Payoff Penalty vs. Interest

[tifnglen]

Ok I have a car loan that I am trying to pay off. The interest rate is 7%. I called the company yesterday to get an exact payoff quote. The rep informed me that if I pay in full before 6/13/2008 then I would be charged a penalty $100-$300. By coincidence, my next payment due is the same day due to me paying extra on the loan. I need some advice on what to do. Here are the choices i was thinking of

a) pay the amount in full on the date. put the money in my ing account until then to cover the payment

b) pay the amount early as planned and pay the penalty

c) continue to make bi-weekly payments and leave a small balance on the loan and pay it off on 6/13/2008

[noppenbd]

I think we need a few more pieces of information:

-What is the balance of your car loan now?
-How is the interest compounded (this should be in your loan document)?

[tifnglen]

Balance Around 1400.
I Will Have To Take A Look At My Loan Paper When I Get Home Thanks

[noppenbd]

Don't pay the prepayment penalty. Just wait until the day after it will expire and pay it in full. 7% interest on a 1400 balance is only about $100 for the whole year, and you only have to wait a few months, so it is better to pay the interest rather than a penalty.

EDIT: Doublecheck your loan papers to make sure your loan doesn't use the Rule of 78s. If so, it could be frontloaded with interest and if you are early in the loan you might be better off paying the penalty (but I doubt it).

[tifnglen]

Would you continue to make monthly payments or pay nothing until June and make one lump sum payment??

[noppenbd]

Good point. I would do choice c from your original post. Come just short of paying it off so you can avoid the penalty and minimize the interest.

[CreditExpert]

from what you say it sounds as if the interest they will cahrge is lower than the penalty, so it will not be wise to pay the loan off early. I would imagine option c would be the best way to go