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Should I pay off my car loan in full?

Peter PrinciplePeter Principle Registered User
edited May 2011 in Help / Advice Forum
Got a car loan a few years ago, there's like 5_10 thousand left on it. Payments are 210 a month. I've got the cash to pay it off completely, and would still have a hefty chunk in savings.

If I do, the extra cash is no longer available if "something happens" but then I'll be saving that xtra 200 bones a month.

If I don't, vice versa. Have the $ but saving less $ per month.

Is there anything I'm missing, any other reason I would or wouldn't want to do this?

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"A man is likely to mind his own business when it is worth minding. When it is not, he takes his mind off his own meaningless affairs by minding other people's business." - Eric Hoffer, _The True Believer_
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  • Nova_CNova_C Sniff Sniff Snorf Beyond The WallRegistered User regular
    edited May 2011
    Do you have zero percent financing? If so, I would say no. If not, then yes.

    Zero percent financing is worth keeping around for the reason you stated of having the money in case of emergency. It doesn't cost you anything to keep paying that debt. However, if you are paying interest then the earlier you pay the loan off, the less money it costs. Totally worth it to just pay it off and be done with it.

  • VeritasVRVeritasVR Registered User regular
    edited May 2011
    It seems you are forgetting the money permanently lost through interest on your loan. If the interest against you is relatively low, keep paying month-to-month, but that money you are saving better be earning it's own interest for you or else it's not really helping. It doesn't have to be enough to counter the loan though (god help us if it does.) Sure you have a larger pot in case shit goes south, but you said you already had that.

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  • KarrmerKarrmer Registered User regular
    edited May 2011
    Yea, the only way to answer this is to know your interest rate.

    For example, I bought my car (2005 Mustang) in 2006 for $16.5k. My interest rate, though, since I had zero credit ever was 22% or some such. Consequently, the TOTAL amount of interest I had to pay over the course of my five year loan was around $15k, which is completely insane. If your interest rate is something awful like that, you need to pay it off immediately.

    If your rate is rather low or even 0%, then there is no reason to bother.

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  • DehumanizedDehumanized Registered User regular
    edited May 2011
    If the interest rate is anything higher than 0%, the only reason to keep it around would be is if you wanted to use it as a way to keep building your credit file.

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  • khainkhain Registered User regular
    edited May 2011
    If the interest rate is anything higher than 0%, the only reason to keep it around would be is if you wanted to use it as a way to keep building your credit file.

    This just isn't true. If the interest you could be earning on the money is greater than the interest you pay on the car then you shouldn't pay it off. The OP also doesn't specify what a hefty chunk in savings is and that would be the other consideration as if you get laid off or have a large expense that you can't cover and have to use a credit card you're going to be paying ridiculous interest which could you put you in a terrible spot financially.

  • webguy20webguy20 Registered User regular
    edited May 2011
    I would say if your between 2%-5% pay double/triple payments. If under 1% just pay normal or double paymentes. Over 5% I would probably just pay it off because I don't see any regular investments paying over 5% returns.

    How much do you have left over after paying off the car? I would keep at least 6 months expenses worth still in the bank minimum.

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  • Dunadan019Dunadan019 Registered User regular
    edited May 2011
    if the interest rate on the loan is greater than the interest rate you can get in a savings account then you will make money by paying it off.

    HOWEVER, most car loans are fairly low interest rates and you need to calculate how much actual money you will be saving.

    It doesn't make sense to spend 10K now to save 500 bucks over the life of the loan.

    also, in certain states, I've heard that interest is added on regardless of wether or not you pay early so you may want to check that as well.

  • rockmonkeyrockmonkey Registered User regular
    edited May 2011
    Do you have any other debt that would have higher interest? Such as credit cards?

    Student loans and Mortgages are usually considered good debt (bit of a lie really no debt is really "good" debt), but generally speaking you can invest the extra money you would use to pay them off and earn more interest on the investment then you pay on the debt, there are other factors, such as the the tax deduction you'd get for the interest on a mortgage can make it even more beneficial.

    It's all about opportunity cost. If you don't know what it is google it. Something you know a little bit about through common knowledge but you really see the details in a principles of accounting A course.

