How should I manage high interest debt such as car loan? What plan should I make to pay off some principal?
I have car loan with high interest rate and would like to pay off some of the principal, but with bad economy I also want to reserve some cash for emergency. How should I pay this loan off? This loan has about three years left.
Most car loans are written under something called the rule of 78. It is a different method of calculating interest and means you pay almost all of the interest upfront. If you pay early, there is a prepayment penalty built into the calculation. It’s not a fair formula for those of us who want to pay sooner. Call your lender and find out how much interest you might save if you pay it off sooner. My guess is that it is a small number, and you would be better off putting the money toward a credit card or other debt, or saving for retirement.
If you borrowed from a credit union, it might be a little better for you – they tend to charge interest on the declining balance.
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Depends on your total finances. You have to decide how much you save in reserve and how much you can use to pay down the debt. No one else can decide for you.
References :
It should really save you a lot of running around to just get an automobile loan estimate online to check out what the going rates are. You might be totally suprised. Also if your credit is not good, a lot of them are more able to help you.
What I most often tell folks is that an online quote at http://auto.lowratetoday.com is worthwhile.
References :
Most car loans are written under something called the rule of 78. It is a different method of calculating interest and means you pay almost all of the interest upfront. If you pay early, there is a prepayment penalty built into the calculation. It’s not a fair formula for those of us who want to pay sooner. Call your lender and find out how much interest you might save if you pay it off sooner. My guess is that it is a small number, and you would be better off putting the money toward a credit card or other debt, or saving for retirement.
If you borrowed from a credit union, it might be a little better for you – they tend to charge interest on the declining balance.
References :
http://www.bankrate.com/brm/news/auto/20010827a.asp
Bankrate.com has a good article on the rule of 78 and why it stinks!