Auto Loan Early Payoff Calculator
3 Ways to Save Money on Your Car
If you can arrange it, an early payoff of a car loan is a very wise thing for you to do. You can save hundreds of dollars in interest fees to the lender by accelerating the amortization of your auto loan. The money that you save in interest paid to someone else can be used to invest in an account that pays interest to you. Another advantage to an early payoff is that the sooner you achieve it, the sooner you can drop the comprehensive and collision portions on your auto insurance policy. You will have much lower car insurance premiums if you only have to carry liability and medical coverage.
The Best Time to Buy a Car
The lower the price you pay for your new car, the lower the amount of the money borrowed that you must repay. There are certain times when car dealers are particularly inclined to offer you a good deal on the purchase of a new car. As each month comes to a close, dealerships know exactly how many more cars they need to sell to qualify for sales bonuses from the manufacturer. If they are getting close to their quota, they will be anxious to sell you a vehicle even if it means accepting a lower price than they would prefer. At the end of December, dealerships are concerned about enhancing their gross revenue and sales figures for the year at a time when people are preoccupied with the holiday season. If you can find time to shop for a car at the end of December, you will find the sales associates more than willing to strike a bargain.
Another good time to buy a car is at the end of the summer. According to J.D. Power and Associates, in any given model year auto manufacturers start to make the following year's models toward the end of the summer. This means that as fall approaches, dealers want to sell off most of the current year's models so they have room for the new ones. In order to accomplish this, dealers offer rebates and other attractive incentives to buy.
The weather can sometimes work in your favor and predispose dealers to give you a good price on the new car of your choice. During prolonged hot or cold spells or during snowstorms, many people would rather not go out shopping. If you are brave enough to do so, you may find that dealers are so glad to see you that they are willing to offer discounts or special financing to induce you to buy.
Paying For Your New Car
For most people, the purchase of a home represents their largest single financial transaction. The purchase of a new car is the second largest. Therefore, if you know that you will be needing a new vehicle in the near future, you should plan for the purchase by setting aside enough money to enable you to pay your loan off early. One way to do this is by opening an online savings account designated specifically for the purchase of a new car. By dedicating all the money in the account to the purchase of a new automobile, you will always know exactly how much you have for this purpose. An online savings account is preferable to a conventional bank savings account because interest rates for online accounts are generally much higher than those you get with a conventional bank account. Once you have your account in place, you should decide what automobile best fits your needs and then determine the approximate cost of the vehicle. With the knowledge of the amount of money that you will need, you can begin to make monthly deposits into your account as if you were making car payments. You can deposit as much as you can comfortably afford, but it should be enough so that you can build up an appropriate amount of money to initially put down towards the automobile purchase.
How Much Should You Offer as Down Payment?
The down payment that you make on a new car is tied to the rate at which the vehicle will build up equity. Equity refers to how much the market value of the automobile exceeds the amount you owe on the loan. According to Edmunds.com, the online automotive information resource, your down payment should be at least 20 percent of the cost of your new car. The reason for this recommendation is that 20 percent money down will, in most cases, cover the first year's depreciation of your automobile. By covering the first year of depreciation with the money you put down, you insure that you will build up equity in your new car during the second year of ownership even if you are only making standard payments. Equity will accrue because the rate of depreciation slows down considerably in the second year. If you have chosen to proceed with an early payoff, you will build equity faster than you would with the standard option. Having a positive equity in your new vehicle is important because if the automobile were totaled in an accident, your insurance coverage would be enough to satisfy your outstanding loan and provide you with some money to put toward the purchase of another vehicle.
The best way to understand the relationship between equity in your new car and the down payment is to work through an example. While depreciation varies depending on make and model, a new vehicle may typically depreciate by about 19 percent after the first year. This means that if you buy a car that costs $20,000, at the end of the first year the vehicle will be worth $16,200 because it has depreciated by $3,800. A 20 percent down payment on this vehicle comes to $4,000, an amount which covers the first year depreciation. If you chose to finance the remaining $16,000 with a 4-year loan at 3.24 percent interest and no monthly prepayment, your scheduled monthly charges would be $356.00. (Note: This figure was determined using the above calclator). This means that after one year of conventional payments you will have paid $4,272 and you will owe $11,728 on the loan. Since the market value of the vehicle is $16,200 after one year, your equity in the vehicle is $4,472 ($16,200-$11,728).
How Much Can You Save With Extra Payments?
If you are thinking of an early payoff for your new auto loan, you should be sure that the loan you get is set up so that there are no penalties for prepayment. Most banks, credit unions and other financial institutions that offer vehicle loans will allow you to pay it off early without a penalty. This method decreases the total amount of interest that you will be charged and shortens the time that the loan is outstanding.
When your vehicle financing is established, you will have a set payment each month for the number of months that you choose. One way that you can pay your loan off early is to increase your scheduled monthly contribution by an amount that you can afford. The above calculator will give you an appreciation for how much you can save by making an addition to your scheduled monthly fee. For example, some banks right now are offering new car loans at an annual rate of 3.59 percent. If you were to borrow $20,900 at this rate for a term of 60 months with no additional monthly contribution, the calculator shows that your scheduled monthly payment would be $381 and you would pay back a total of $22,863. If you were to increase your scheduled monthly contribution by $100 to $481 as soon as the loan began, you would pay back a total of $22,422. That means that you would save a total of $441 in interest: $22,863-$22,422 = $441. In addition, you would fulfill the financing agreement 13 months faster--47 months instead of 60.
Biweekly Planning
Another way to achieve an early payoff of your new auto financing is to make biweekly contributions instead of monthly. In this loan method, you are contributing half of the standard monthly payment every two weeks. This means that you are making 26 installments per year, which is equivalent to 13 monthly installments. With the standard monthly payment, you would be making only 12 installments so you are making one extra installment each year by using the biweekly method. The biweekly method lowers your total interest cost and shortens the duration of your agreement. You should discuss this option with the financial institution providing which provides your auto loan to make sure there are no penalties for making an extra payment or for fulfilling the loan early.
The bi-weekly payments calculator is a useful tool for illustrating the savings you will realize with the biweekly method. It compares the total interest that you would pay using the standard monthly plan to the total interest using the biweekly method. It also tells you how much faster your loan will be paid off with the biweekly method. If, for example, you were to borrow $20,900 for a term of 60 months at an annual interest rate of 3.59 percent, the Bi-weekly calculator shows that with the standard monthly charge of $381.05 you would have a total interest fee of $1,963. By comparison, it also shows that with a bi-weekly charge of $190.53 (half of the standard payment), you would have a total interest fee of only $1,811. So, you are saving $152 in interest, and you are paying the loan off in 56 months instead of 60 months.
Round Up Your Payments
According to The Huffington Post, a simple way to achieve an early completion of your auto financing agreement is to round up your monthly bill to the nearest hundred. For example, if your monthly charges come to $366.19, you would contribute $400 instead. After 12 months, you will have paid an extra $405.72, which represents an additional 1.1 payments.
