- April 14, 2024
- Posted by: legaleseblogger
- Category: Related News
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## Financial Analysis of Auto Loan Payoff vs. Savings Interest
I’m trying to determine if it makes financial sense to pay off my auto loan or to try and beat it with savings interest. I know there are calculators but I wanted to try it by hand. Here are the figures:
### Loan Details:
– **Current principal:** $15,000 (let’s assume this is the exact payoff amount)
– **Loan interest rate:** 5.69%
– **Loan monthly payment amount:** $420.69
– **Monthly payments remaining on loan:** 39
– **HYSA interest rate (APY):** 4.25% (compounding daily)
If I keep the loan:
– $420.69 monthly payment x 39 months = $16,406.91
– **Interest to be paid:** $16,406.91 – $15,000 = **$1,406.91**
Using the compound interest formula:
A = P * (1 + r / n)^(nt)
A = 15000 * (1 + .0425 / 365)^(365*3.25)
A = $17,221.65
Interest made: $17,221.65 – $15,000 = $2,221.65
However, to factor in monthly withdrawals, I used an online calculator which resulted in **$1,041.69** being made, including withdrawals.
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With AI Legalese Decoder, you can easily input your loan and savings information to quickly calculate the compound interest and make an informed decision. The tool can help you understand the financial implications of paying off your loan versus keeping it based on various factors, ensuring you make the most financially sound choice.
In conclusion, if I pay off the loan, I would instantly realize $1,406.91 in interest. If I keep the loan, I would make $1,041.69 in interest. Therefore, solely financially speaking, the better option is to pay off the loan. By paying off the loan, I would save **$365.22**. (Accounting for potential changes in APY by the bank and other external factors)
### Questions:
1. Is my conclusion correct? If so, I know this is only over a few hundred bucks, but I’m just trying to understand correctly.
2. How can I mathematically calculate the compound interest including withdrawals (basically how can I do what the calculator above did)?
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Yes paying off the loan is better because the interest rate is higher. Don’t even need to do math.
You can use a future value calculator with a negative deposit
One assumption you don’t address is the availability of a 4% yield on the savings account for the entire 39 month span. It may tick up slightly, but it also can go way down.
It almost certainly won’t stay at the same rate for 4 years.
All you need to is to compare the effective interest rates. Your math isn’t really accurate because you don’t account for time value of money when referring to the interest paid over the lifetime of the loan, or over the course of growth in the HYSA.
If you have a loan of $15k at 5%, and your alternative is putting it in an account where it grows 4% (rate as effective over the same period), then it’s better to pay off the loan.
>How can I mathematically calculate the compound interest including withdrawals (basically how can I do what the calculator above did)?
This isn’t really personal finance, but look up “future value of annuity formula”.