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Car Loan Payment Acceleration - Does it Save You Money?

By Liz Opsitnik
Friday, Mar 06 2009 15:39

As consumers look for ways to save money and lower their monthly expenses, car loan acceleration is something being talked about more often on the Internet. The premise behind it is that if you split your auto loan payment in half every month and pay it twice, you’ll pay less in interest.

As seen in many Internet forums and on several Web sites, some people are suggesting doing this to save money.
“This is maybe the most foolish thing I’ve ever heard,” says John Ulzheimer, president of consumer education for Credit.com and a CNBC contributor. “You could save more money by limiting yourself to Starbucks three times a week instead of four.”
check writing picture
Ulzheimer (pictured below) explains that consumers can certainly write two checks to their auto loan lender every month or pay more than the required payment to save on interest if they choose, since it’s computed daily. By paying more, they can pay off the loan faster. Auto loan lenders won’t penalize consumers for doing this.
“This is a common approach to mortgage lending,” he says. “You add one-twelfth of your monthly payment into your regular mortgage payment.”
But there are credit score, interest and emergency planning issues that come up when people do this with their car loan, Ulzheimer says.
John Ulzheimer picture
“It’s not wise to accelerate your car loan payment,” he explains. “You’re throwing money after cheaper debt when you have more expensive debt out there, and it's not wise especially if you need to build an emergency fund. This would only be good if you have no credit card debt and plenty of money in the bank. It won’t help your credit score and your APR is still the same.”
Also, by paying half your car loan payment twice a month, you have to make sure your lender applies the payments correctly, or you’ll get hit with late fees and not making the required monthly payment, he says, which can negatively affect your credit score. There’s so much involved to do this properly and there’s a lot of room for errors.
Ulzheimer says that if consumers are looking for ways to save money on their car loans, there are other options.
“Try paying one month early instead,” he says. “If your payment is $400, pay $800 one month. This would be better because then you’ll be one month ahead the entire time. It works out better because you’ll have paid well before the due date.”
Ulzheimer also suggests that you earn a good credit score so you’ll qualify for the 0% financing deals.
You can also take out your car loan over as long a time as possible and then pay it in much less or half the time, he says. For example, if you take out a 60-month auto loan, pay it based on the calculations of a 36-month loan. That way, you’ll not only pay it off faster, but if you lose your job, you can fall back on the low payment that you locked-in when you first got the longer, 60-month loan. This gives you a built-in emergency plan.
The bottom line is that although car loan acceleration can be done, it’s not going to save you the money you think it will, like a mortgage acceleration plan would, Ulzheimer says.
 

Copyright © 2009 AutoLoanDaily.com. All rights reserved. This material may not be published, rewritten or redistributed without permission.

 
Top image via vote08.freedomblogging.com.

 

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Confused or unsure about some of the car loan terms used in the article? Click here for our Auto Loan Glossary.



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Comment By: Douglas on Tue, Mar 23 2010 at 10:41 PM

Yeah, don't pay your car off faster.. Don't save on interest.. Hmmm sounds smart. Or maybe your in with the consumer lending industries.. If i make my 108 montly car payments once a month, 20 dollars of that goes to interest. If i make 2 payments a month, 12 dollars goes to interest.. If i make 4 payments a month, 5 or less goes to interest.. I'm not steven hawkings or anything but sounds like i'm saving money..

Comment By: Rob on Sat, Apr 10 2010 at 6:29 PM

I fully agree. The reason we get car loans in the first place is because they depreciate. It's all about cash flow. Get a low-interest loan and let your own cash in the bank work for you.

Comment By: Will on Tue, Aug 17 2010 at 6:17 PM

you're saying no, then giving variables then not answering the question. I agree with douglas. Any idiot can get on TV these day, look at the Kardashians.


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