Do you pay extra car payments?

Question

If you have a car loan, do you make extra payments on it, and if so, how much? What are the benefits of paying off your car early versus putting the money in your emergency fund?

I'm trying to determine the best thing to do in my situation (I owe $6,300 on my 2002 car at 4.39 percent and I'm earning 4.4% in ING, not including other funds in CDs making higher rates). In a couple of months when my personal debt is gone, I was planning to make extra payments on my car to retire it early. What would you do?

Answer 1

I just made an extra car payment today - am cutting out of debt and want to pay it off early.

If you have other debt, such as credit cards that have higher interst rates, and you've been paying on your car for a while, you may want to pay off the higher interest rate debt first since you probably pay the bulk of interest at the beginning of a car loan. So put the extra money toward higher interest debt first.

Congrats on wanting to be debt free - and on using places like ING for savings. I use ING for my emergency plan money.

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Answer 2

Yes, I do this as often as I can. I've paid as much as 3 or 4 extra payments in a given month. I do this because when I apply extra money towards the principle, it lowers the car loan balance plus I do not have to pay as much interest than if I paid the minimum.

The thing is, your car loan APR is a really good rate, to the point that you get higher interest with your ING account. I think you should split the excess 50/50, putting 50% of it in savings, and 50% towards your car loan. It is good to pay off the car loan because you will save interest plus your credit score will be boosted when there is a smaller balance on the loan versus the original balance; however, if you have a very low interest rate, sometimes it's not worth it to pay it off right away because the interest accumulated on say, a 1.9% APR loan is really not that much(in proportion to the payments). However, if you have a subprime interest rate(my friend has 21% on his used car!), pay it off as soon as you can!! Your interest rate is good, but still higher than )% or 1.9%, so that's why I say to split the excess money for payments between your savings account and paying down the car loan.

Answer 3

Extra payments on your car has several benefits:

1. It's money that is going directly to the principal amount. Your regular payments are being split between principal and interest (for instance if you have a $300 per month payment, $50-100 may be going to interest, if you make an extra payment, then none of it goes to interest)

2. Whatever payment you make beyond your car payment, you won't have to pay interest on that amount of the car. So if you pay off $1000 early, then that's $1000 that you avoided paying interest on.

3. You'll avoid getting into negative equity. In the car business its called being "upside down." Many many people owe more on their vehicle loan than what it is worth to sell or what insurance would pay for a total loss. Making extra payments help you to stay on top of that and avoid that problem as much as possible.

4. You'll be out of debt and will have more flexibility if you want or need to do something different in the future, including trading in your car to something nicer and possibly keep the same payment.

**That's what I would do, but make sure you have a simple interest loan and won't be penalized for paying it off early.**

Answer 4

Since the rate of your earning interest is the same as what your rate is for your car payment interest. I would pay off the car first. You have to pay taxes on your dividends that you make and the difference on the money you would make putting it into savings .01% wouldn't cover the tax's. It is a small amount either way. After you pay off the car loan then you can save more. I wouldn't use higher rate savings to pay it off early since you would make money on the interest.

Answer 5

I did this on my car, and I ended up paying it off 8 months ahead of time, It was so worth it! When you do this you know it's going straight to the interest and principal balance, and that your shortening your amount of payments remaining. Sometimes when you put your "extra" money into your savings, you find a reason to use it, if you just make that extra payments on your car, you can't get the money back out to spend it, this is good because your working towards a goal and you can't get side tracked.

Answer 6

We did with our house. Be careful with cars though. Most have a clause that says you may pay a penalty if you pay off early.
We made double house payments every month, paid off our house in only 10 years (instead of 20) and save $1000's in interest!! Now our house is worth something to us, not the mortgage company.

Answer 7

thats a really good question. as a former car salesman , id say pay the car off first, get the BAD debt out the way before you save a lot of money. dont put all your eggs in one basket though. whatever you have in excess, you should divide that by two, put half in your savings, and half towards the principle of your car. paying it off early will save you money in interest

Answer 8

extra payments are great, just make sure they go to the principle and not just applied to the next payment. paying early greatly decreases the amount of interest you pay.

Answer 9

you could if you have the money to burn, but you can always pay towards the principal.