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Paying off a $15,000 car loan in 9 months without using savings

After reading the articles everywhere on using 0% balance transfers to earn extra savings interest, or paying off debt, I had an epiphany.

We have a car loan with about $15,000 left. We bought the car almost 2 years ago for $25,000, and in the last 3 months, I’ve been steadily pounding away at the loan with bigger payments.

I have an agressive schedule to pay off the car by September of this year (2007). It is January. That’s roughly 9 months to pay off $15,000, AND without using any of our savings. Can we do it? Is there any way we can accelerate that with little risk?

YES! I’m going to call my Chase card to ask for an 8 month 0% balance transfer of $20,000. Why 20k when we only owe 15?

If I’m going to pay a transfer fee of $75, I might as well get the best out of it. I’ll put the other 5k into a 5-5.5% savings acount or 6-month CD and make $127 in interest (did I do that math right?).

The biggest savings though, is in the car loan interest. I’ll ignore lower the fact that my monthly interest payments will go down with each bigger payment for simple math.

Right now, we pay about $100 of our $416 payment in interest. In 9 months, that would be $900. That’s just shy of 3 months’ payments of actual principal. With a 0% loan, that’s $900 less that I have to budget, or about 1 month sooner that I pay off the loan. (Keep in mind that I did a lot of rounding off to keep it simple.)

Oh, and our car would be officially paid off, the title will be ours, and we would save some money in auto insurance because there is no lien on the car.

That is a SUBSTANTIAL savings, and I might use this plan next on our new Ridgeline. That loan has about $25k left, so I might need to do 2 or 3 0% loans to make it happen.

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Clever Dude

23 Comments

  • I’ve been thinking about this…

    Are you sure $100 of your payment is interest? That seems awfully steep. If you will get me your loan information I can run an amortization for you. The info I need:

    Interest rate
    Amount financed
    Number of years financed

  • Yeah, right now about $100 of my $416 payment is going towards interest each month. We’re only into the 2nd year of amortization.

    I knew when I was doing the simple math that I was ignoring the fact that total interest would go down as the principal owed goes down. However, for easy explanation to the wife, I used simple numbers.

    I did the calcs on Bankrate.com just now and it shows that at 5.9% vs 1.9% on a 9 month payoff of $15000, that I would pay $371 vs $119 in interest. A difference of $252 is not like the original $900 I figured, or even the $400 that I lowered down to, but it’s still $292 in my pocket for a relatively low-risk financial decision.

    Plus I got an extra $3k for in the bank to “pay back” the $75 transfer fee. I did get the money direct deposited into my account.

  • Oh yeah, I should mentioned that I didn’t go with Chase because their term was too short. They offered 0.82% (weird) till mid-June, which would have made it only 5 months. I needed till September on this one, so I went with my old MBNA (now Bank of America) card for the transfer since it had the higher credit line of my remaining cards.

    I wanted to avoid signing up for a new card for this, as I want to reserve those true 0% offers for when I need them.

  • How exactly do you pull off a transfer for 20 grand? Isn’t that higher than the limit on your card?

    That’s actually a nice plan though. I’ll try to work out something similar when my finances stabilize a lil’ bit.

  • I had 2 MBNA (now BoA) cards and was able to move most of the credit limit from one card to the other. Plus, I have really good credit, so they upped the limit another few thousand.

  • When I left college, I had almost $20,000 in credit card debt, without having much to show for it (a couple guitars and a big waist from all that chinese food I bought on credit).

    I swore to not use any of my credit cards and stopped carrying them with me. I still spent too much on cash, but it wasn’t the little things getting me. It was my obsession with cars.

    After college (and even before and during college), hunker down on your spending. Be frugal without being cheap. Have fun, but don’t think you need to spend money to have fun.

  • Ahhh, understood. MBNA/BoA has been good to me too. Not as good as you though, but then again, I’ve only been employed for a few months. I guess a 7.9% APR isn’t bad for a college student.

    I not sure whether I have good credit. I know that it’s just not messed up too bad is all. I’m trying to rack up some quick points so that by the time I need to get an auto loan it won’t hurt as bad.

    Any tips for a fresh college grad?

  • I have a car loan of about 22300$ at 7% apr for another 4 yrs. i used one of the online calculators and found that the interest i will have to pay will totally be around 3300$.

    Now i will be getting some amount of money as a lump amount arund 7500$. I thought it made more sense to pay off more of my car loan than putting it my savings account which has a interest of 3.5%. but when i calculated i saw that i save only like 50$ by doing so. this stumps me as the rate is double for the car loan and i exepcted it to give me more savings than the interst from my savings account.
    can soemone explain wat i am missing here? is it better to pay off the loan or put my money in my savings account?

  • @Mani, using the Bankrate calculator, the interest paid by just doing the minimum monthly payments is $3332, which is what you found.

