How to Pay Off a Car Loan Faster Without Using Velocity Banking.

Today we will talk about how to pay off a car loan faster and how to avoid common mistakes.
We will use an example from one of the recent popular YouTube videos (Vanntastic channel). In that video a customer was given a terrible advice. This advice will actually cost customer more money and can potentially get them into financial problems. I will explain why it is so bad, and show the smart way of how to pay off a car loan faster and cheaper.

Hi, my name is Dmitry. I used to work in a Software industry. I have the experience of managing over 3.5 million dollars ARR. And I can tell you, when you work with money, you need to be good at spreadsheets, otherwise you can make a lot of mistakes. That’s why I prepared a spreadsheet with car loan calculations using the example from this popular YouTube video. You can download it HERE (or below). Remember, this is just an EXAMPLE for illustrative purposes.

How to pay off a car loan faster – my video.

Many people wonder “is velocity banking good or bad?”
You can watch my YouTube video, where I explain why I think velocity banking is a bad idea to pay off a car loan.

Now, let’s have a look at the example from popular YouTube video promoting velocity banking.

The video explains how to pay off a car loan faster – in 8 months instead of 4 years.

So, here is the case. Someone has a car loan of $12,381 at 2.5% interest rate with $286 monthly payments. With this payment schedule, the person will pay off a car loan in 46 months, which is almost 4 years. This person has a monthly income of $2,905. The monthly expenses are $1,286 + $286 car loan payment. After deducting monthly expenses, this person has $1,333 left each month.

In order to pay off a car loan faster, this person got a recommendation to open a Personal Line of Credit with simple interest rate 10.99% and transfer the car loan, monthly income and monthly expenses to this PLOC. This is called “velocity banking”.

With this scheme the interest is applied to the outstanding balance. I created the spreadsheet, so you could see the exact calculation (see image 2 below).

So, you take the initial balance of $12,381, exclude the monthly income $2,905, but then you need to add your monthly expenses $1,286, because that is what you will spend. And you get your outstanding balance. To calculate the monthly interest, you need to multiply your outstanding balance by the annual interest rate, which is 10.99%, then divide it by 365 days and multiply by 30 or 31 days in the current month:

Monthly interest rate = outstanding balance * 10.99% / 365 * 30

We will simply multiply by 30 to have a general idea. Each month you repeat the same actions – you put your monthly income into PLOC, you deduct your monthly expenses, your outstanding balance decreases, and voila! The car loan will be paid in just 8 months. Even more, this person (the happy car loan owner) will only pay $373.37 of interest in total.

Why velocity banking is not a good idea for paying off a car loan.

The first reason, is because it will cost more money than it should. Which is kind of obvious, when you switch from 2.5% interest rate to 10.99% interest rate.
The second reason is because it encourages bad financial behavior and can easily lead to even bigger debt. I will explain it in more detail in a second.

So,

Reason #1 why velocity banking is a bad idea – is because paying with PLOC will cost more money.

The question we should ask here – why do we need to open a Personal Line of Credit with high interest rate, if we can simply pay the existing car loan with low interest rate, and pay it faster?

Let’s have a look at the calculation of the existing car loan payment scheme (please see image 3 below). Then I will explain how to pay it faster and cheaper. So, we have the annual interest rate of 2.5%. We divide it by 12 and get the monthly interest rate (0.00208333333333333), which is a fixed percentage. It is always applied to the remaining balance. You can see that the remaining balance decreases after each monthly payment, and so the interest you pay monthly also decreases. It means that with each monthly payment, which is $286, you will pay less interest and more principal balance. It will take 46 months to pay this car loan in full. And you will pay a total interest of $607.91.

How to Pay Off a Car Loan Faster – the SMART WAY.

Remember, in the beginning we said that each month this person has $1,333 left? The smart way to pay off a car loan faster would be to use the existing payment scheme with 2.5% interest rate and to simply increase the monthly payment by adding these $1,333. The total monthly payment would be 1,619 dollars, the remaining balance would decrease faster, the interest would also decrease faster, and, unbelievable! You will also pay off this car loan in just 8 months!

But have a look at the total interest. Instead of paying $373 total interest with PLOC, this person would only pay $113 interest. That’s why the advice in this popular YouTube video is bad – because paying with velocity banking using Personal Line of Credit will cost you more money.

You can download my spreadsheet and compare all 3 calculations of “How to pay off a car loan faster”:

1. With the initial car loan payment scheme, you will become debt free in 46 months and you will pay $607 of interest in total.
2. With velocity banking, it will take 8 months to pay off a car loan, and you will pay a total interest of $373.
3. But if you use the existing car loan scheme and pay it off faster with the money that is left after your monthly expenses, you will also get rid of this debt in just 8 months, and you will only pay a total of $113 in interest.

If you want to check these formulas for yourself, you can DOWLOAD THIS FILE HERE.

Reason #2 why velocity banking is not a good idea – is because it encourages wrong financial behavior (getting more debt).

Now, the second reason why the advice in this popular video is terrible, is because it encourages wrong financial behavior. One of the reasons why the customer was advised to use velocity banking, was because “you always have money available in your PLOC”. If you want to go on vacation, or you have a medical bill, you can always use this money. Yep, this is a wrong thing to do. It gives you the feeling that this money is yours and you can use it as you want. But this is exactly how people usually get into debt.

Banks do it on purpose – they make credit lines easily available, because they know that people have temptations to use credit money more often. And then they have to pay high interest rates. This is a bad financial behavior.

If you want to be debt free – please try to avoid using credit cards and Personal Lines of Credit.

If you want to go on vacation – plan in advance and save money 🙂
And for emergency cases, like medical bills or car repair, we should always have a special Emergency Fund. If you struggle to build one – this article will be super useful: How to use the 50/30/20 Rule with low income?

I hope this helps. Please share this article or video with your friends, and stay safe. See you in the next one!