Paying More Than the Loan: Getting Ahead on Payments

Dear Miss Mota Mouth,
I am about to buy a car?
I intend to pay the car off early because the dealer told me that there was no penalty for early pay-off of the loan. I'm just curious about what kind of penalties could be imposed on someone who chose to early pay off? Also- would it boost my credit score if I paid the exact car note some months and other months I sent in a larger sum? The contract is for 60 months but I'm hoping to have it paid off in 48 months.
Thanks,
Nora

Dear Nora,

It may not help your credit score but you will be ahead if you can afford to send in extra payments every few months! Make sure that you indicate on the payment that you would like for the amount over the usual payment to be applied to in the principal of the loan and not the interest. If you do not specify this, they will apply it automatically towards the total 60 months of interest.

As for penalties, most car loans do not have them now but a lot of bulk loans like house loans and commercial loans do and you can be charged anywhere from 1-10 % of the total loan amount for pre-paying off a loan. The lenders do this to try and keep income from interest.

Good luck and great intentions!

M

Stumble It!

Selling a Car I Can't Afford!

Dear Miss Mota Mouth,

I have a 2005 Mustang that I purchased on a 5-year loan. A year and a half in, and I'm just tired of paying nearly $500 a month for this car. As much as I love it, I just want something cheaper. Can I trade in my car for something that's going to have a lower monthly payment? Do I have to sell it myself? What are my options? And how does it work trading a car in like this. Any advice would be great.
Sincerely,
Terry in Tennessee

Dear Cheap in Chattanooga,

Going car shopping with a new paycheck sometimes is like going to the grocery store when you are hungry: you end up with way too much in your basket and end up having to toss half of what you bought because it goes rotten in your fridge.

With a car, when you sign a 5-year loan, it pretty much means that for 60 months, like it or not, you have to make that payment unless you are able to pay it off in advance. Short of having a big windfall of cash coming in, you will probably have to sell the car and in most cases, you will still owe a balance on the loan because the loan balance is for more than the car is worth. Estimate your new used car payment here but remember this isn’t all that you will have to pay.

If you went back to a dealer and used the car as a trade-in they would give you wholesale value credit for the car and roll the balance that into yet another. You could end up paying as much to drive a car that isn’t as nice as your ‘Stang.

A better option is to sell the car yourself and get more than wholesale which will lower the amount that you will owe to the lender and then start afresh with a new used car. You can get your For Sale By Owner value at www.mota.net.

Don’t forget to try your credit union or bank for your next loan. Very often they will have better rates than any dealer will want to give you. And, when you find you more humble car, count it as a lesson learned.

Encouragingly,

M

Stumble It!