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Should I pay off my car loan in full?
Peter Principle
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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?
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?
"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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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.
Let 'em eat fucking pineapples!
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.
ps. don't ever be like me
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.
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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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.
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.
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.
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 $500 at the end, just from the interest differences between the loan and the savings account.
Paying off the car loan immediately was the only thing that really saved my credit rating at that point in my life. I had bad credit cards and everything else as well. but the choice between paying them and keeping my car from being repossesed... it was no brainer
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What, you mean not completely pay off your card balance each month? No. _Wrong._ Always pay off your full balance if you can. The only one who benefits from not keeping a 0 balance month to month is the bank, because then you pay them interest.
One thing, and this may be silliness, is the gap insurance that I bought on the car. (Gap insurance is insurance you buy in case your car is totaled while you still owe money on it. If that happens, the insurance pays off the remainder of the balance due.) Is this something that might affect my decision to pay this loan off? Would suck to drop the Texas$ on the car and then have someone rear end me, that's a bit of a gamble.
This is wrong. This is bad advice.
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.
we also talk about other random shit and clown upon each other
Just pay it off. Then you own the title and can sell the car or do whatever you want.
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.
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.
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.
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.
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.
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).
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.
Yes, still under warranty.
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.
In Texas as well, never have had to buy it. They really push it though.
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....
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.
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.
Please expand on these two things...
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).
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.
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.
"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.
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.
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.
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.