    Also if you have a car note that you can pay off, but your company also offers a 401k program with some sort of match. You'd probably always want to pay into your 401k to meet the match before paying off a car loan as well.
    Assuming your investments don't constantly lose money a dollar for dollar for the first 5% company match is free money and you automatically just doubled that money.

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  • Sir Headless VIISir Headless VII Registered User regular
    edited May 2011
    You also might want to phone them and see if you are actually able to pay it off all at once and what the penalties for doing so would be. Many loans will limit the amount you are able to pay back at a time and/or set penalties if you do.

  • HeirHeir Registered User regular
    edited May 2011
    Yeah, definitely look at paying off any other debt that may be a higher interest rate first.

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  • Chases Street DemonsChases Street Demons Registered User regular
    edited May 2011
    I understand where people are coming from by saying to pay off the higher interest debt first, but I think it's a better idea to pay off the car first and then examine credit cards, etc. The reason for this is that a credit card is a revolving door charge - it actually hurts your credit rating to have cards open with 0 balances, so you're always going to carry some kind of small balance. Once a car is paid off, you can use that extra monthly cash to drop into the credit card payment.

    Your style of living will literally feel 0% different, but you'll be out of debt permanently on the car and rapidly heading that way on other credit sources.

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  • lonelyahavalonelyahava One day, I will be able to say to myself "I am beautiful and I am perfect just the way I am"Registered User regular
    edited May 2011
    I had a car loan of about 10k when my grandmother passed away. she left my mom some money which mom then split between me and my brother. I basically had enough to pay off the car loan right off, or to let it sit in that account, collecting interest and also paying the 200/month payments off.

    I asked the lady at the bank who had the car loan, and she did some quick math, turns out that if I paid it off, it would be paid off no problems,but if I did the payments, I would still end up with about $500 at the end, just from the interest differences between the loan and the savings account.

    Paying off the car loan immediately was the only thing that really saved my credit rating at that point in my life. I had bad credit cards and everything else as well. but the choice between paying them and keeping my car from being repossesed... it was no brainer

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  • Gabriel_PittGabriel_Pitt Damn you, eidetic memory! Registered User regular
    edited May 2011
    - it actually hurts your credit rating to have cards open with 0 balances, so you're always going to carry some kind of small balance.

    What, you mean not completely pay off your card balance each month? No. _Wrong._ Always pay off your full balance if you can. The only one who benefits from not keeping a 0 balance month to month is the bank, because then you pay them interest.

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  • Peter PrinciplePeter Principle Registered User
    edited May 2011
    Thanks for all the helpful replies so far. I have no other debts, other than my mortgage. I pay my one credit card in full every month, and don't owe money on anything else. My interest rate on the loan is ~ 4.5 percent, iirc. I pay ~ $30 in interest every month on this loan.

    One thing, and this may be silliness, is the gap insurance that I bought on the car. (Gap insurance is insurance you buy in case your car is totaled while you still owe money on it. If that happens, the insurance pays off the remainder of the balance due.) Is this something that might affect my decision to pay this loan off? Would suck to drop the Texas$ on the car and then have someone rear end me, that's a bit of a gamble.

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  • KyanilisKyanilis Registered User regular
    edited May 2011
    Well, if you pay off the car and then get rear ended the car is in your name so then your actual auto insurance will be what takes care of that damage. Including if it gets totaled. The gap insurance is only while you're paying off the car. Say it gets totaled and the insurance payout is less than what you owe, then the gap insurance covers that, well, gap. You wouldn't actually receive any extra money or anything because of it.

  • SixSix Registered User regular
    edited May 2011
    I understand where people are coming from by saying to pay off the higher interest debt first, but I think it's a better idea to pay off the car first and then examine credit cards, etc. The reason for this is that a credit card is a revolving door charge - it actually hurts your credit rating to have cards open with 0 balances, so you're always going to carry some kind of small balance. Once a car is paid off, you can use that extra monthly cash to drop into the credit card payment.

    Your style of living will literally feel 0% different, but you'll be out of debt permanently on the car and rapidly heading that way on other credit sources.

    This is wrong. This is bad advice.

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  • JasconiusJasconius sword criminal Flo-ridaRegistered User regular
    edited May 2011
    If you lose your job, high balance credit cards will wound you more than a medium-low balance car loan (relative to the value of the car).

    I think this is a false choice.

