Auto Loan Question

[CHH1023]

I just got off phone with my parents and my parents are going to give me $3000 for my birthday coming out next month and they suggested me to use that 3000 to pay toward my auto-loan because the sooner I pay it off the less stress I'll have in the future.

I currently use Volkswagen Credit and have 60 months term with interest rate 5.1%. My minimum payment is $250/month and I've made 7 payments so far (4 out of 7 were $350) (interest 49.10 and principal 200.90 for $250/month for other 3 payments). I have $11579 balance and 53 payments left.

If I use that $3000 toward my auto loan, how many payments will I have left?

[mrpaseo]

Loan amount: $13,215.50 (Assumption)
Interest rate: 5.1%
Loan period in years: 5

You said your payments are $250 per month, with $100 extra for the first four payments (Assuming the first four payments, which does make a minute difference in the long run).

At this point, (with your four extra payments of 100 per month), you adjusted from 60 payments to 58 payments.

Add the $3,000 to your next payment (Your 8th payment) and you will have gone from originally 60 payments down to 44 payments. That is if you add the $3,000 to your original payment of 250 for a payment of $3,250.

My suggestion, ensure you have an emergency fund before you lump all $3,000 down. If you save a payment ($250 dollars) in reserve, and you make a payment of $3,000 ($2,750 from your birthday money plus your original payment of $250) then you will have a total of 45 payments (Minus 8 and you will have 37 payments left).

Ray

[nmboone]

Bankrate.com has the absolute BEST calculators for stuff like this. When I had my car payment I would constantly be running numbers through it to see when I could pay it off. I would give it a look.

[jpg7n16]

Originally Posted by CHH1023

interest rate 5.1%.
My minimum payment is $250/month and I've made 7 payments so far (4 out of 7 were $350)
$11579 balance
53 payments left.

If I use that $3000 toward my auto loan, how many payments will I have left?

As is:
In a financial calculator, at $250/month you have 51.69 payments left.
At $300/month, you have 42.24 payments left
At $350, you have 35.73 payments left.

With paying down $3k immediately:
At $250/month you have 37.17 payments left. (saves 14.52 payments)
At $300/month, you have 30.55 payments left. (saves 11.69 payments)
At $350, you have 25.94 payments left. (saves 9.79 payments)

Hope this helps!

[greenskeeper]

invest the 3k into something that isn't depreciating!

[jpg7n16]

Originally Posted by greenskeeper

invest the 3k into something that isn't depreciating!

How about an appreciating loan?


The $3k isn't a further investment in a car (he's already invested $11,579 in his car) - it is going towards debt elimination, which is an appreciating expense.

The car and its loan are 2 separate things.

[greenskeeper]

He would get a 5.1% "return" on the $3k if he puts it towards the car that is losing value.

or save around $500 in interest if he continues to pay at $250 up to $300

Seems like a waste of a lump sum of cash.

CHH1023 do you have an emergency fund established?

If you kept the $3k and lost your job you could still pay the loan and drive the car for a whole year.

[CHH1023]

Originally Posted by greenskeeper

He would get a 5.1% "return" on the $3k if he puts it towards the car that is losing value.

or save around $500 in interest if he continues to pay at $250 up to $300

Seems like a waste of a lump sum of cash.

CHH1023 do you have an emergency fund established?

If you kept the $3k and lost your job you could still pay the loan and drive the car for a whole year.

I do have an emergency fund (3 months worth of expenses). I know you don't improve your credit score by paying off your loan early but my parents thought it's a good idea to pay it off ASAP so I have 1 less bill to worry about once I'm out of school.

[greenskeeper]

thats great that you have an emergency fund.

Its your decision, can't go wrong with paying off the loan.

As I said I would never finance a car, but if I had a car payment the $3k would not go towards the car instead I would put it towards something that can increase in value.

Apples to Oranges I guess?

[CHH1023]

Originally Posted by greenskeeper

thats great that you have an emergency fund.

Its your decision, can't go wrong with paying off the loan.

As I said I would never finance a car, but if I had a car payment the $3k would not go towards the car instead I would put it towards something that can increase in value.

Apples to Oranges I guess?

I think I know what you meant. For example, I could use that 3K and max out my contribution to my Roth IRA for 2010 and use the leftover money to pay for the auto loan?

