Paying your car loan off early is a pretty good idea if you’re trying to be frugal. If you’re like me, you probably have a car loan you shouldn’t have at all! You were impatient, didn’t save up, decided to get rid of the jalopy that you had because it just didn’t suit you anymore. It was a mistake that the you of today, filled with knowledge of personal finance and a sense of responsibility and frugality, would never let happen. Old you didn’t know, so we obviously have to forgive them.
So now that we have this whole car loan business, it’s time to figure out how to pay off the car early. The obvious solution here is to simply pay more (duh!). This is my general strategy however my loan is a bit large. As of today, we’re looking at a car loan of $21,790.65. I know, I’m being a bit more precise than I need to but I’m a bit of a freak like that. So, let’s take a look here at some different payment strategies, different amounts, and see how long it will take me to pay off my loan. Remember, one of my goals for the year is to pay off at least half of my car loan. So let’s see here, what are the basics of the loan:
Principal Balance (01/30/2013): $21,790.65
Interest Rate: 4.99%
Payment: $471.15 a month
So, as of today there are 49 payments remaining on the loan if I do nothing to pay it off early. Yikes, four years. That’s nothing to sneeze about. What’s even worse is the total amount of interest I will have paid on the loan: $3,500! That’s no small sum of money to someone like me. I’m still at the point where that can actually make a huge difference in my Net Worth. So, let’s do a quick calculation to see how the term will change if I up the payment to $571.15 a month:
New Term: 40 Months
So, by applying an additional $100 a month, I just decreased my payoff time on the loan by 9 months. Now let’s see what happens if I throw $300 at the problem to try to knock it down even more.
New Term: 29 Months
Wow. So, I’m not quite doubling my payment but by adding $300 a month to the payment, cash I have sitting around, I can 100% pay this off in 29 months. That’s a pretty damn good deal if you ask me!
As you can tell, having to pay nearly $500 a month ($5,652 a year or $34,788.23 if invested at 6% every month over the same term as the loan) absolutely kills me. It kills me to the point that even though I LOVE my car (an Acura RDX that is obscenely nice and reliable), I just can’t stand paying so much each month and putting my financial future in such jeopardy. I mean, I can AFFORD to spend this much on a car each month. However, I definitely do not enjoy doing this. I’d much rather be pouring this into my Vanguard account or be building up my Dividend Empire. Alas, I’m trapped in this consumer cycle and will be for a while yet. If I can accomplish my goal of paying off half by the end of this year, then I think I’ll go out and buy a new (used) car with just cash and trade in value. If I can do that and get rid of my car payment by 2014, I’ll be a happy camper! Until next time everyone!