Auto loans are a necessary part of life for most people, but when interest charges add up over the life of a loan, the total cost can be expensive. For example, $15,000 borrowed for four years at 8 percent interest results in a total interest cost of $2,577.12.
The best way to pay off a car loan depends on your circumstances, but use a few simple tips to pay off your loan early and save some of that interest.
Pay Twice Each Month
Split your payment in half and make two payments to your car loan every month, but be sure to make both payments before the monthly due date. Splitting payments is beneficial if you have a simple interest loan, but not if you have a precomputed loan, so check your paperwork.
Simple interest loans include only the principle amount of the loan. Interest is calculated from payment date to payment date, and is subtracted from each payment, leaving the rest of your payment to be applied to principle. If your loan payment of $300 is due on the 30th of the month, pay $150 on the 15th. That amount will pay the interest accrued from the 1st to the 15th, and will decrease your loan principle by the remainder. This is important because interest due from the 15th to the 30th will be calculated based on a lower principle amount.
Precomputed loans include the loan's principle plus all interest due over the life of the loan. Paying the full payment amount each month, whether in one payment or two, will not decrease the loan balance any faster.
Increase Your Payment
Add an additional amount to your payment every month. Whether you have a simple interest or precomputed car loan, increasing your payment will help you pay your loan off faster, saving you interest.
With simple interest loans, the lender first takes the amount of interest due from your payment, then applies the rest to principle. If your payment is $300 and you owe $50 interest this month, the lender will reduce your principle by $250. If you pay $325, the lender reduces your principle by $275, paying off your loan faster.
If you have a precomputed loan and make higher payments every month, you will pay your loan off early. The lender will owe you a refund on the amount of interest they have collected but have not earned. The state of Indiana recommends that you contact your lender to ensure they return the unearned interest to you.
Make Extra Payments
Make an extra payment once or twice each year. Under simple interest car loans, you'll reduce the principle faster, reducing the amount of interest you pay. Under precomputed loans, you'll pay off your loan early and be entitled to a refund of unearned interest from your lender.
0 comments:
Post a Comment