Question about my car loan - pay it off early?

[CCrox24]

Is it beneficial for me to pay a car loan off early?

I have 13K left on the loan and the percentage rate is 7% over a period of 6 years. It just seems stupid to drag it out that long. I mean Il'l be in my early 30s (OH MY GOD!) by the time I pay the thing off.

So, what are the benefits of paying it off early....do you think it's better to get it out of the way, or just ride it out and make the payments?

[yankeeyosh]

Is it beneficial for me to pay a car loan off early?

I have 13K left on the loan and the percentage rate is 7% over a period of 6 years. It just seems stupid to drag it out that long. I mean Il'l be in my early 30s (OH MY GOD!) by the time I pay the thing off.

So, what are the benefits of paying it off early....do you think it's better to get it out of the way, or just ride it out and make the payments?


Unless you see a situation where you can invest the money and get a return of more than 7% annually, or you are itching for a house (which opens up another can of worms), I see no reason why you shouldn't pay it off early if you are able to.

[coll214]

If you can afford it, why not? I paid my last car off early and then went on to use the extra money to put towards CC's. Helped when buying the next one too :D. there's usually no penalty for paying it off early, but i'd double check with your loan provider.

[old_school_soul]

Unless you see a situation where you can invest the money and get a return of more than 7% annually, or you are itching for a house (which opens up another can of worms), I see no reason why you shouldn't pay it off early if you are able to.

Those aren't the only reasons.. You should also keep at least 3 months of money in savings that is equivalent to your salary in case of unexpected unemployment. So if you have that and the extra $13k to pay off your car loan, then go for it.

[red]

you can always just pay extra each month and that will effectively shorten the term of the loan even if you don't have the whole 13k lying around.

so for example, say your monthly payment is $250, you can round up and pay $300 or more if you can afford it. that's what i have always done on my car loan (but my loan was 48 months) and we will have the car paid off a year early. it is also nice bcs i am paid ahead so if i don't actually have to make a payment this month if an emergency came up, for example. i mean, you should always have an emergency fund too, but if you can afford to round up, then i'd do it.

[AshleyJordan]

you can always just pay extra each month and that will effectively shorten the term of the loan even if you don't have the whole 13k lying around.

so for example, say your monthly payment is $250, you can round up and pay $300 or more if you can afford it. that's what i have always done on my car loan (but my loan was 48 months) and we will have the car paid off a year early. it is also nice bcs i am paid ahead so if i don't actually have to make a payment this month if an emergency came up, for example. i mean, you should always have an emergency fund too, but if you can afford to round up, then i'd do it.

That's exactly what I'm doing with my student loans, and it's working out very well for me.

[red]

great minds think alike ;-)

[Samwell]

If you can afford it, why not? I paid my last car off early and then went on to use the extra money to put towards CC's. Helped when buying the next one too :D. there's usually no penalty for paying it off early, but i'd double check with your loan provider.

Yup, you should look over your loan before doing anything. Make sure it's a simple interest loan with no prepayment penalties (which is likely unless you had shaky credit or got hosed by the lender).

If it is a simple interest loan you'll save a bit of money overall by prepaying since you'll be reducing the principle faster than scheduled. With a loan that long you'd save a significant amount of interest and be done quicker.

[redav]

Another feature of some loans such as car loans is that they will reduce the next required payment by the amount you overpay. For example:
- Suppose your payment is $300/mo.
- You pay $350 this month.
- Your required payment next month is $250.
- Keep it up for 6 mo, and you will not be required to pay anything the following month.
- Keep doing it for a year, and then you won't be required to pay anything for two months.

The intent behind this 'feature' is that they want you to take as long as possible to pay of the debt, thus maximizing the interest you pay (you can never count on lenders to be benevolent). But it does have a side benefit, which is that it effectively works out to an emergency reserve for you. Instead of having to save enough to cover paying the note, you instead don't have to pay it at all for those months. The end result is the same, but instead of earning ~4% and having to pay taxes on your earnings, you are saving 7% tax free.

Of course, not all loans have this 'feature,' so be sure to check before you make any plans.

[winneythepooh7]

I agree with Red & Ashley. And honestly, even if "house buying" is in your future, this type of loan is not really going to effect your getting a mortgage, since it's a fixed payment loan every month. In fact, my husband and I just got pre-approved for a mortgage with having a fixed monthly loan that I rolled the last amount of my car payment and some credit card debt into, and my personal credit score has RISEN to the highest end ever!!!

And PS, with "house buying" they are looking at your debt-income ratio overall, joint income, and overall credit rating ;). Now being single and affording a home, yeah, that's a whole other can o' worms.

[Moon Gazing]

You should send the extra money towards your loan separately and indicate that the extra money is to be applied to your principal not the current payment. If you pay more when sending in your payment some of that money will go to interest.

[NewMrs.]

I paid my car loan off about three months early about a year ago. I added $40 or so to my car payments for several months to do this. The bank applied the extra money to my principal, not my interest, so I ended up paying less in interest overall. The biggest advantage for me is that it is really nice to not have that extra $240 loan payment every month.

[Dirty Sanchez]

I agree with Red & Ashley. And honestly, even if "house buying" is in your future, this type of loan is not really going to effect your getting a mortgage, since it's a fixed payment loan every month. In fact, my husband and I just got pre-approved for a mortgage with having a fixed monthly loan that I rolled the last amount of my car payment and some credit card debt into, and my personal credit score has RISEN to the highest end ever!!!

We did the same... and, we got approved for the mortgage and bought the house less than a year after I'd paid off my car (2 yrs early) and 2 months after my husband had just bought a 25K :rolleyes: car. My credit looked better and helped us actually, since I'd paid my loan off early.

[redav]

You should send the extra money towards your loan separately and indicate that the extra money is to be applied to your principal not the current payment. If you pay more when sending in your payment some of that money will go to interest.
It would depend on the loan, but for all the loans that I have had, it can be included with the payment. If it's calculated using simple interest, then all they do is take the prior balance, multiply it by one plus the product of the number of days since your last payment and the daily interest rate, then subtract your payment, and that yields your new balance. (If it they are using a monthly method rather than a daily method, it's the same, just with months rather than days.)

But a phone call to the lender to ask how they handle it would be best.