    Making principal only payments on your car is a great way to save money on interest, and you can also take care of your credit cards at the same time.

    If you really have 10 grand in the bank, the prudent thing to do would be to not blow your entire wad on what could be regarded as a mere convenience (of having a totally paid off car).

    Pay your cards, make an extra principal payment on your car every month, have a nice steak dinner.

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  • FyreWulffFyreWulff Registered User, ClubPA regular
    edited May 2011
    If you have full coverage then the car gets replaced anyway. It's the same "gamble" as being rear ended after you finish paying it off normally.

    Just pay it off. Then you own the title and can sell the car or do whatever you want.

  • bowenbowen Registered User regular
    edited May 2011
    In summary with what other people have said:

    1) Pay off high interest loans and lines of credit (Credit card, charge accounts)
    2) Check to see if there's any penalties for paying more or early (triple payments or pay it fully) also check the interest rate on the loan
    3) If yes and the interest rate is low, keep on keeping on, chances are the penalties are worse than the interest
    4) If no, pay that the fuck off, and get some credit on it.

    Talking with my loan officer on my account he tells me the only help your credit once the loan is paid in full, not if you're making monthly payments. Though they can ding your credit for not making monthly payments on time.

    Also, never carry a balance on your card. Ever. Use it every 2-3 months for like, a snickers bar or something, and then pay it off at the end of the month.

    Just to clear up some confusion every time these threads roll around, good credit with credit cards come from a few things:

    1) Are you current? (Read: IS THE BALANCE $0)
    2) Is it active?
    3) How long has it been open?

    Carrying a balance does nothing but give the banks a free loan off you. That's worse than giving it to the government with overtaxing yourself. Why? Because fuck banks.

  • WildEEPWildEEP Registered User regular
    edited May 2011
    The only thing to do with a chunck of cash is either pay down your debt, or invest for long term growth.
    If it just sits there, its wasted..and with inflation..it actually shrinks a little.

    Seeing as how the investment market is currently shittacular, I would recommend paying down your debt. Pay off the car and let it be yours. Drop the Gap insurance and keep full coverage auto insurance on "your" (not the banks) vehicle.

  • rockmonkeyrockmonkey Registered User regular
    edited May 2011
    Having a rainy day fund is an important part of a healthy financial plan. Paying off the car is a good idea it would seem for your current situation, but as someone else mentioned briefly above, you don't want to blow all of your savings on paying off the car early and then something else comes along and you don't have the money for it. Car repairs, medical bills, losing a job. Idealing (and this is a generalized amount) people say you should have 4-6 months of expenses set aside in an easily accessible account (not a retirement account or some other account that would penalize you for withdrawing the money).
    I always saw that amount as geared toward 1 (main) income households. If you are a two income house and the disparity between the incomes isn't crazy, then you can safely go with something like 3 months expenses, which will last you longer if one of you loses a job b/c that means the other still has his/her job.

    So if you still decide to pay off the car in full NOW, then I'd highly recommend you immediately start building an "oh shit" fund next. After that is done maybe saving for an upgrade for the house, be it cosmetic, a large appliance, a new deck, etc. Then after that switch back and up your retirement savings.

    I like to alternate between things that are long term and things that make me happy now, but are still a valuable place to spend/put your money. Improving the house adds grafication now, and also adds to the value of your home in case you decide to sell it down the road.

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  • bowenbowen Registered User regular
    edited May 2011
    Yeah living paycheck to paycheck its the pits.

  • FiggyFiggy Registered User regular
    edited May 2011
    As usual, everyone is chomping at the bit to give their advice and they don't even bother reading what the OP is telling them. He does not have credit card debt. Stop telling him to pay off his credit card debts.

    OP: forget about your gap insurance dilemma, you don't fully understand what that is. You won't be screwed over if you get in a wreck on the way home from paying off the car--the gap insurance only covers what your own car insurance wouldn't. So, generally, it's only a good idea if the life of your loan is so long that you won't be paying it off quick enough to beat its depreciation.

    Pay off the car if the money you save on interest is more than the money you gain in interest from that money sitting in your account. It's that simple.

    Edit: And again, the OP clearly states he'd have a hefty sum left over after paying the car off. I imagine car repairs aren't an issue since he's likely still under warranty.

