 21
percent car loan is highway robbery
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 Dear
Debt Adviser,
How can I pay off a 21 percent car loan earlier than 60 months?
If I pay an extra $50 a month, would that even make a difference?
-- GJ
 Dear
GJ,
Ouch! Did the lender wear a mask and have a gun,
too?! Twenty-one percent interest for a car loan is literally "highway
robbery"! Either you have some skeletons in your credit closet
or someone has taken advantage of you, big time.
Either way, your question is a good one and my answer
may both please and surprise you.
Yes, adding even a small payment such as $50 per month
to your existing car loan payment will make a difference. Let's
do some math: Say your original loan is for $15,000 at 21 percent
interest with a payoff term of 60 months. Your monthly payment would
be $405.80 and you would pay a whopping $9,348.02 in interest. By
adding $50 per month, for a payment of $455.80 per month, you would
shorten your payoff term by 10 months and save $1,809.83 in interest.
Not that I want you to go in the direction of a smaller
additional payment, but even if you only add $25 to your original
payment in the above scenario, you would still knock five months
off your repayment term and save $1,008.07 in interest. Use Bankrate's
auto
loan calculator to run your numbers.
In fact, to encourage you, let's take a look at what
an additional $100 payment per month would look like: You would
save $3,010.37 in interest payments and pay off your loan 17 months
earlier. You should send two separate checks to your creditor and
mark the extra $50 check as an additional principal payment so there
is no confusion as to what you are paying.
As you can see, even a small additional payment makes
a difference in the total amount of interest paid and how long it
takes to pay off the loan. One word of caution: Creditors that charge
21 percent on a car loan often like to make the full $9,000 in interest
and may try to protect that income stream. They might have included
a prepayment
penalty in the loan terms for early payoff. Check your loan
documents to see if such a penalty is included in the terms of your
loan. Even if you have a prepayment penalty, it may be worth taking
the hit if what you would save in interest is more than the penalty.
If you don't have a lot of free cash right now, don't
give up. You might consider using any tax refund, birthday cash
or half of your next raise at work (before you see the money and
get used to it) as sources to increase your accelerated payoff.
One last piece of advice: Due to the fact that you
have a car loan for 60 months at 21 percent interest, I suspect
you might be having or have had some trouble with your credit. I
encourage you to get
a copy of your credit report if you haven't already to make
sure all the information on it is yours and accurate. If you find
and fix some errors, then maybe next time you need a loan you will
get a much better deal.
Good luck!
The Debt Adviser, Steve Bucci, is the president
of Money Management International Financial Education Foundation
and the author of Credit
Repair Kit for Dummies. Visit MMI
for additional debt advice or to ask a question of the Debt Adviser,
go to the "Ask the
Experts" page to ask a debt question.
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