Car Loan Function

• Each payment on an auto loan consists of a payment to reduce the loan balance and an interest charge. The amount of interest paid on each payment is based on the current balance of the loan. As loan payments are made and the loan balance declines, the amount of interest paid decreases and the principal portion of the payment increases. The last few payments on a car loan typically have very small interest components and are primarily payment of principal.
  
  

Rate and Term

• The amount of interest yet to be paid on your car loan is a function of how many payments remain and the interest rate on the loan. If you have less than a year to pay and the loan is at a low rate, paying off the loan will result in a small interest savings. If there are several years worth of payments remaining and the interest rate is high, paying off the car loan balance may save a significant amount of interest.
  
  

Simple Savings Calculation

• The amount of interest savings if you pay off the balance of your car loan is a simple calculation. Call the bank or finance company of your car loan and ask for the payoff balance. Multiply the number of payments remaining times the monthly payment amount. This result should be larger than the payoff amount. Subtract the payoff amount from the total of the remaining payments. The result is the interest savings if the loan is paid off before the next monthly payment.
  
  

Considerations

• If other loans are open with higher interest rates than the car loan, it may make more sense to apply the auto loan payoff money to a loan with the higher rate. If the plan is to keep the car for several more years, paying off the loan will allow the monthly payment amount to be used for additional savings. If you will trade the car in soon, the loan will be paid off anyway by the dealership.