Day 7
Subject: Paying down your car loan
If you have a loan on a car, you know that it’s usually a frustrating experience. Your car lost a ton of value the moment you drove it off the lot. The interest you pay for car loans is frontloaded, meaning you pay that first, with very little going to the principal. It often looks like it’s never going to be paid off. However, it will be paid off in the number of months it’s financed for if you keep paying like you normally do.
Depending on your credit history, you may have a reasonable interest rate or a bad one. Either way, you may at first be upside down on your loan – owing more than you could ever sell the car for, and that can be frustrating. If you want to pay down the loan faster, consider a few factors first.
Is Your Loan Low or High Interest?
Look at the interest rate on your auto loan and compare it to other interest rates you have. Car loans can be as low as zero percent for individuals with perfect credit and a high down payment, and as high as 33 percent like a credit card loan.
Look at your statement to determine your APR. How much from your payment is going toward the principal versus the interest each month? Understanding how this is affecting your loan is essential.
Do You Owe Money on Higher Interest Loans?
If you owe money on other loans with higher interest, it’s important that you work toward paying those down before you tackle the auto loan with the lower interest. You’re going to save a lot more money if you focus your payments toward revolving consumer credit rather than your automobile loan in this case. Credit cards aren’t like that and can keep growing again when paying only minimum payments, even if you don’t use them.
Do You Have an Emergency Fund?
Even if you don’t owe anything on your credit cards, another thing to look at is whether you have filled your emergency fund. If you don’t have six months of emergency funding, make it a priority to fully fund that before you pay down a car loan. The reason is that a car loan is set. You have only a certain number of months before it’s paid off.
We’ve given a lot of information here. Thankfully, there is technology that can help. The debt management tools and technology that exist today really help most people get their finances in order. Next time, we’ll talk about some tools that will help you get your debt paid down easily.