Amid talk of a recession and record-high inflation, you’d think Americans would keep a close eye on auto-loan spending.
And you’d be wrong.
New data from LendingTree shows the average U.S. monthly auto-loan payment stands at $644, up 11.8% from a year earlier.
Worse, loan payments for used-cars and lease arrangements are rising faster than regular auto payments, which were up 15% and 18%, respectively, Lending Tree reports.
With Auto-Loan Debt, Slow Means Trouble
Auto-loan borrowers who take their time repaying their vehicle debt are making a big mistake – over and above that rising monthly loan payment.
“A car loan is no different than any other debt in which the original sum borrowed must be repaid along with interest,” said Kunal Sawhney, chief executive at Kalkine Group, a global equity-research firm. “To emerge as a prudent borrower, one must always prioritize repaying the debt on time.”
For starters, not repaying the debt on time curbs a borrower’s ability to access other forms of credit that may be more critical, for example, buying your first home.
On the other hand, repaying a car loan faster "improves your credit score and allows you to take another loan in case of urgency as it improves your debt-to-income ratio,” Sawhney said.
“It gives the creditor confidence that you have the will and the capacity to repay.”
Four Ways to Pay Down Auto Debt Faster
Get ahead of your total auto-loan debt and get out from under those high monthly loan payments with these tips from personal-finance experts.
Get a side hustle. Looking for realistic ways to earn some extra money is a big key to getting out of auto-loan debt more quickly.
“There's so many flexible side hustles you can do these days, working as much or as little as your schedule allows at any given time,” said Andrea Woroch, founder of the personal-finance advisory platform AndreaWoroch.com. “Plus, many side hustles can be done from home.”
For example, you can make as much as $1,000 a month by pet sitting through sites like Rover.com.
“Other ideas include virtual tutoring on nights and weekends through Varsity Tutors, getting paid to answer professional questions based on your professional background via JustAnswer, dropping deliveries while running errands using the Roadie App, or offering online chat support through The Chat Shop,” Woroch said.
Put your savings to work. Every time you dodge an impulse purchase or save money by using a coupon, put those savings to work by immediately transferring the amount you were about to spend toward your car-loan payment.
“You can find coupon codes for just about anything through deal aggregators like www.CouponFollow.com, which organize savings by store name and category, or use the browser extension www.Cently.com, which applies discounts automatically,” Woroch noted. “For big-ticket items, a 10% or 20% off savings can make nice dents in your loan balance.”
Pay extra on your loan payments. If you can afford to pay more than the minimum payment on your loan, consider doing so.
“By making extra payments, you'll be able to increase the speed at which you pay off your loan,” said Carl Jensen, founder of the financial-products-comparison site MoneyMow.com. “However, you shouldn't go too crazy – aim for more than 25% of your monthly income, if possible.”
Streamline payments via autopay. Speed things up by establishing auto-pay with your bank. Better yet, do so with an extra amount added every month.
“For example, if your car payment is $500 per month, set your auto-pay to $600 or $700 per month,” said Kalen Houck, founder of the personal-finance blog KalenHouck.com. “If you automate it, you're much more likely to stick with it as it forces you to be self-disciplined.”
In doing so, don’t take the mindset that if you have money left over at the end of the month, you’ll pay a little extra on your auto loan.
“You have to decide at the beginning of the month exactly how much extra you want to pay, and include that amount in your budget,” Houck said.
“If you don't decide beforehand, life happens and there will always be other things that come up and steal those dollars away.”
