Does your car loan belong in the debt snowball?
Yes. List it with everything else you owe. In most plans the car loan ends up last, and that's the point: while you clear the smaller debts, the car keeps getting its regular payment, and when its turn comes every freed-up payment lands on it at once.
An example with a car loan
Here's a plan with a $14,500.00 car loan at 7.9%, two credit cards, and $150.00 a month beyond the minimums.
| Debt | Balance | APR | Minimum | Payment as target | Paid off in month |
|---|---|---|---|---|---|
| Store card | $650.00 | 27.99% | $35.00 | $185.00 | 4 |
| Visa card | $2,800.00 | 23.99% | $85.00 | $270.00 | 15 |
| Car loan | $14,500.00 | 7.9% | $350.00 | $620.00 | 33 |
Everything is paid off in 2 years 9 months, with $2,498.39 in interest. Paying only the minimums on the same debts takes 4 years 7 months and costs $4,513.54 in interest.
Open the car loan example in the calculator
Once both cards are gone in month 15, the car loan gets $620.00 a month instead of its $350.00 minimum.
Why the car loan usually goes last
A car loan is usually your biggest balance, and at typical auto rates it's also one of your cheapest debts. So the snowball (smallest balance first) and the avalanche (highest rate first) agree: cards first, car last. The car loan also can't run away from you. Its payment is fixed, so paying the minimum finishes it on schedule.
Don't send extra to the car first
Paying the car off early feels good, but extra payments on a car loan don't lower its monthly payment. They only shorten the loan, so nothing is freed up until the very last payment. The same money on a credit card saves more interest and clears a whole payment sooner, which is what makes the snowball grow.
When the car loan becomes your target
- Check for a prepayment penalty. Most auto loans don't have one, but your contract will say if yours does.
- Tell the lender where the extra goes. Ask for extra payments to go to principal. Some lenders otherwise treat them as paying next month early, which saves you nothing.
- Keep the rolled-up payment going. When the car is paid off, you're done, or that whole payment moves to your next debt.
Refinancing and trading in
Refinancing helps only when the new rate is lower and the term isn't longer. A lower payment from a longer term costs more in the end, the same trap as with consolidation loans. If you owe more than the car is worth, avoid trading it in: the leftover balance usually gets rolled into the next loan, and you start over deeper in debt.
Try it with your own numbers
Enter your car loan's balance, rate and payment along with everything else you owe, and the calculator shows when each debt is paid off. Build your plan in about a minute.