Pay off auto loan early? (funds, financing, charge, income)

[nielsxu]

Just bought a new car with a little high APR 7.5% for 5 years.
I was wondering how much I can save from the interest, if I pay off the loan early. Actually, a simple question came to my mind.. If I pay off the debt 2 years earlier, would that be equivalent to a loan with 7.5% for 3 years?

I did look through the contract with Honda financing. It says that I amy prepay, but I must pay the "earned" and unpaid part of the finance charge and all amounts due up to the date of my payment. Then what is the "earned" part?

I did some research on this. Please correct me if I am wrong..
It is like you earn 60/(1+2+...+60) times your total finance charge for the first month, then 59/(1+2+...+60) for the second, decreasing by 1 in the numerator....This way I would have to pay over 35 percent of the total interst for my first year, then almost 2/3 for the first two years..

This way, if I pay off in 3 years, I can only save less than 1/5 interest from a 5 year loan.. Am I right?

[Fnix]

Use this Amortization Calculation

Be sure to check off "Show Amortization Schedule"

[AdamK]

I am thinking that you got yourself into a pretty bad deal, 7.5 seems really high, and arent you supposed to finance over 3 years at a maximum? I would be paying this puppy off as fast as possible!!

[Shuffler]

Pay that sucker off, and for future reference: never, EVER take out a loan to finance a depreciating asset!! Buy used, pay cash if possible the next time around.

[sean98125]

You posted elsewhere that this loan is a precomputed interest loan.

With a simple interest loan, you owe the initial principal and the amount of interest you owe depends on how long it takes you to borrow the money. If you borrow $10,000 and a day later walk in and pay it all off, your interest charges are almost nil.

On a precomputed interest loan, the total finance charge is determined at the time of purchase and that is the amount you owe. If you borrowed $10,000 and they determine that the interest you would pay over the life of the loan is $2500 then you owe $12,500 from the start.

So, you owe the total amount of the cost of the car and the calculated interest of your five year loan at 7.5%, regardless of how early you pay it off. The only exception will be whether or not there is a clause in the contract you signed about rebates or refunds or discounts for pre-payment of the loan.

[Huckleberry3911948]

moving out of debt is always a good idea no?
esp with rainy days ahead?

[sean98125]

Originally Posted by Bunky39

moving out of debt is always a good idea no?
esp with rainy days ahead?

Unless there is something in the contract about rebates or discounts for pre-payment, the OP won't be saving any money by paying off the loan early because it isn't a simple loan.

The advantage of paying off a simple loan early has a direct effect on the total amount of interest that will be paid so it makes sense to get it paid off as soon as possible. But the OP has already committed to paying all of the interest on the 5 year note, regardless of how early it's paid off.

If the days are going to be really, really rainy then it makes more sense to keep making payments on time and sock away the extra payments into savings for contingency. Unless the loan contract provides for prepayment advantages, in which case get it paid off as quickly as possible.

[Fnix]

I know ppl who got 72 months @ 9.5apr and only make 900 per month in income.

[pghquest]

Originally Posted by nielsxu

Just bought a new car with a little high APR 7.5% for 5 years.
I was wondering how much I can save from the interest, if I pay off the loan early. Actually, a simple question came to my mind.. If I pay off the debt 2 years earlier, would that be equivalent to a loan with 7.5% for 3 years?

I did look through the contract with Honda financing. It says that I amy prepay, but I must pay the "earned" and unpaid part of the finance charge and all amounts due up to the date of my payment. Then what is the "earned" part?

I did some research on this. Please correct me if I am wrong..
It is like you earn 60/(1+2+...+60) times your total finance charge for the first month, then 59/(1+2+...+60) for the second, decreasing by 1 in the numerator....This way I would have to pay over 35 percent of the total interst for my first year, then almost 2/3 for the first two years..

This way, if I pay off in 3 years, I can only save less than 1/5 interest from a 5 year loan.. Am I right?

7.5% for an auto loan isnt bad at all, even in todays economy.

[sean98125]

It's bad when it isn't a simple loan.