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Loan question

pbf98

pbf98

Android Expert
I am just looking for general info, and thought some of you might be able to answer what I am wondering

As you all know its tax season, and this year I will be getting a nice amount back. Now I have a couple of choices of what to do with it. Save it, or spend it. For the spending it I want it to go to one of my loans (of two) but not quite sure what the affect will be.

So if I were to pay about 25% of a loan off in one payment, what would that do? Would it lower the payments each month, would it decrease interest, or would it do neither and just shorten the time span for it to be paid?

I'm just a young guy asking those who have experience in this area, either been there before or know it as a profession. This will help my decision in the end, but for now I'm just curious.

Thanks!
 
Depends on the sort of loan.

Some loans are fixed term, some will only take extra repayments into account at certain points within the life of the loan etc. You really need to take a look at the loan contract to find out.

In general, if the loan does NOT have any of these clauses, then you have a choice: either you can reduce your monthly payments and keep the duration of the loan the same or you can leave the payments the same and pay the load off early.

Or you could go for a compromise and pay slightly less each month and have the loan last slightly less long.

One thing to note: if you have more than 1 loan, do make sure you pay off the loan with the highest interest rate first. Usually, this will be your credit card (unless you have one of those crazy short term loans from a pay day loan company).

NB: I'm not a financial advisor - the above is just general information.
 
No credit cards for me! haha just a student loan and a car loan. The student loan is a federal loan which gives me flexibility in payments if i were to absolutely need it. My car loan is the loan I want to get paid off sooner or at least lessen the payments. I have tried finding away to contact them about the topic, but I have had troubles connecting with them by phone... and they provide no way to email them or contact in any other way..
 
May want to consider that the student loan interest may be tax deductable while the car loan isn't.
 
I would definitely pay off debt. Interest rates for savings are garbage. The exception being if you don't have an emergency fund, put it there first. After that I would say car loan. Reasons are 1. School loan interest is deductible; 2. Federal Loans are flexible as you said; 3. Car loan is backed by a tangible asset. So your money will still be accessible to you as equity in your vehicle.
 
I would probably put more into the car loan, particularly if it is financed with a reputable company (GMAC, Honda Financing, a major bank, etc.). If the loan is from some scumbag used car dealer, I would first try to figure out what needs to be done to pay extra principal.

Setting aside the interest rate concerns for a minute (which are important, don't get me wrong), if you depend on the car for transportation to your job, you want to get it paid off as soon as you can. If you were to lose your job (but presumably would still need a car for transportation to a new job) you would be in a bind pretty quickly if you couldn't make payments.

After you make your decision, change your federal deductions so you don't get a huge refund in the winter, but get a slighly bigger paycheck each pay period. Put that extra money every month into your debt. A big federal refund is giving the government an interest free loan on your money while you're paying interest to the banks.

I've got my witholdings set up so that I usually get about $100 from the feds and owe my state about $100 every year. If I sell stock or wind up not doing my part-time job it winds up different but having a net 0 (or close to it) is my goal. Be careful, though: if you don't withhold enough and owe the feds more than $500 you pay penalties on it.
 
Toss it at which ever loan is smaller. Spend every extra dollar you can milk out of your budget at that loan while making minimums on the rest. Then toss all your money at the next loan.
 
I'd put it on your highest interest student loan. Knock it out of the park if you can.
 
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