I was just doing some mental math in my head re: down payments and monthy payments and interest and such..

Say that I get a 3 year loan with a good rate and a good monthly payment. If, a year into the 3-year deal I get some huge break and I am able to pay off the remaining sum at once, would I generally be able to do that? Or would I be locked into the original terms, regardless?

Is there a penalty for paying off the remaining balance early?

 

Read the contract
Some may have penalties, some may not.

 

Figured. Thanks!

 

I have worked for a couple different auto finance companies and neither had penalties for paying out early! The interest is calculated like a mortgage, so lots of interest and not so much principle in the beginning, and then not so much interest and mostly principle at the end. In other words, if you payout the loan in the early stages, you will save lots, but not so much if you payout closer to the end. You can call the finance company and get an 'ammortization schedule' which gives you an estimate of the breakdown of the monthly payments into principle and interest for the course of the loan (as long as the payments are made on time).

 

Not sure, but I think laws have made early payoff penalties illegal in most cases. That said, you have to compare the interest being charged to the alternative. For example, if you're paying 7% on a car loan but can invest the money from "your big break" in an 8% CD, then keep the loan and buy thye CD...you'll make a net 1% on the deal.

In my case I used my equity line to by my MINI. Higher interest than a car loan, but I was better off because I could deduct 25% of that interest on my taxes.

It also helps your credit rating to pay off a loan early.

 

Beautiful, Again. I'm loving this forum and have enjoyed lurking for a couple of years. Sure am glad that I've started posting.

Thanks! Keep it coming....and great info, too re: the laws against early payoff penalties +better credit.

 

In todays market you will not find an 8% cd. They do not exist. You can check Bankrate.com and find the best rates. You will be lucky if you can find 3 to 4 percent and that is for a longterm 5 year cd. Shorter terms are typically lower rate. Almost all car loans have no early payment penalties. The last 2 cars I bought I paid off within 3 months of getting the loan. The fed rate is 0 to 1/4 percent so until that rises you will not find 8% cd's.

Always read before you sign.

Pat

 

Check with your local credit union, they are usually more customer friendly than banks or other finance companies for low rates and early payoffs.
As said above most companies will not have early payoff penalties, if they do move on and get another lender.

Based on your original question, get as long of a loan as you can with a reasonable rate and no early payment penalty. This way when you need the cash you don't have to use it on the loan. Just pay as much as you can as early in the loan as you can and you will be clear of the loan much sooner.

 

I have financing through MINI and there is no penalty for early pay off.

 

Good advice here; check with your lender. Generally it is advantageous to pay off early. Even if I have the $$, I finance for the longest time at the lowest % (I figure the balance between the two). I then pay extra each month as if it were a shorter term loan.

I ALWAYS round off upward (a $250 payment bill is paid at $300, but even 10 bucks a month extra cuts off payments). This way I get the car paid off early and still could drop to the lower payment if my cash flow changes or if the bills are unusually high for a month.

Figure it out--if your payment is 290 and you pay 10 bucks more a month in a 60 month loan, you lop off better than 2 payments, even without calculating the interest you have saved.)

Others may not agree with this strategy, but it works for me--cigarman economics It does take some discipline.

BTW, the same thing works with a mortgage. Make an extra payment each year and you shorten the loan significantly.

 

I have never paid a penalty for an early payoff.

Here is a link that will supply you with an amortization calculator:

http://www.amortization-calc.com/

Click on show results to give you the option for a monthly breakdown.

 

This works great if you intend to live in your house unti retirement or longer. But statistics say that most people do not stay in their home that long. If this is the case you are better off putting your money in some type of tax sheltered savings account. You will get more in the end run.

I don't plan in staying in my house that long. It's too big. (It's actually too big now but it's not the right market to sell.) The kids are gone now and I want to downsize once the market if right. For me it does not make economic sense to pay more on the mortgage.

Every case is different. But I digress, almost all legitimate car loans do not have an early payment penalty. Check with your lender. Good solid advice in these posts.

Regards,

Pat

 

I have also never heard of an early payment penalty, but it is correct, you will reap more benefit by making extra payments early into the loan, on a standard loan. The comment about the credit score is not true though explicitly. You will not improve your credit by paying something off before the term of the loan, this is not how the score is calculated. You can however increase your score becasue you will have less debt outstanding. If you go into other debt just to pay this off early, you are not doing anything to your credit except reallocating where the money you owe is, possibly to another area that will effect your credit rating in a negative way. Secured (a car loan) and unsecured (credit cards) affect your credit rating differently.

 

Car loans are straight line loans, not mortgages. In other words, you pay the same amount of interest each month from start to finish, if you can pay it off early, you'll save quite a bit of interest. There should be no prepayment penalties, unless you're financicng thru a "second chance" or other non-mainstream source like "buy here/pay here" places - in that case all bets are off..............

 

You are so right on. Careful with the "buy here/pay here" joints. Typically they cater to subprime borrowers and the interest is typically sky high. If you have good or better than average credit history there is really no reason to use these types of services.

 

Wow, this thread really exploded today with more good advice than I could imagine. This is great. Way to go NAM!

Also, desertmini, thanks for the tip on the amortization chart. good find.

 

Amortization charts don't apply to car loans, other than figuring out a monthly payment.

Go to cars.com for a loan calculator.

 

Yes, you do pay more interest at the beginning of a car loan. I worked in banking for five years and that was always the case. If your finance company isn't front loading the interest on a personal loan (auto loan), I would like to know the name of the finance company.

I pay interest up front with my auto loan. As matter of fact, I track the loan online and it shows me how much money was paid towards the principal and interest. The finance company is very reputable.

 

If you don't mind me asking, what company?

 

It's a nice bit of information to have. I might could use them.

 

I am financing from the following company (click on the following link):

https://www.penfed.org/

They are only charging 4.75% for a five or six year loan. The rates may not be as competitive these days, but were back in October.

Call the company, or any other finance company and they will tell you that you pay more interest up front.

 

Sully, what kind of MCS are you ordering or buying?

 

Incorrect.
If you have a 'straight line' loan you are probably not dealing with a good lender.
Every bank or other financial institution I have ever worked with calculates interest on the outstanding balance.

Early payment will save you interest on any loan without prepayment penalties (which are very few). Now, sometimes is does not make sense to pay early on a house if the interest rate is low enough and your tax rate is high enough. Say a 5% loan with a 33% incremental tax bracket, the interest is only costing you an actual 3.35% (5% - 1.65% tax deduction). So if inflation is above 3.35% or if you can earn more than 3.35% on a safe investment (if there is such a thing now) you would not want to make early payments.

However, I live by the idea of pay off everything as soon as possible. So I will make early and extra payments on houses and cars whenever possible.

 

I worked in the car bidness for about 30 years, many (if not all) of the loans we did were straight line loans as I recall....... but it's been a few years - I could be misremembering.............

 

Well my auto loan is not "straight line" but rather the interest is calculated for each payment, so when i get near the end my payment each month (which will be the same EVERY MONTH for the whole term) will apply more to principle than interest. But in teh beginning that same amount is eaten up by interest and less goes to pay off the principle each month.