Question: I have my car financed through Nations bank . The amount financed was for 48months. What I wanted to know from you net guru’s is, financially what will be best way to pay the loan: 1. pay the loan in 4 years, 2. pay in less than 4 years, (equal instalments), 3. pay in less than 4 years, (the excess amount paid all at one time. End or begining of the financial year), 4. any other way ???
Answer: If the loan was a relatively “normal” car loan (interest computed as a function of outstanding balance; no prepayment penalty), you’re best off paying the loan off as fast as possible (equal installments, or large installments up front result in less interest over the life of the loan). Of couse, this assumes that you can’t invest the money at a higher rate of return, after taxes. First, Make sure that they can’t penalize you for early payment.
The earlier you can pay the larger amounts, the better, since during the early part of the loan, most of your payments are going towards the interest, and very little towards the principle.
Some methods that have been used are based on paying twice the principle payment each month. If your total monthy payment is $75 and the statment mentions that the interest is $72, then your principle is $3. Pay $78 dollars on that payment… Of course, using this method, when you get near the end of you loan, and the principle is $72 and the interest is $3, then in order to continue this early payment scheme, you would have to write a check for $147.
If you have a loan with an interest rate of 4% and have your money in a CD getting 8%, then it is better to not use your CD funds to pay the loan… you’d be losing 4% interest.
If however, you have your money in a 4% passbook account, and your loan is charging 9% interest, it might be best to use your savings to pay off your loan. Net savings, 5%.
The best thing to do though, is reduce the interest charges by reducing the principle of the loan as soon as possible.
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