Episode 76: Payoff your loans early while saving on interest rate payments

Banks tell us that there is no penalty for paying off our loans early, but they don’t tell us that there are financial rewards for doing so.

Banks tell us that there is no penalty for paying off our loans early, but they don’t tell us that there are financial rewards for doing so.

Hello. I am Bobb Rousseau and this Apostrophe Podcast.This episode discusses pay off and interest rates. Most importantly it shows a technique to be financially rewarded when we pay off loans early. Without further ado, let’s dive right into it.

But first, your credit score does not necessarily drive your interest rate. When purchasing a vehicle, your interest rate relates to the year, the category, and the vehicle’s mileage. With a 740 credit score, a 2014 Toyota Celica will have a higher interest rate than a 2020 Toyota Celica with the same mileage. A 2019 Honda Civic with 40.000 miles will have a lower interest rate than a 2019 Honda Civic with 85 000 miles. The interest rate for a 2014 Cadillac ELR will be higher than that of a 2023 Ford Focus because a 2014 Cadillac is considered both a luxury car and a classic vehicle.  

There is no such thing as getting a good deal when we take out a loan to finance our car. Dealerships will never sell you at a loss. We may have a better deal than our friends but our deal will not be better than that of the bank. When we pay cash or finance with 0% interest for six or 18 months, we simply spend less than our friends who finance with interest.

I hear people bragging about paying off their vehicle six months early. Listen, if they did not save at least $100, they made a bad financial decision. Let me show you now how to avoid doing like these people.

Because of interest rates, we will always pay more than the actual value of the item we purchased. For example, you buy a vehicle for $25,000 with a 12% interest rate for 60 months with a monthly payment of $600. At the end of the contract, your total cost will be nearing $30.000.

If you still owe on your vehicle, grab your cell phone and follow along. Open your calculator to divide your monthly car note by 12. Using the numbers for the example above, it is 600/12 and the ratio is 50. Remember this number, as you will need it for the rest of the podcast.

Open Google and type Auto loan payoff calculator. Click on any of the links, and follow the instructions on the screen. On the “What is your additional monthly payment” field, enter 50; the number I had from dividing my monthly car note by 12, and click on Calculate. Fifty dollars represent how much more I am willing to pay to save on interest payments and shorten my loan term agreement.

Increasing your monthly payments by $50 shortens your loan term by six months and saves you $970.79 in interest payments. Paying off your car loan early allows you to get back what you would’ve paid in interest. You will end up paying the vehicle about $28.000 instead of $30.000. The higher your additional monthly payments, the more you save on interest rate and the shorter the loan term. Before starting to make additional payments, call your bank to tell them to apply the payments toward the principal, not toward the actual payoff amount. Otherwise, you will be ahead of your payments without saving anything. 

In summary, this episode outlines how to pay off a loan early and get financially rewarded. It explains that credit score does not always dictate the interest rate and that paying cash or taking out a loan with 0% interest is still costly at the end of the contract. It then provides an example of a loan for a vehicle and shows how to use an auto loan payoff calculator to calculate the potential savings from paying off the loan early. By making additional payments of $50, it explains that the loan term can be shortened by six months and that about $1000 in interest payments can be saved. The more additional payments made, the greater the savings and the shorter the loan term.

Bobb Rousseau, PhD
Apostrophe Podcast