    But they have an advanced option to plug in other numbers, such as a one-time lump payment. I did a $7500 payment one month after the loan starts and found that the new total interest paid on the loan is $1442, a savings of almost $1900. However, if that $7500 is also a loan, you need to factor in the interest you’re paying there, but it doesn’t sound like it’s a loan for you.

  • Hi ,
    thanks so much for the reply. but what confuses me is.
    if i see the total interest paid for (22265 – 7500 = 14765) for 7 yrs i get 2,200
    but u tell me when u put that in the calculator as one time payment, instead of reducing the value from current day’s principal , it gives total interest of only 1442.

    why are these 2 different values? isn’t reducing it from current days value the right one?

  • sorry i meant 4 years at 7 % in
    “if i see the total interest paid for (22265 – 7500 = 14765) for 7 yrs i get 2,200”

  • @Mani, Thinking more about it, the main difference between getting the big loan (22300) and paying 7500 after the first payment versus getting the smaller loan after paying the 7500 is this:

    With the first option, you’re amortizing a larger amount over 48 months. The interest expected for the bigger loan is higher because the payments are higher and the calculated interest portion of each payment is higher. With paying down that bigger loan with the $7500 up front, you’re reducing the timeline to pay down the loan by 5 whole months. You’re reducing the timeline AND reducing the amount of each payment that’s going towards interest, thus reducing the overall interest.

    So, when you get a smaller loan, amortized over 4 years, the payments are smaller, but you’re still paying for 48 months, not 43. That’s where more of the savings come from.

    Confusing, huh?

  • kind of..

    this might be a stupid qn.. still i ask.. so at any point in time if i had a car loan at rate of say 7% for a loan amt of say 10000$, and i got some lump amt with me : 10000$, its better to pay it off rather than trying to put the 10000$ in a savings account with same apr?

  • @Mani, actually, that’s an excellent question. First, it really depends upon your situation. If we’re just looking at the math, and assuming you can find a bank offering 7% (5% is the current max I’ve seen), then paying off the loan is the same as sticking it in the bank.

    But then it gets into whether you need the debt off your books or if you need that $10k for an emergency fund or down payment on a home or college tuition, etc.

    For example, say you’re going to be applying for a home loan of $50,000 (where $10k is 20% down). Your $10k loan on your credit report, by itself, probably isn’t a big deal, but having that $10k available for a down payment is. Again, it all depends on your situation when the math equals out.

  • that sounds right.. i understand tht it all depends on whether i want to have liquid cash at my disposal.

    thanks so much for ur time

  • Clever Dude, maybe you can help me.
    If you take out a boat loan which is like a car loan the payment goes to mostly interest in the early part of the loan and then reverses at the end. That means your effective interest rate in the early part of the loan is higher in the first year then the last year. Right? How would you calculate that? I’m interested in knowing because my boat will be paid off in another 3 years or so. I’ve considered like you using a balance transfer to pay off the remaining balance. The original rate was 9% for 15 years, but I’m not really paying 9% now in the last 3 years. Is that right? It might be just a few percent. I’m wondering how beneficial that might be because I could use the 0% balance transfer to pay down other credit lines in the 7-10% range.
    I guess I could look at an amortization table for my loan, look at the total remaining interest payments in the last three years and then divide that by the outstanding balance at the end of 12 years to get an effective interest rate? Does that make sense.

  • @Joe, use the Auto Loan calculator at BankRate.com. Plug in the initial loan value, rate and term. Click to show the amortization table. Go down to the point where you are in the loan and add up the interest shown.

    Be wary, though, that many CC companies have removed the maximum fee on transfers. It used to be capped around $50-75, but now it’s a flat 3% or so. That could wipe out any savings on interest and force you into repaying in 6-12 months versus 36.

  • As I thought, the actiual rate on the last 3.5 years of the loan come out to 5%.
    For kicks I did the first three years and guess how much…79%. There should be a law against this

  • hi clever dude, so i am trying to figure out how to pay off my current auto loan in about 6-9 months and i still owe about $6500. i know, not alot but i will be going back to school full time next fall 2010 and really do not want a car payment or any debt for that matter. my interest rate currently is 11.75% once again i know, crazy, it is something i plan on refinancing, and the loan was just opened in may of this year ’09. it’s pretty ambitious but i think it could happen i just need the tools to know how. if you could help me with any kind of info or even redirecting me somewhere else where i could find some answers, anything would be appreciated.

  • I have a question about a situation that I am in. Please go easy on me with the answers as I’m new to this lol. Here goes…I have recently refinanced my mortgage from 4.94% to 3.81% for a fixed rate for the next five years. I receive $25, 000 for the refinance. I am planning to buy a second condo as an investment property at 5% down…so we’re looking at around $9, 000 for the down payment, etc…

    My question is whether or not I should put all of that money into the second property or should I use part of it to pay off my current car loan. I owe $6, 925 on my car loan 4.9% interest. I pay $150 every two weeks approx. for my car loan and about $14 of it goes to the interest.

    So basically I would like to know what the wisest thing for me to do with the refinance money.

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