How to Pay Off Your Car Loan Faster (it's NOT Velocity Banking)

today we're going to talk about how to pay off a car loan quickly the right way sorry to be blunt but there are some dumb ways to do it that you'll find on YouTube channels that promote velocity banking sometimes these channels don't even mention velocity banking by name but if you watch how they pay down the loans in the video that's what they're doing I'm going to show you why that method doesn't work in the right way to pay off a car loan faster if anyone you know is talking about velocity banking you might want to share this video with them so they're more educated hi everybody my name is will I'm a former Chief Financial Officer of software companies I have an MBA specializing in finance from Cornell University and I'm a chartered financial analyst which means I studied in-depth how to price and analyze Financial products let's talk about paying off a car loan for this discussion I'm going to use the scenario presented in someone else's very popular recent YouTube video about fast payoff of a car loan you'll quickly see why the advice given in that video was bad and actually cost their client money here's the scenario the video discusses a person with monthly income of $2,955 and monthly expenses of $1,286 leaving them with available cash flow of $1,619 per month which they refer to in the video is being the person's cash flow the person has a car loan with a balance of $2,381 an interest rate on the loan of 2.5% in a monthly payment of $286 and the loan has4 6 months remaining to pay off the loan quickly the client was advised to take out a personal line of credit pay off the car loan by transferring the car loan balance onto the personal line of credit personal line of credit has an interest rate of 10.99% in case you missed it the person was advised to transfer the loan from a car loan at 2.5% to a p at 10.99% the final step in this method the client was told to put their entire paycheck of $295 each month into the P to pay it down and to pay their monthly bills of $1,286 out of the P so why do this well the person was told that it would reduce their interest cost and enable them to pay off the car loan in just 8 months and guess what by doing this they can pay off their Loan in 8 months so it works right not so fast as I'll show you in a minute before I do though I need to mention one other supposed benefit of doing this method the client was told that if they needed cash one month they could simply take it out of the P whereas had they just been putting all their cash into the car loan and didn't have the P the cash would be gone it wouldn't be available to them anymore supposedly that's another big benefit of using the P to pay off the car loan access to cash if they needed it sorry but that's dumb too which I'll explain in a few minutes let's compare now four ways that this loan could be paid down so you can see the total cost for each one by comparing different ways of paying down the loan we'll see which one is best to do this let's jump into the spread sheet so here are the four ways to pay off the loan scenario one is the original car loan payment schedule there are 46 months left paying off the loan according to this schedule would cost a total of $2,989 to get that figure I just summed up all the payments they would make until the loan was paid off this is what I did for every scenario to get the total cost the cost of $2,989 from just paying off the car loan over 46 months is our Baseline we're trying to find a method that costs less than that scenario two is the first alternative this person has $1,619 available each month after paying their other bills obviously therefore they could simply put all the $1,619 each month onto the car loan if they did that the loan would be paid off in8 months for a total cost of $2,494 saving them $495 is compared to paying the loan off over the original 46 month term next is scenario three the person could open a personal line of credit the p and transfer the entire car loan balance onto the P but in this scenario don't put your paychecks into the p and don't charge your other bills there either now the velocity banking people will say this misses the whole point of velocity banking which is to reduce your interest cost however I'm doing this scenario for a reason so just hang tight if you do this open a PL transfer the car loan onto it and then just pay the available cash of 1,619 each month onto the line of credit to pay it off the loan will be paid off in 8 months for a total cost of $2,895 which is $41 more than the cost of just paying the car loan down directly with the same 1,619 of cash flow each month the reason cost more is because you're paying a much higher interest rate on the P than on the car loan okay so this method didn't work let's see if doing the velocity banking method is better that's scenario 4 in scenario four we do the same thing we did in scenario 3 we transfer the car loan onto the P but then we also deposit all paychecks onto the loan balance and charge monthly expenses to the loan too supposedly this will reduce the interest costs and make it all work actually however it only helps a very small amount compared to the last scenario using the p and depending on when the paychecks and monthly bills actually hit the P it might not help at all I calculated that the method in this scenario costs $352 more than just paying down the car loan directly with the 1,619 each month because people who like velocity banking will think I'm doing the math wrong let me just show you the math of what I did for each month of the eight months it takes to pay off the P loan I assume the person gets paid weekly which is $726 deposited into the P four times per month and I assume their bills of $1,286 per month hit the P evenly over the month which is $428 per day I then calculated simple interest once per month at the end of the month on the average daily balance of the p and added that month's interest to the loan balance on the last day of the month following this method the loan was paid off in 8 months for a total cost of $2,846 which was only $49 cheaper than scenario 3 where I also used the pl but didn't bother with the paychecks and expenses running through the loan so the velocity banking only saved $49 compared to scenario 3 in exchange for all the hassle it added but again the most important comparison is of this scenario 4 that plos see with velocity banking to the much easier option of just putting the same amount of extra cash of 1,619 per month directly onto the car loan itself so again the person who is paying down their loan with a p and velocity banking is paying $352 more in total cost than if they just put their extra cash directly into the car loan Here's the final Point people argue that by using the p a person has access to cash if they need it they say if they had been paying their extra cash into the car loan then what if they need money one month what if something comes up the extra money they paid into the car loan is gone and you can't get it back again that's true but missing the obvious if the person is capable of getting a p which was the Assumption to begin with then get a p and don't use it just pay your extra money into the car loan to pay it off which we know is the less expensive method and if something comes up where you need money then you can withdraw it from the P exactly the same as the other method but without the higher interest expenses and hassle there are some important lessons here but first a request if you find this information helpful please hit the like button and leave a comment below the video sharing the worst Financial advice that you've ever heard remember to subscribe too to follow me with more videos about personal finance and Entrepreneurship as for lessons about paying down debt in general and velocity banking I have three first when you're looking to pay down loans take the time to compare a few different scenarios to find the best payoff option for your situation everyone has different loan details with different fees interest rates and other restrictions and everyone's personal financial situation is different so you always need to do the correct comparison using your own unique details in videos like this we can only give examples two when someone is pitching you a loan payoff method perhaps velocity banking for example the first thing you should always look at is the total cost of Simply putting your extra money directly onto the original loan to pay it down then compare the total cost from using other methods to that make sure it's a fair comparison where the same amount of money is paid at the same time into each loan in comparison then you can choose the approach that works best and third as a general principle it's going to be nearly impossible to come out ahead by paying off a lower interest rate loan using a higher interest rate loan someone might tell you that it works because you're going to save interest using the velocity banking method because the loan you will use for that has a better interest calculation method than your existing loan but be skeptical again do the math to see the total cost of paying off the loan using each method it's unlikely to be cheaper if you switch to a loan with a higher rate well that's it for today I hope this helps you better understand how to think about paying off your car loan or any loan for that matter thanks for watching I'll see you in the next one

Channel: The William Lee Show

Views: 289,192

Keywords: car loan, paying off car loan early, pay off debt, velocity banking, velocity banking explained, paying off mortgage faster, william lee, velocity banking strategy, pay down debt faster, pay off your debt faster, debt snowball, debt snowball method, debt avalanche, debt avalanche method, debt consolidation, think wealthy velocity banking, vanntastic!, vanntastic velocity banking, vanntastic finance, payoff car loan, velocity banking with heloc, payoff car loan faster

Id: MDFFUb_ZosQ

Length: 10min 7sec (607 seconds)

Published: Sat Oct 07 2023