Big payments or one lump sum to pay off car?

[mindaugas]

I'm hitting my next high interest debt which is a car loan @ 18% interest (yikes!) with $5300 left on it.  Should I keep sending normal payments and save up the payoff amount, or should I send big payments? if I send big payments that should help with interest right, because the principal will be going down? And at the end I will pay off less than if I just save?

I have 1.5 years left on the loan. I plan on paying it off within 3 months (merry xmas!).

[AmbystomaOpacum]

If the money is available, it is always better to pay it immediately rather than wait... unless somehow you are earning greater than 18% interest on the savings.

[mindaugas]

the total payoff amount is not available, however I can make some large payments of around $2k each month. My decision is whether to put that $2k in the bank until I have enough to pay it off in full, or just send those chunks as payments now.

[Another Reader]

Paying more off sooner reduces the total interest paid.  In your proposed plan, it won't be much of a difference.

I would pay this albatross off ASAP.  I would also figure out what I did that got me to 18 percent interest on a car loan and fix THAT ASAP.

[mindaugas]

I would also figure out what I did that got me to 18 percent interest on a car loan and fix THAT ASAP.

Thanks! I did, my credit score is about 200 points higher than when I purchased that car. Regardless I won't be buying another car loan so that part doesn't matter to me.

[mindaugas]

Oh, how do you send in a large payment? Is it possible to dictate how much goes to principal? Otherwise won't they apply it however they want using their fancy maths to keep the principal as high as possible? IE on my mortgage I can specify an additional amount to put towards principal or interest. So in this case I would want to send in the normal payment and then another check for just principal I think.

[simonsez]

Interesting.  You have a mortgage where you can choose principal or interest on the additional amount.  Why would anyone ever choose interest in such a scenario? 

Using fancy math, your principal will be kept as high as possible if you wait to save up and pay it off.  Just throw whatever you can as soon as you can at the loan.  Are you only restricted to one payment per month?

[mindaugas]

No, I can make as many as I want. I would end up sending at least two payments since the wife's salary is basically going to be dedicated to this, maybe three if we have left over at the end of the month.

[Another Reader]

Look at the lien-holder's website to see how to send an extra principal payment.  Some have the information, some don't.  If they don't, try calling for the procedure.  With Toyota, we have always sent a separate check to the payment address, with both the envelope and the check labeled "Additional Principal Payment."  There is no way to do this on their website.  There is a way to send the pay-off amount, because that's not uncommon as cars get paid off or sold.

You have to watch the car loans, as the lenders will occasionally try to apply excess funds to future payments instead of principal.

[mindaugas]

You have to watch the car loans, as the lenders will occasionally try to apply excess funds to future payments instead of principal.

Ah, that is what I remember reading about. If I over pay, my next payment is less. IE a $400 payment means $250 next month. Thanks, I'll give them a call.

[mindaugas]

For anyone interested, I have my loan through Well's Fargo and I can make a big payment online and then call them 24 hours after it posts and ask for the extra to be applied to principal. Or just send in a separate check that says principal only.