lkg919 asked:
I have an auto loan with my credit union with a balance of 21,000, the loan term was for six years – began in 10/08, my payments are 370.00/month and I believe my interest rate is around 5%. Should I take my tax refund (6000) and apply it towards my loan?
I have an auto loan with my credit union with a balance of 21,000, the loan term was for six years – began in 10/08, my payments are 370.00/month and I believe my interest rate is around 5%. Should I take my tax refund (6000) and apply it towards my loan?
Does anyone know how much time it would approx. take off the life of my loan? Would this benefit me in the long run? Or should I let my tax refund collect interest in a savings account?
i don’t need a loan!! i already have one.
i am not asking about what kind of loan i should get. i already have an auto loan, i am asking if i should make a large principle payment, and what the pros and cons are.
Keith
Eileen
If you have other debts with a higher rate of interest, say a credit card, you should pay that off first. You should also make sure that your deductibles are such that your refund isn’t quite so large…it should be about break even, unless you have a mortgage and kids. Also, make sure that you have enough in your savings account for emergencies, from what I hear from experts, you should have about 6 months worth of living expenses in your savings account.
I would probably send some, but not all to the car payment. The interest is not tax deductible, so it would help you some with that, but you should check that you don’t get penalized for making early payments.
Also, if you have a mortgage, send some to that and it will cut thousands of dollars of interest off.
Also, just treat you and your family to a nice day out…at least you’ll have some fond memories…and that’s priceless.
Good luck.
Comment by mich — August 7, 2010 @ 12:11 pm
Michele
If you pay on schedule, you would pay it off by Oct 2014, right? Assuming that I have correctly deduced the other terms of the loan (5% rate, 6 year term, $370 payment ==> $23,000 original loan), paying an extra $6,000 now and paying on schedule thereafter would pay off the loan in the first month or two of 2013.
You would save about $1,550 over the life of the loan. This ignores any earnings that you could gain by depositing the money in the bank or investing it. I gather that you have no consideration to invest it. So that leaves your alternative to bank it. Assuming a rate of 3% on your deposit, you would earn about $1,050 over the remaining life of your loan. That means that you would have $500 more wealth on Oct 2014 by paying off the loan than if you left it earning interest at 3%. This assumes, of course, that you have the discipline to leave the money in the bank. Your savings are more if you might succumb to the temptation to spend it.
There are no tax advantages to your auto loan. However, any interest earned by depositing/investing the money is taxable. Up to now, everything stacks up to paying down the auto loan. Ignoring taxes, as a rule, you should pay down your highest rate debt first unless you are certain that you can invest at a greater rate.
Now, there is a con to paying off the auto loan. Suppose that you pay down the loan, and soon after you lose your job or have some big expenses. You rack up consumer debt that may require interest payments of as much as 15% or more. If something like this happens, you would wish that you still had the $6,000.
Finally, after giving much more detail than you probably wanted [1], here is my recommendation. If your cash reserves are low, you should save the money. Don’t leave it in a checking account. Open a money market account. Your local bank can help. The rule of thumb is to have funds for six months of living expenses.
On the other hand, if you have a comfortable cash cushion and have no higher interest debt, you should pay down the auto loan.
Comment by Joe S — August 9, 2010 @ 10:10 pm