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Ask Dr. Don
By
Don
Taylor,
Ph.D.,
CFA
•
Bankrate.com |
Additional principal payments on a car loan
Dear Dr. Don,
Due to my not-so-good credit, I had to have my used car
financed at a very high interest rate. I believe it is something
like 22 percent. I am currently making monthly payments of $261
on a 48-month loan. I would like to know if I can send in extra
money each month to pay down the principal, like people do with
a mortgage?
Tamiko Tenacious
Dear Tamiko,
Yes, provided that there aren't prepayment penalties built
into the loan agreement and interest isn't being allocated based
on the Rule of 78s.
Your loan agreement will address any prepayment penalty
and will tell you if the Rule
of 78s is being used. Review it before starting to make additional
principal payments. When you're getting charged that kind of a rate
on a loan, you need to worry about the lender treating you fairly.
Bankrate's auto
loan calculator can show you how additional principal payments
reduce the loan's term and total interest expense.
You haven't given any specifics about your loan, other
than its sky-high interest rate, but I've put together an example
in the table below:
|
|
Regular payment
|
Regular payment + $200 |
|
Loan amount:
|
$10,000
|
$10,000
|
|
Interest rate:
|
22%
|
22%
|
|
Loan term:
|
48 months
|
25 months
|
|
Loan payment:
|
$315.06
|
$515.06
|
|
Total payments:
|
$15,123
|
$12,474
|
|
Total interest:
|
$5,123
|
$2,474
|
|
Interest savings:
|
|
$2,649
|
Input the specifics of your loan into the auto
loan calculator to find out how additional principal payments
will reduce both the loan term and the interest expense.
Keep track of your payments, including the additional
principal payments. Your lender should have a convenient way of
keeping track of the loan's payoff balance. Your additional principal
payments bring that balance down, so keep a table showing the loan
balance over time. It's also a great way to stay motivated to make
those extra payments.
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