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Financial Question: Continue Saving or Pay off Car?

Gunslinger08

Gunslinger08

Lifer
Details of current situation:

Living with parents while saving for a house (which I will have to buy within the next 2 years).
Debt includes:
- $20k left on car loan @ 6.14% - 30 payments left
- $14k left on student loan @ 3% - not worried about paying this off soon
Savings of $15k+ in a high yield savings account.

My options are: continue saving money and paying standard car payment, stop saving and direct all funds to car until it's paid off, or reduce savings rate and increase car payment by some percentage.
 
Originally posted by: pyonir
I'd reduce savings a bit and increase car payment a bit.
Click to expand...

Sound advice, make sure you keep some in savings for an emergency fund (any good financial planner will tell you to do this before investments or paying off debt at an interest rate that low).
 
All depends on how high your yield is on your savings account. If its under what you are paying on your car loan you should pay off the car loan with savings.
 
Originally posted by: jackace
All depends on how high your yield is on your savings account. If its under what you are paying on your car loan you should pay off the car loan with savings.
Click to expand...

Not an option, as I'll be using the money for closing costs and a down payment.
 
So you're paying about 670 a month for the car? I'd say bump that up to like 8 or 900...reduce your savings per month by that amount...so you'll get that car paid off quicker. *shrug*
 
Unless your savings account is pulling down some godly interest rates you should put all available funds into paying off the car loan asap.

edit- make sure you have some savings for down payments, closing costs, and an OH-SHIT fund. After you have some in those 3 areas I would put everything you can afford on the car loan.
 
You still haven't mentioned the rate on your savings account which is critical info. Based on the assumption that it's at least 5% and that once your car is paid off you will keep it for a decent period after that, I would increase your car payments by the amount necessary to have the car paid off shortly before you plan on buying a house. So if you have 30 months left now, use one of the online calculators and see how much you would have to pay to get it done in 24 months or whenever you think you'll start the approval process. This also assumes that once the car is paid off you will take the money you're paying towards that and put it in savings (and/or use it for the house).
 
Originally posted by: joshsquall
Originally posted by: jackace
All depends on how high your yield is on your savings account. If its under what you are paying on your car loan you should pay off the car loan with savings.
Click to expand...

Not an option, as I'll be using the money for closing costs and a down payment.
Click to expand...

If you can't afford to pay off the car loan and then build the savings account back up, how do you ever expect to afford a house payment?

You'd have to be making 8% on the savings account for to make up for the interest you're paying on the car loan.

How much are you saving a month?
 
Originally posted by: sciencewhiz
Originally posted by: joshsquall
Originally posted by: jackace
All depends on how high your yield is on your savings account. If its under what you are paying on your car loan you should pay off the car loan with savings.
Click to expand...

Not an option, as I'll be using the money for closing costs and a down payment.
Click to expand...

If you can't afford to pay off the car loan and then build the savings account back up, how do you ever expect to afford a house payment?

You'd have to be making 8% on the savings account for to make up for the interest you're paying on the car loan.

How much are you saving a month?
Click to expand...

I can afford to pay off the car loan and then build the savings account back up. However, I'd prefer to have a larger amount saved up to avoid PMI, if I decide to buy a house sooner (based on a turn-around in the housing market).

I'm making 5.3% on the savings.

I'm saving roughly 40% of my net income.
 
The answer to your question lies within the lender that you are going with when you take out a loan for your house. If you haven't chosen one yet then just go talk to a few. What you want to find out are the details about your loan given a couple different scenarios. One scenario would be if you continued saving for the two years just like you are now. The other would be if you saved less, but paid off your car more. The lender should be able to tell you if you will save a lot of money in the long run due to increased amount that you have saved for the house.


Remember these two things:

1. What they tell you are estimates so if the numbers don't make much of a difference either way, then do whatever makes life easier for you now.

2. A house is an investment. It is what we call "good debt" because it will most likely increase a lot in value over time. Therefore, there usually is not much of a reason to pay off your house very quickly. Also, all interest accumulated on a house is tax deductible every year. So, a 30 year mortgage is what you should be telling your lender when he asks unless you have a special situation where you want to pay it off faster.
 
LOL@$600+/month car payment.

If you live with your parents, you have no business purchasing a car like that, unless it's a specialized vehicle for business. Sell it.
 
Originally posted by: joshsquall
Originally posted by: jackace
All depends on how high your yield is on your savings account. If its under what you are paying on your car loan you should pay off the car loan with savings.
Click to expand...

Not an option, as I'll be using the money for closing costs and a down payment.
Click to expand...

Well, if I understand correctly the reason you don't want to pay your car loan with savings is because you want money for house downpayment. However, you said you plan to buy house in 2 years, and in 2 years you will repay almost entire car loan anyway, so why waste money on high interest car loan? Repay it faster and start saving more money not burdened by high interest.
 
Originally posted by: fleshconsumed
Originally posted by: joshsquall
Originally posted by: jackace
All depends on how high your yield is on your savings account. If its under what you are paying on your car loan you should pay off the car loan with savings.
Click to expand...

Not an option, as I'll be using the money for closing costs and a down payment.
Click to expand...

Well, if I understand correctly the reason you don't want to pay your car loan with savings is because you want money for house downpayment. However, you said you plan to buy house in 2 years, and in 2 years you will repay almost entire car loan anyway, so why waste money on high interest car loan? Repay it faster and start saving more money not burdened by high interest.
Click to expand...

