A simple change to the way you pay can cut hundreds (or more) off your auto loan. We’ve got an auto loan hack that can save you money.

Auto loan hack: Splitting your payment

Splitting the payment in half and paying twice a month (semi-monthly) saves money. Why? On an auto loan, interest compounds daily. By paying half your payment early, you actually cut down the principal faster, thereby reducing the corresponding compounding interest you’ll pay over the life of the loan. Plus, any extra amount you kick in toward your loan beyond what you owe for the month, even if that’s only $25 or $50, can save you big on interest over time and trim down your timeline to paying off the loan completely.

What’s the catch?

If we’ve made this sound too good to be true, we promise it’s not. There are a couple of important caveats to be aware of:

1. Watch out for prepayment penalties. Some lenders charge fees when you pay off your loan early. We don’t, but if your lender does, you’ll want to do the math first to determine if the money you’ll save on interest over time will be worth any fee you might incur for paying early.
2. If you make an extra payment, make sure it is applied toward the principal. Some lenders may hold the extra payment as a prepayment for a future month. If that’s the case, make sure to let your lender know that you want the extra payment to be applied to the principal while retaining your next scheduled payment. Remember to check your monthly statements to be sure the payments get applied correctly.

How extra payments work on Grow auto loans: When you pay extra, your payment satisfies the daily interest since your last payment, then the rest of the amount you’ve paid goes toward the principal balance. This may advance your due date, but don’t worry, the principal balance of your loan is still dropping. Continuing to make extra payments toward the principal can knock time and money off your loan.

Stuck with another lender that doesn’t want you to get out of debt? Learn more about refinancing your auto loan with us.

Refinance Your Car

Subject to credit approval.

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• Auto Education