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How should I manage high interest debt such as car loan? What plan should I make to pay off some principal?

nwn asked:

I have car loan with high interest rate and would like to pay off some of the principal, but with bad economy I also want to reserve some cash for emergency. How should I pay this loan off? This loan has about three years left.
Asked on: 2012-11-25 23:00:39

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  • 35k car loan with 650 credit score


  1. src50 says:

    Depends on your total finances. You have to decide how much you save in reserve and how much you can use to pay down the debt. No one else can decide for you.

  2. Lauren F says:

    Most car loans are written under something called the rule of 78. It is a different method of calculating interest and means you pay almost all of the interest upfront. If you pay early, there is a prepayment penalty built into the calculation. It’s not a fair formula for those of us who want to pay sooner. Call your lender and find out how much interest you might save if you pay it off sooner. My guess is that it is a small number, and you would be better off putting the money toward a credit card or other debt, or saving for retirement.
    If you borrowed from a credit union, it might be a little better for you – they tend to charge interest on the declining balance.

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