Deciding whether to pay off a loan early

I’ve reached a financial crossroad, where my car loan balance is something I could reasonably pay off 6 months early and I’ve recently gotten a windfall. I chatted with a friend who is much better with numbers than I am and he pretty much said that paying off the loan won’t save me that much money.

For those of you who aren’t as lucky as to have such a smart number-crunching friend, I found a couple of calculators that could help you make your decision on whether it is better to pay off a loan early or leave the money in a savings account for the same time period. I tried to find one good calculator that would calculate the savings of paying off early but couldn’t find one. I found two different ones that can calculate the two parts of the costs/benefits equation.

This will tell you how much you can save by paying off the loan early: http://www.nycreditunions.com/java/AutoPayoff.html

However, that is just half of the equation. You could save money by paying less interest, but you have to consider the opportunity cost, or lost interest, of not having that pay-off amount in a savings account.

Since my loan is over in 6 months, most of the savings calculator don’t work in my situation because they calculate the time in years instead of months. The calculator I found is for CDs, but if you resolve that you won’t touch the money in the time period, a regular savings account can be considered a CD. This calculator will tell you how much money you would have after x amount of time: http://www.bankrate.com/brm/calc/cdc/CertDeposit.asp

I calculated how much money I would save if I were to pay off the loan right now. I then calculated the amount of money I would have if I left that pay-off money in a savings account. The results showed that though I would save some money paying off the loan early, I could earn more money leaving that amount in a savings account.

At this stage of the loan, the difference isn’t so significant, but it’s nice to have more money than less. Also, for some people, the convenience of having one less payment per month is worth it. The scenario I have doesn’t necessarily match other people’s financial situation. This article gives more things to consider when making the decision: http://www.wikihow.com/Decide-Whether-to-Invest-or-Pay-off-Debt

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