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  • Peter PrinciplePeter Principle Registered User
    edited May 2011
    Figgy wrote: »
    As usual, everyone is chomping at the bit to give their advice and they don't even bother reading what the OP is telling them. He does not have credit card debt. Stop telling him to pay off his credit card debts.

    OP: forget about your gap insurance dilemma, you don't fully understand what that is.


    I think I understand gap insurance. A hypothetical car, according to the car insurance company, is worth $7,000 at the time of a hypothetical accident that totals the vehicle. There is $15,000 principle left on the car loan. In that scenario, the car insurance company gives you a check for $7K. The with whom you purchased gap insurance then gives you a check for 8 grand. Gap insurance makes up the unpaid difference on a car loan.


    You won't be screwed over if you get in a wreck on the way home from paying off the car--the gap insurance only covers what your own car insurance wouldn't. So, generally, it's only a good idea if the life of your loan is so long that you won't be paying it off quick enough to beat its depreciation.

    So I'm still not sure I follow when people say that I won't be screwing myself if the unlikely happens and I pay off the loan completely and then total my car.

    Look at the scenario above. Assume the owner has exactly $30K cash in his savings account. The car owner paid off the $15K car loan, and the next day totals his car.

    30,000
    -15,000 (minus what he paid off the loan with)
    +7,000 (plus what insurance pays him for his totaled car)
    $22,000 in bank

    versus the situation where he doesn't pay off the loan, and his $30K bank balance remains unchanged.

    Didn't he just screw himself out of 8 grand by paying off his loan?

    Maybe I'm overestimating depreciation, and the hypothetical car hasn't depreciated that much. But even if Geico thinks his car is still worth $13,000, doesn't that make the calculation still come out 2 grand not in his favor?

    30,000
    -15,000 pay loan
    +13,000 receive insurance
    28,000

    Of course, I'm also aware it's all a gamble, and if the car is never in a totalling accident then I've lost money in not paying it off (approximately $1000 for the remainder of my loan in paying the interest).
    Pay off the car if the money you save on interest is more than the money you gain in interest from that money sitting in your account. It's that simple.

    I think they're pretty close, if not exactly equivalent. Maybe I just need to pay it off so I can have that extra money every month to buy hookers.
    Edit: And again, the OP clearly states he'd have a hefty sum left over after paying the car off. I imagine car repairs aren't an issue since he's likely still under warranty.

    Yes, still under warranty.

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  • bowenbowen Registered User regular
    edited May 2011
    Don't most states mandate gap insurance on a policy regardless? I think NYS does.

  • TejsTejs Registered User regular
    edited May 2011
    Texas doesn't, as far as I know. I've never had to buy it, but then again, I always made a large downpayment such that I wouldn't have a gap.

    Anyways, my opinion is that simply paying double payments is going to be your best bet. I could pay off both of my cars in full today with a hefty sum left over, so I know exactly the kind of angst that you're experiencing right now about the financials. In the end, I simply decided that paying 2x the monthly payment was the right move for me. For full disclosure, my interest rates are 6.75% and 4.25% respectively. If your interest rates are higher, and you have more time left on your loans (I have about 3 years left from when I originally started, but about 2 years left based on principle amount), you might find paying more than 2x to be useful.

    You keep liquid money available right now; however, you also are quickly paying down your loan. For me, US Bank (who finances my Mazda) will attempt to not send you a bill (unless you check the checkbox) if you overpay; it's quite nice when you have the option of paying or ignoring the bill that month (because they sent you a bill of 0.00 owed this month). At the end of the day, it's just a stress reliever - you still have a lot of liquid money and you know you're saving money on interest by double paying.

    EDIT: In addition, since double paying just significantly reduces the time spent paying off the car, you run less of a risk with undervalued insurance and gap coverage. Since your vehicle depreciates over time, and your bank account only decreases a little bit over time, you have less cost involved in case of a totalling accident.

  • HeirHeir Registered User regular
    edited May 2011
    Tejs wrote: »
    Texas doesn't, as far as I know. I've never had to buy it, but then again, I always made a large downpayment such that I wouldn't have a gap.

    In Texas as well, never have had to buy it. They really push it though.

