Auto loan early payoff question

[FrugalIII]

If I were to pay off a car loan early, would I save money in interest like I would when I paid off my mortgage early? I've never paid off a car loan early, so I don't know how that works. Someone told me it would not.

[wincrasher]

you should save a little, depending on how far into the loan you are.

if you are on year 4 of a 5 year loan, then it will be very little.

mortgage savings can be great because of the amount of principal and length of the term.

[ktmarvels]

If you make a principle payment this will reduce the amount of interest you will pay overall and potentially reduce the life of the loan. You may have to specify "principle payment" otherwise the company may not apply it in this manner, and it will not save money in the end. Make sure your loan allows prinicple payments and early payoffs without penalties.

[FrugalIII]

I'm exactly at the 1/2 way point of paying it off. It is a 6 year loan. I was thinking of making extra payments now that I can afford it and pay it off in a year or so.

[Jazzmint98]

Originally Posted by ktmarvels

If you make a principle payment this will reduce the amount of interest you will pay overall and potentially reduce the life of the loan. You may have to specify "principle payment" otherwise the company may not apply it in this manner, and it will not save money in the end. Make sure your loan allows prinicple payments and early payoffs without penalties.

Even if you do specify to allocate money to the principal, it doesn't always happen unless you call customer service several times to follow-up. Just experienced this last week!

[kork13]

Because auto loans tend to have the interest payments made upfront, paying an auto loan off early tends to have much less impact than with other loans... For example, I've been making payments on my car loan at more than double what the loan calls for since the outset 1.5 years ago. For the first few months, only $50-$100 (of my $500 payment) went to principle, the rest went to pre-paying the interest that would eventually accrue. So even though I will be paying off my 5yr loan in less than 2yrs, I'm still only saving less than $100 of interest.

[maat55]

Add up what you would pay if you payed the loan as scheduled, then call the bank and ask for your payoff.

In most cases, the early payoff is less. Some loans have prepayment penalties, but early payoff is usually worth it.

This also depends on other debt with higher interest, applying money there would be more efficient. I personally like the motivation approach to just payoff loans I would not like and be done with it.

[Bimmer]

It might be debatable how much interest you save, but paying it off early will free up that monthly payment so you can apply it somewhere else (other loans, retirement, savings, mortgage, etc).

[KatieNK]

So if the interest savings isn't that much, would it be better to put the extra money you would apply to the loan, into an ING (or better) account so you can earn interest on that money? Then once you have the payoff amount you can just pay it all off?

[FrugalIII]

Well, the bank says the payoff is just a few dollars over $20k. The payments are just a couple dollars less than $700 and I have 30 payments left. So by my calculations, if I were to pay it off today, I'd save about $900 in interest. Assuming there is no penalty for early payoff. Of course I'm not in a position to do that, but if I pay it off in 15 months instead of 30, I should save a few hundred dollars anyway.

[KatieNK]

Maybe I am slow, but I don't get how paying it off early would not save you interest? It does with your house... is that just because the loan is much larger and for a longer term?

[kork13]

Originally Posted by KatieNK

Maybe I am slow, but I don't get how paying it off early would not save you interest? It does with your house... is that just because the loan is much larger and for a longer term?

Partly, yes--that's exactly right. But also, I believe the payment schedule itself differs from auto loans to mortgages.

With auto loans, your payments start out going (for example) 60% to interest, 40% to principal. Over time, that shifts so that you pay less and less toward interest and more and more toward principal. By the middle of your loan's term, it might be 20% to interest, 80% to principal. By the end, it's basically 95% principal and only 5% interest. So basically, you are charged all of the interest upfront. That means that accelerating payments saves you less interest, because you've already paid the majority of the loan's interest.

I believe mortgages are a constant ratio of interest-to-principal, or perhaps starts with principal being a more significant proportion. In addition to what you said above (mortgages are alot bigger), this is also why accelerating mortgage payments has a more significant impact.

[maat55]

Originally Posted by kork13

Partly, yes--that's exactly right. But also, I believe the payment schedule itself differs from auto loans to mortgages.

With auto loans, your payments start out going (for example) 60% to interest, 40% to principal. Over time, that shifts so that you pay less and less toward interest and more and more toward principal. By the middle of your loan's term, it might be 20% to interest, 80% to principal. By the end, it's basically 95% principal and only 5% interest. So basically, you are charged all of the interest upfront. That means that accelerating payments saves you less interest, because you've already paid the majority of the loan's interest.

I believe mortgages are a constant ratio of interest-to-principal, or perhaps starts with principal being a more significant proportion. In addition to what you said above (mortgages are alot bigger), this is also why accelerating mortgage payments has a more significant impact.

I've noticed that mortgages are no different. you pay heavy in interest at the beginning, also. That's why 30 year notes are bad if you are selliing inside of ten years.

[Seeker]

There used to be (and probably still is) a "Rule of the 78's" that may apply to your auto loan. These loans are front loaded with interest pre-payments.

Some companies use "Simple Interest" for auto loans. These essentially are the same as home loans.

So, in order to determine what's best for you, look at your contract.


I know that our loan with Honda is a "simple interest" loan. We are not penalized for pre-paying in any fashion.

[KatieNK]

I probably do have the type of loan that you pay most interest up front because the balance never seems to go down, lol. I will look it up though.