08-18-2012 10:51 AM
Make as much extra payments you can and make them (your lender) apply the extra payment towards principal and you should be off the loan soon.
If the apply the extra towards your next months payment than
1. irrespective of where the payment is applied start paying as much as you can OR
2. keep paying montly installment and keep any extra money aside and when you have enough to match the pay off amount that pay off the whole loan in one shot few months down the line wiht the savings
Just curious but why would you ever pick the second option? The APR on the loan is pretty much guarunteed to be above your effective savings rate so you're simply putting yourself further behind by pooling the money in a depository account instead of throwing it at the car loan (or some other higher interest debt).
I just did a quick calculation on my auto loan running both scenarios. In my case, I compared toss another $100/month on top of the scheduled payment compared to making an extra $1200 payment once a year. Ended up being a 2 month difference in payoff date in favor of the $100/month route. Not a significant difference, but a difference none the less.
That said, I could see the 2nd option being a preferred one, if only to maintain a higher level of cash in the savings account to cover unexpected emergencies which could be a help for those of us a bit cash strapped which I suspect is the case for many of us taking these bad credit auto loans, myself included. After all, if we had a large amount of cash sitting in an account somewhere, we wouldn't be on these loan terms to begin with.
After running the numbers for myself, I don't see any reason why i couldn't throw every extra dollar I've got at my new auto loan, and get it paid off within a year. But then that also leaves me with zero in the emergency fund, which could put me in a huge bind if I have a financial emergency arise.
It also could depend on how the lender applies any extra money sent in. If it's applied directly to the principle balance, then yes, it would be to the borrower's advantage to pay extra on a monthly balance. However, it appears that several (many?) bad credit lenders simply apply any extra funds to the next month(s) payments, basically just creating a "paid ahead X months" situation, so that while you're technically paying the loan off early if you maintain this, the total amount you ultimately pay (principle+interest) remains exactly the same as if you had not been sending in more, thus the 2nd option of holding the extra money in your savings account until you reach the pay off amount will make much more sense assuming, of course, that you're not subject to pre-payment penalties (which I've heard from some people that actually end up being more than if they had just paid the normal monthly to begin with).
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