Compound Interest is ahhhh-mazingggg

[cptacek]

I would pay it towards the vehicle loan because your parents are giving to you with that idea in mind. It isn't a bad idea anyway, and it makes your parents happy...a win-win

[jpg7n16]

Originally Posted by greenskeeper

As I said I would never finance a car, but if I had a car payment the $3k would not go towards the car instead I would put it towards something that can increase in value.

*sigh* The loan is not the car.

Decreasing an expense is just as good as increasing income.


If you want to argue, "don't pay off a 5% loan, because you can invest at higher than 5%" then that's reasonable (and should be considered after adjusting for taxes and risk tolerance).

But arguing "don't pay off a 5% loan, because your car is going down in value" makes no sense. The two are unrelated.

--------
CHH- you should also consider your goals. Is your goal to eliminate debt? Or to build your investment account?

Have you considered doing 1/2 and 1/2? (1500 paying down loan, 1500 added to ROTH)

[CHH1023]

Originally Posted by jpg7n16

*sigh* The loan is not the car.

Decreasing an expense is just as good as increasing income.


If you want to argue, "don't pay off a 5% loan, because you can invest at higher than 5%" then that's reasonable (and should be considered after adjusting for taxes and risk tolerance).

But arguing "don't pay off a 5% loan, because your car is going down in value" makes no sense. The two are unrelated.

--------
CHH- you should also consider your goals. Is your goal to eliminate debt? Or to build your investment account?

Have you considered doing 1/2 and 1/2? (1500 paying down loan, 1500 added to ROTH)

I have contributed $3800 this year so far, I have 2 months left until the end of 2010 contribution cycle right? If so, I will be contribute a total $4200 this year.

I do want to pay off my car loan as soon as possible but I heave read some articles saying that you do not improve your credit if you pay off your installment early, in fact, it could lower it.

[disneysteve]

Originally Posted by CHH1023

I do want to pay off my car loan as soon as possible but I heave read some articles saying that you do not improve your credit if you pay off your installment early, in fact, it could lower it.

I wouldn't let issues with your credit score drive your financial decisions. That is backwards. Make good sound financial decisions and a better credit score will follow.

[kork13]

Originally Posted by CHH1023

I have contributed $3800 this year so far, I have 2 months left until the end of 2010 contribution cycle right? If so, I will be contribute a total $4200 this year.

I do want to pay off my car loan as soon as possible but I heave read some articles saying that you do not improve your credit if you pay off your installment early, in fact, it could lower it.

You can actually make Roth contributions for 2010 until tax day of the following year (15 April 2011). However, that would also likely put you behind for 2011's contributions... So you could just throw $800 at the Roth to have it to the max by the end of year, then be set to start 2011's contributions in Jan. The rest of the $3000 can all go to the car loan, or you can set some more of it aside to add to your 2011 Roth contribution.

As to the car loan, wherever you read that is not a very credible source for information. By paying off a car loan (whether early or according to schedule), you have on your credit history a car loan (type: secured installment loan) that is paid in full and satisfied. You no longer have the increased debt level of the loan counting against you, and it's also providing breadth of account type (compared to revolving credit [credit card], mortgage, unsecured installment, etc.). Paying off a car loan early might not benefit your credit any more than paying it off according to schedule, but paying it off early most certainly does not harm your credit. But in the end, DS is right -- make financially smart decisions (e.g., paying off your debts) and your credit will look just fine.

[CHH1023]

Good news! I thought I was getting 3K for my birthday but it was actually 3.5K instead. Anyways, I'm use all that money to pay back my auto loan along with my regular monthly payment for total of $3750.

Volkswagen Credit is gonna hate me for doing that because they'll earn less money from meee

[Hector]

I would sell Volkswagen and buy a used car from that 3k.

[solvemybadcredit]

The bad news is that you usually don't save on the interest unless you do pay off the loan in full, at least that is the case in the UK. You can although try and refinance the loan, but maybe the interest rate will not be the same.
Would like to know if you have asked for a settlement figure from the finance company? Not a balance. Just a question.

[CHH1023]

SOOOOO I finally made my payment today!

Total $3750 (regular 250/month + extra 3500 from bday present)

Anyways, I found $49 out of 3750 was interest and 3701 was principal

[Seeker]

With every payment, the dollar amount applied toward interest is less.

CHH when you pay the next payment, the amount of interest due is calculated based on the total principal amount due.

So your next interest payment is likely to be under $40 (or right around there).