Good idea to pay additional principal on car loans?

Question

I have two car loans, each at about 6%, each maturing in 2011. For the past several months, I've been paying a couple hundred dollars extra of the principal on each loan every month, thinking that I'll save on interest in the long run. But I'm not sure this is really a good idea. Would I be better off putting that extra money into some sort of investment vehicle? If I trade in one or both of the cars for new vehicle(s) before they're paid off, will I have derived any benefit whatsoever from paying down the principal as I've been doing?

Answer 1

The answer to your question really comes down to can you invest those funds and have a return on your investments greater than the 6% you are paying as interest on the loan. If you can, don't prepay the debt but funds those dollars into your investment. If not, continue to pay the debts down.

If you have other debts with higher interest rates, those funds really should be used to decrease those higher interest loans.

By paying down the car loans you are decreasing the term you will be paying on them. If you trade the cars in (or sell them) before the debts are paid, you'll owe less (and net more out of the sale) if you continue your debt reduction strategy.

Answer 2

1

Answer 3

As has been said above, unless you could invest the money somewhere you could have a guarnteed rate of return higher than 6%, you're doing the right thing.

To address your second question- yes, you've gotten a benefit even if you turn them in for new vehicles. If your loans are maturing in 2011, that means you financed for approx. 5 year. I'll assume the cars were new or almost new when you bought them. What happens when you finance a new or almost new car for 5 years and only pay the pricinpal is that you go upsidedown on your loan. That means the loan on the car is more than the car actually is worth (that's because the car depreciates so much in the first couple of years)

If you only paid the pricipal and then turned the cars over for new ones, you'd usually end up having a difference of a couple thousand dollars you'd have to come up with out of pocket or add to your new car loan (e.g. You still have a loan of $20,000 when you go to trade in. Because of depreciation, your car is only worth $17,000. That's $3000 you have to come up with for yourself)

Answer 4

Well you are right you will save intrest in the long run.
There are alot of great intrest rate calculators on the web that will show you how much you will be saving when you apply extra payments (see link)
If you trade one or both that only means that you will get better trade in value against what you owe which will save on the new vehicle.
But to be sure check out what the trade in value of your cars would be. Most dealers use NADA or KBB for estimates on trade in value. If you pay the principal down then that only means that the remainder will be applied to your new loans, thus reducing prinicipal/intrest/payments on your new vehicle(s)

Answer 5

I think it is always a good idea to pay off some principal on any loan...best to work out the figures to see how much is best to invest in the car payments/principal payments or investment in another type of investment...my car payment was paid off before the due date and I did not receive a penalty, so it was best for me to pay off my debt first

Answer 6

This is a good move only if you don't have other debt with higher interest that you could be paying down with that same money.

Primarily I'm thinking of credit card debt, that is typically at 18% and is frequently even higher than that.

If this is your highest interest debt, then it's a good way to save money in the long run.

But what I tell everyone, is to pay down those credit cards FIRST - it's by far the best investment you can make.

Answer 7

Can you invest the extra money you are paying and have a guaranteed return greater than the interest rate of the notes? Unless you can you should reduce your debt first. This may be influenced by your own specific tax situation. Your tax consultant would be a better source for accurate information.

Answer 8

Concerning the question above where is a calculator which would show what savings you are getting based on how much extra principal you are applying. For me I am planning a one time 1k or better payment to principal now intead of spreading it out, and even then when I can pay extra.

Answer 9

Ask yourself the following question.

If my cars were paid for, would I borrow against them at 6% to invest the money? If the answer is yes, then invest the money. If the answer is no, then pay off the car.