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Paying Extra
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THE SCENARIO
I have a car loan at the moment and I'm considering paying extra on it to retire the debt faster.
I currently pay $206.42 every month, with an annual percentage rate of 3.140%. I still owe $7,638.11.
The question: If I were to pay an extra $65 every month, how much faster would I be paid off than if I just kept with the required payments?
THE SOLUTION
This one is fairly straightforward, and has 3 parts:
- Figure out how long I still have on the loan as-is
- Figure out how long it would take me to pay off the loan with an extra $65 in payments every month
- Do a little subtraction to see how much faster it would be
First things first, make sure the calculator is using 12 Payments per Year.
Step 1: The loan with no extra monthly pay-down
N: (This is what I'm trying to find)
I/YR: 3.145 (The loan's interest rate is 3.145%)
PV: 7,638.11 (I currently owe $7,638.11)
PMT: -206.42 (My monthly car payment is $206.42)
FV: 0 (I want to know how long it would take me to pay it off entirely)
If I were to make no extra payments, I'll pay off the loan in 38.97 months.
Step 2: The loan with $65 extra monthly pay-down
First, a little arithmetic. $206.42 + $65 = $271.42.
N: (This is what I'm trying to find)
I/YR: 3.145 (The loan's interest rate is 3.145%)
PV: 7,638.11 (I currently owe $7,638.11)
PMT: -271.42 (If I pay an extra $65 per month, my payment would be $271.42)
FV: 0 (I want to know how long it would take me to pay it off entirely)
If I were to pay an extra $65 every month, I'd pay off the loan in 29.27 months.
Step 3: Find the difference
If I pay $65 extra every month, I'll pay off the loan 38.97 - 29.27 = 9.70 months faster.
What do you think? Would you pay extra on this loan to pay it off in 2 ½ years instead of 3 ¼? Why or why not? Let us know in the comments!
