from-home job after you’re done with your full-time job
• Use reward apps or take online surveys to earn cash or gift cards that you can use to cover your everyday purchases or for an extra loan payment

I went the route of selling items online and using reward apps. While I didn’t earn thousands of dollars I was able to earn enough to increase my extra principal payments by small increments. This helped to decrease the amount of interest I was paying over the life of the loan and saved me some money in the long run.

4. Refinance

This probably had a big impact on my paying off my car loan early. My initial loan was through a regional bank. I knew the rate was a bit high, but it was the lowest one I qualified for at the time because I never had a loan before.

After about a year into the loan, I shopped around and found a better, much lower rate with a local credit union. With the lower rate, my monthly payment decreased quite a bit. I kept paying the same amount I had been to pay down the principal which counted as extra payments. 

When I was looking to refinance I wanted to make sure I got the following

• A much lower rate so I was saving at least a hundred dollars a month
• The same or shorter term for the loan. I didn't want to extend the loan because while the monthly payment would be lower I would be paying more interest over time. The opposite I was trying to do.
• No penalties for paying the loan early. 

5. Make extra payments

I’ve been talking about this for a while because the only way to pay off a car loan or any loan for that matter is to make extra payments. And not just any type of extra payment but one that is applied to the principal.

When making extra payments it's important that they are applied to the principal and not the interest. I repeat not to the interest. My bank, like pretty much every other bank, would automatically apply the extra payments to the interest unless I directed them to apply it to the principal. They do that because they make more money in the long run.

My monthly payment for my car loan was around $300. When I first started the loan I made an extra payment of $10 every month and then every few months would make an extra payment of $100. When I got serious about paying off the car and was employed I made $100 or more extra payments every month.

Because my car loan was a simple interest loan and accrued interest daily I found it was better to pay my regular payment and then follow up with one or two additional principal-only payments soon after. That way less interest was accruing and for my next monthly payment more was applied to the principal and less to interest.

6. Have a rainy day fund

While this bucket of money won’t be used to pay off the car, it can be helpful when you’re trying to pay off your loan. Should some financial emergency come up you, hopefully, won’t have to skip or decrease any payments on your auto loan because you can use your rainy day fund for the emergency versus your loan payments.

A few years into my car loan I was laid off. Not once but twice. Despite that, I didn’t have to skip any payments because I had a rainy day fund that had enough money to cover 3-6 months of living expenses.

7. Take advantage of windfalls

Sometimes you may have a financial windfall small or large that you can put towards the loan and pay off a good chunk. Here are some windfalls I’ve had over the years that I’ve applied to debt

• Tax refund: Unless you have another financial need you can use a tax refund for an extra principal payment.
• Insurance savings: I’ve found it’s always good to shop around for car and home/renters insurance every year or two to see if you can get a better deal. If you change insurance providers you may get a small refund from the one you’re leaving. You can use that and your savings from switching to extra car payments
• Work bonus: If you happen to get a bonus at work, put it towards a car loan payment.
• Rebates: Sometimes we get rebates for certain purchases. While it may only be $10 or $20 it can still be used to help you lower your loan amount.

What tips do you have for paying off debt quickly?