I said within the next 2 years. The housing market appears to be (somewhat) picking up around here. I don't want to miss out on a good buying opportunity because I dumped my savings to pay off my car.
 
Well, there isn't quite enough info, but I can still throw out ideas.

I'll assume you can save $1000/month or put that into the loan. This goes from your 40% savings rate and an assumed salary just under $50k before tax. I also assume a total 31% income tax bracket (25% federal and 6% state). But of course, that may vary quite a bit.

I assume you are going to buy a house in Virginia, and thus average house prices are a bit over $200k. Lets just say you buy a $200k house. To avoid PMI, you either need $40k in cash or $40k in cash/high interest rate loan.

With $15k saved and $1k per month added, it'll take you 2 years and 1 month until you can buy a house without PMI and without a downpayment loan. This is right within your reach of your stated goals and limits. So, in order to reach those goals/limits you cannot pay off your car loan.

But, what will that cost you? If you put the $1000/month extra into a bank account, you'll have $24,860 extra in that account and a $4249 car loan in 2 years. Net: $20,612 (plus whatever that $15k in savings has become). If you put that $1000/month into the car loan and then put the car loan payments and that $1000 into a bank account when the car is paid off, you'll have $20,977 (plus whatever that $15k in savings has become). Difference: $20,977 - $20,612 = $365. By putting it all into savings, you lose $365 after tax.

So, is meeting your goals worth losing $365? If so, put it all into savings. If you can bend your goals a bit (delay the house, get a downpayment loan, or get a cheaper house), pay off the car and take the $365.
 
Originally posted by: joshsquall
I said within the next 2 years. The housing market appears to be (somewhat) picking up around here. I don't want to miss out on a good buying opportunity because I dumped my savings to pay off my car.
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1) You can still buy a house without savings. You just need a second loan for the downpayment. That second loan is a bit higher interest rate though, so it will cost a bit more than your car loan. The balance comes as to whether or not the savings from paying off the car loan will be greater than the loss that comes from the downpayment loan.

2) Housing prices in VA are going up 6% a year (data compares this summer to last summer). It isn't like they are skyrocketting. Your savings account earns almost that, and any investment accounts should have been doing more than that. I just want to keep that in perspective. Historically, houses go up ~2% to 3% a year. They don't even outpace inflation. Houses are not a very good investment.

3) The car is what is killing you. You can just barely meet your goals. If you had a slightly cheaper car, you'd have been better off. But of course, the car does give you value (fun, possibly chics, etc). I'm not trying to bash that decision. But, many people do what you just did. Get a good job, rush to buy a car, and struggle to get a house. Instead, what you should do is buy a house, and then get the good car. Just reverse the order and you'll be far better off financially in most cases.
 
dullard has a nice run down. Most people will correctly point out that if the interest rate on the loan is higher then you'll lose money by saving it instead. However, liquidity has value and it definately does in OPs case. I was going to pay off my car loan early by paying extra every month, but after doing the math yesterday I found I'd save like a whole $300 with my old plan of doubling payments over the next two years versus my new plan.

Instead, I think I'm going to just toss the extra $200/mo into a HYS over the next two years so its still available for emergencies, then use that money to wipe out the car loan at the same date it would have been paid off. After accounting for interest earned on the savings, I think I lose out about $100 or something. I'm sorry, but $100 isn't really a lot of money and at this point having those funds available is worth more.
 
Originally posted by: dullard

I assume you are going to buy a house in Virginia, and thus average house prices are a bit over $200k. Lets just say you buy a $200k house. To avoid PMI, you either need $40k in cash or $40k in cash/high interest rate loan.

With $15k saved and $1k per month added, it'll take you 2 years and 1 month until you can buy a house without PMI and without a downpayment loan. This is right within your reach of your stated goals and limits. So, in order to reach those goals/limits you cannot pay off your car loan.
Click to expand...

I came to the conclusion that as long as he can save 20% in 2 years, he'll be able to afford the payments on the house (no matter how big)

For example, for the 200k home, payments would be right about 1000 for a 30 year loan at 6.5%. For a 300k home, payments would be 1500 or so, which is also what he needs to save a month to get to 20% down.

However, at that point, he would have no savings (used it all on down payment), $700 a month car payment, and now all the extra liabilities of owning a house and no extra income to pay for those liabilities.

I think it would certainly be better to decrease liquidity now by paying of the car loan and delaying the home purchase a few months, to be in a better financial situation to be able to keep the house.
 
Originally posted by: sciencewhiz
I came to the conclusion that as long as he can save 20% in 2 years, he'll be able to afford the payments on the house.
Click to expand...
I agree.
However, at that point, he would have no savings (used it all on down payment), $700 a month car payment, and now all the extra liabilities of owning a house and no extra income to pay for those liabilities.

I think it would certainly be better to decrease liquidity now by paying of the car loan and delaying the home purchase a few months, to be in a better financial situation to be able to keep the house.
Click to expand...
Also, I agree. He is "just" able to meet the goals. But what if something goes wrong in the next 2 years? A little flexibility in those goals would really help. And the easiest flexibility would be to delay the house a couple of months. If he does that, then the car will be paid off in full. Then the conclusion is simple. If you are going to pay off the car in full before buying the house, pay it off ASAP. Heck, put in the $15k savings into the car. Then after 3 months, the car will be paid off. By doing this, he'd have the downpayment in 26 months from now. That would be the best solution of all (I didn't do the math, but the net savings will be over $500), if he can delay the house by 2 months.
 
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