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  • Romero ZombieRomero Zombie Registered User regular
    edited May 2011
    You'll ultimately do what you want to do - but if I were in your situation and had a nice nest egg in savings then I would not blow my savings to pay off the car, but send a little extra every month to pay it down quicker. Having a buffer in a savings account is hugely important. Granted, you'll be able to drop extra money in every month after your car is paid, but it's just getting it back up will be the issue.

    Thing about being a homeowner, when shit breaks in your house, it's almost never cheap to fix and that nice little nest egg in your savings will come in super handy and you don't have to worry about dropping it on a credit card.

    Sounds like you are doing much better off than I am in terms of credit discipline - I screwed myself bad in my early twenties and made a lot of poor financial choices. If I could turn around and do it again though....

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  • bowenbowen Registered User regular
    edited May 2011
    You and me both.

    Honestly it doesn't seem like it really matters either way. I'd say pay it in full though because even if, he can use his car as collateral when it's free and clear.

  • FiggyFiggy Registered User regular
    edited May 2011
    Spoiler:

    Didn't he just screw himself out of 8 grand by paying off his loan?

    Maybe I'm overestimating depreciation, and the hypothetical car hasn't depreciated that much. But even if Geico thinks his car is still worth $13,000, doesn't that make the calculation still come out 2 grand not in his favor?

    30,000
    -15,000 pay loan
    +13,000 receive insurance
    28,000

    Of course, I'm also aware it's all a gamble, and if the car is never in a totalling accident then I've lost money in not paying it off (approximately $1000 for the remainder of my loan in paying the interest).
    Spoiler:

    Like I said, gap insurance is beneficial if you are paying your loan off so slowly that it depreciates that much. Also, keep in mind that you're paying for that gap insurance every month, with interest, while your loan is still outstanding.

    Find out what the blue book value is of your car at this moment, and then compare that to what you still owe. I don't think you'll find it off by thousands. Not paying off your loan faster and eating the interest on the chance that you might total it and want to take advantage of the gap insurance isn't exactly the smartest move, in my opinion.

    For next time, keep in mind that gap insurance itself is overpriced if purchased from the dealership. You can often call your car insurance company and they'll have their own gap insurance premium that is a fraction of the cost, and you can simply cancel it as soon as your car is worth the same or more than your outstanding loan amount.

    When you buy it from the dealer, you pay way more for the premium, you pay interest on it, and you can't cancel it at any time. It's an added premium until your loan is payed off in full.

    Regarding the interest paid vs interest earned scenario, keep in mind that if you keep the loan and decide to let the funds earn interest for you over the course of the loan instead, you're going to be paying taxes on the money earned.

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  • ShawnaseeShawnasee Registered User regular
    edited May 2011
    Got a car loan a few years ago, there's like 5_10 thousand left on it. Payments are 210 a month. I've got the cash to pay it off completely, and would still have a hefty chunk in savings.

    If I do, the extra cash is no longer available if "something happens" but then I'll be saving that xtra 200 bones a month.

    If I don't, vice versa. Have the $ but saving less $ per month.

    Is there anything I'm missing, any other reason I would or wouldn't want to do this?

    Please expand on these two things...

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  • Peter PrinciplePeter Principle Registered User
    edited May 2011
    Figgy wrote:
    For next time, keep in mind that gap insurance itself is overpriced if purchased from the dealership.

    I've done some learnin' on car dealership scams. I purchased my gap insurance from the bank where I also obtained my car loan. The price diff there was ~$600, iirc. It was interestingly enough the only BS that this particular dealership really tried to push (they didn't for example try to sell me undercoating or emergency road kits or any of that jibber jabber).

    Shawnasee wrote: »
    Please expand on these two things...

    I think everyone here has done an excellent job of helping me resolve this, so probably not necessary. My bank sometimes uses that information as a security question, so I'm reluctant to reveal it, regardless.

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  • DemerdarDemerdar Registered User regular
    edited May 2011
    Why not just up your monthly payment? That way you wont pay it off all at once (and be without a lot of money right now) and you will also pay it off faster, since you seem to want to get it off your hands.

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  • LanchesterLanchester Registered User regular
    edited May 2011
    I will suggest what others have said. That being just up your monthly payment. Double your payment from 210 a month to 420. If you do this, just make sure they apply the extra amount towards the principle and not next month's payment.

