Car Loan Payment Acceleration – Does it Save You Money?

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.”

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.

“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.