Win the Race Against Car Loan Interest Rates

A calculator for car loans shows making prepayments can be an unbeatable investment.
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Everyone knows paying off mortgage prinicpal can net you tens of thousands of dollars in interest payments -- but what about car loans? With the help of the online

Auto Loan Payoff Calculator

from BankingMyWay.com, you can now figure that out.

The calculator provides an amortization schedule based on details such as loan amount, interest rate, duration and time remaining. It then calculates a second schedule based on additional monthly payments. The calculator compares the two, giving you the estimated savings.

Let's say you take out a 60-month, $18,000 loan at 6.77%, the recent national average for auto loans, according to rates published by BankingMyWay.com. If you get a raise after a year, you might consider making additional $50 monthly payments for the remaining 48 months. According to the calculator, doing so means you'd save $304 in interest payments by the time your loan is paid off.

That $304 is your return on a $50 per month investment over four years. That sounds good -- but what if you had invested that money instead? The national average rate for money market accounts is just 0.87%. At that rate, investing $50 a month for four years would net you a meager $43. In order to benefit from investing rather than prepaying your loan, you'd have to find an investment account that offered rates of return higher than the 6.77% of your car loan.

What's more, if your investment account is taxable, rather than a tax-deferred account such as a 401(k) plan or IRA, you'd have to achieve a return of 9.67% in order for investing to be a better move than prepaying the loan. In this case, then, paying off the car loan early is the better move.

Before you increase your monthly loan payment, however, make sure you won't incur prepayment penalties. The majority of auto loans are simple-interest loans that won't trigger a prepayment penalty -- provided your loan agreement doesn't specify otherwise. However, if you hold a pre-computed loan -- a type of loan generally reserved for subprime borrowers -- you are on the hook for the entire principal and interest amounts as outlined in the amortization schedule, regardless of whether you prepay.

One other thing to consider: Your money may be better spent paying off other debt first. If you are carrying a balance on your

credit card

with rates north of 20%, for example, prioritize paying down that debt.

Likewise, consider the advantages you might gain by prepaying your mortgage. Since mortgage interest is tax deductible, this move may or may not be more advantageous. Consult a

mortgage prepayment calculator

to make the more complex savings calculations involved in this scenario.

Peter McDougall is a freelance writer who lives in Freeport, Maine, with his wife and their dog.