    I have a very similar situation with a couple student loans that I'm paying off. With the low interest rate (and it being tax deductible), I don't want to use all my savings to pay it off, so I just pay a little extra every month.

  • ShawnaseeShawnasee Registered User regular
    edited May 2011
    This is what my wife had to say about this:

    "Personally, $1000 emergency fund all other monies go to paying off debt - car included.

    But anyhow, pay it off! You can reduce insurance if you're not carrying a note on it. Also, your car is paid off - how awesome is that?

    You can continue paying your car payment to yourself and use it for car repairs or to save up and pay cash for your next vehicle."

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  • WhacktoseWhacktose Registered User regular
    edited May 2011
    Shawnasee wrote: »
    This is what my wife had to say about this:

    "Personally, $1000 emergency fund all other monies go to paying off debt - car included.

    But anyhow, pay it off! You can reduce insurance if you're not carrying a note on it. Also, your car is paid off - how awesome is that?

    You can continue paying your car payment to yourself and use it for car repairs or to save up and pay cash for your next vehicle."

    As others have said, your emergency fund should generally be between 4-6 months average expenses. Unless you live alone as a hermit on property that you own, $1000 will not be enough for a true emergency. Seriously. This is how people get themselves into trouble. Calculate what you spend on a monthly basis and try to build up at least 3x that in cash or cash equivalents.

  • TejsTejs Registered User regular
    edited May 2011
    Also, paying off the car doesn't reduce the insurance unless you plan on dropping the coverage to liability only.

  • ShawnaseeShawnasee Registered User regular
    edited May 2011
    $1000 is what you start off with when you are busting your debts down. Not knowing what his "hefty chunk in savings" is specifically, this is a good jumping off point.

    You start building your 4-6 month salary/emergency fund once your debts are gone. People get themselves in trouble by buying things with money they don't have so I fail to see how having a $1000 emergency fund while your paying your debt off gets anyone in trouble.

    And as far as upping the amount you pay each month: why?

    Why not pay yourself (ssavings) that money? Or, put that extra money towards your mortgage?

    @ the OP: the quantities I wanted you to expand on are vague. Hefty chunk means different things to different people in different financial situations. The difference between $5k and $10k is a pretty significant sum and knowing exactly what they are only gets you better advice but fair enough.

    Also, gap insurance doesn't mean anything once the car is paid off so that should not be a concern.

    edit: most loan agents require you to have full coverage on a car you are still paying on which is what she was referring. We went to liability when we paid our car off.

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  • FiggyFiggy Registered User regular
    edited May 2011
    Shawnasee wrote: »
    $1000 is what you start off with when you are busting your debts down. Not knowing what his "hefty chunk in savings" is specifically, this is a good jumping off point.

    You start building your 4-6 month salary/emergency fund once your debts are gone. People get themselves in trouble by buying things with money they don't have so I fail to see how having a $1000 emergency fund while your paying your debt off gets anyone in trouble.

    I don't follow. Being in debt doesn't mean you're any better off should you lose your job. What gets people in trouble is not having an emergency fund large enough in case of an emergency. $1000? That's less than a single paycheck, no? How is that going to really cover you in the event of a job loss/injury/etc.?

    I mean, if you're comfortable with that, fine, but to tell someone they only need $1000 put aside because they have a car loan to worry about doesn't really compute.

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  • WhacktoseWhacktose Registered User regular
    edited May 2011
    Shawnasee wrote: »
    You start building your 4-6 month salary/emergency fund once your debts are gone. People get themselves in trouble by buying things with money they don't have so I fail to see how having a $1000 emergency fund while your paying your debt off gets anyone in trouble.

    Debt in and of itself is not a bad thing. A mortgage is debt. Debt that you cannot afford to pay back is an issue. If you have a car loan at (for the sake of argument) 5%, paying $300-ish a month, you will not be materially impacted if something happens to you but you have 6 months worth of expenses in savings. On the flipside, if you have no car loans outstanding but only $1000 in your savings account, you are up shit creek if you lose your income.

    I would agree with you that one should focus on paying down usurious debt (read: credit cards/10-15%+) as quickly as possible, but something like a car loan has collateral, and is designed to be paid over longer periods of time without being a burden. Low-interest debt is to your advantage if you are shrewd, and you should always focus on being prepared for the unexpected when it comes to finances.

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