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Car Loan Payoff Quandry

January 26th, 2009 at 09:30 am

I am in a quandary right now. One of my goals is to pay our car loan off by summer of 2010, which would be 1 year early. I called Capital One today to make a principal payment and was told that they no longer accept payments toward the principal -- huh? I was told that I had to pay more than our normal monthly payment and the difference would be put towards the principal. Problem is, the payment is automatically deducted from our checking account so there isn't any way I could pay the monthly payment amount and the extra payment together. I was told I could either call Capital One and make a payment over the phone which would cost met $15 every time I did that or mail in a payment. I'm not paying $15 every month in order to pay my car off early and I'm not comfortable mailing in the payment and when I tried last week to make a payment online it would not allow me to pay less than our normal monthly payment. Frustrating! So, I think I will pay the loan off with our HELOC. The interest rate on our HELOC is tied to the prime rate, which currently stands at 3.25%. I think the fed may be cutting interest rates again, possibly today, and if they do prime rate will likely be 3%. I'm going to my bank today to inquire about locking in the rate. Our car loan is at 6% interest, HELOC interest is tax deductible and the car loan interest is not. My quandary is that if I do this we will have an $11,000 second mortgage. I am not worried about job security for my husband or myself, so our ability to make the payments is not an issue, just the thought of having a 2nd mortgage is a little scary. I think I pretty much have my mind made up about paying the loan off with the HELOC, and DH is ok with it too, I'm just nervous.

5 Responses to “Car Loan Payoff Quandry”

  1. merch Says:

    How long would it take you to save up $11k and just pay it off?

    Let's say your car loan is 7.25%. The difference in interest is 4%. Or $36.67. (11,000*.04/12) If the HELOC is new, you may have fees associated with that.

    My point is that if you focus on the loan, you may be able to pay it off in 6 months? And you would probably be better just doing that. I had 2 car loans last year and I just saved the money in the account and just paid them off. For me, the interest savings did not offset the interest I was paying when coupled with the new interst payement, fees, and time frame.

    Just something to think about.

  2. Little L Says:

    Car loan interest is 6% and our HELOC is at 3.25% but will probably be 3% if the Fed decreases rates today. So we would be saving half of the interest payment. We plan to make almost double payments, so according to an online loan calculator, we would have it paid of by March of 2010.

  3. Little L Says:

    ETA:
    HELOC is already established so no fees would need to be paid.

  4. merch Says:

    In the end, you would be saving about $350 with tax savings of about $98. If everything is set up, I would probably do it.

    My other post was kind of a framework to think about it.

  5. Little L Says:

    Thanks, I appreciate your input. All in all, my motivation to pay the car off early is not so much with saving money as it is in freeing up the car payment money for my son's high school tuition (he will be starting high school in fall of 2010).

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