To pay off car or keep making payments?

[nitsuj3580]

I bought my car almost 3 years ago. I took out a 5 year loan which works out to about $300/month payments.

Interest rate is like 3.x percent. I'm able to pay off the balance of the car now if I so choose and it won't financially cuff me or anything.

I know the rule of thumb is that if I can make more money greater than the interest rate of the car, I should do that but I figure I can invest that $300 I wouldn't be paying on the car anymore.

So should I pay off the remaining balance of the car or keep paying $300/month for the next 2 years to finish out the duration of the loan?

 

[hypn0tik]

If you pay it off now you won't have to pay interest in the remaining balance right?

 

[akubi]

what's the x in 3.x? makes all the difference in the world since many of the safe cds are in the "3.x" range.

probably should pay it off since it won't "financially cuff" you. :laugh:

 

[robphelan]

i'm in favor of paying it off.. that's one less monthly obligation you have to worry about

 

[radioouman]

Just do it!

 

[nitsuj3580]

Originally posted by: hypn0tik
If you pay it off now you won't have to pay interest in the remaining balance right?

I'm assuming this is the case. I'm going to hit up my credit union in a couple hours.

 

[mugs]

Originally posted by: nitsuj3580
but I figure I can invest that $300 I wouldn't be paying on the car anymore.

That's bad logic, put the money where the interest is highest.

 

[VirginiaDonkey]

If you have paid for 3 yrs, then you have paid most of the interest off. You are now paying principle. As others have said, if you pay it off now, then that is one less obligation every month. It will help your credit if you keep paying by the age of the account.

Here is an idea, If you can pay it off now, why don't you put the money in a CD that allows you to draw on it every month. That way you make money while you continue to pay the note.

 

[Kelemvor]

Definitely pay it off. Why shell out 3.x percent interest if yo ucan jsut pay it off? If you had 0% financing then there's no way you should pay it off. But yuou're paying out extra money you don't have to so why keep doing that?

 

[Gibson486]

How can you question this? Just pay it off if you can. You owuld just be hrowing money away if you didn't.

 

[nakedfrog]

If you pay it off now, that's $300 per month you can put into something that won't depreciate.

 

[dxkj]

Originally posted by: Gibson486
How can you question this? Just pay it off if you can. You owuld just be hrowing money away if you didn't.

Unless he has a higher interest rate payment (house) or has a higher returning 2 year CD (5%)

 

[Chadder007]

Would he be helping his credit score if he did keep paying payments on it instead of paying it off?

 

[Vic]

Keep making payments. The 3.x% interest rate is comparable to the current rate of inflation (meaning that it is now essentially "free" money), and your savings could make at least 3% in an ingdirect account, where they would provide a nice cushion should you come across any future financial challenges. If you have any other debts, like high interest credit cards, pay those off first.

Originally posted by: nakedfrog
If you pay it off now, that's $300 per month you can put into something that won't depreciate.

Pardon me, but this is really really bad logic. His low-interest car loan payments are probably almost all principal right now, which means that whether he pays $300 per month for the next 2 years, or pays it all of in full right now, the actual total amount paid will be roughly the same. And as long as he intends to keep the collateral until it's paid off, it doesn't matter whether it depreciates or not. In the meantime, one should not turn down cheap money.

 

[RossMAN]

3.x is a great rate.

 

[tfinch2]

Just keep making payments and invest the money elsewhere. It's not like you're going to save money from the interest, you've already paid that, and the lump sum you pay to pay it off will all go towards the principle.

 

[PeeluckyDuckee]

At this point is mainly principle you'll be paying into. If you can invest it and earn an after tax rate of more than what you're paying into right now I'd go ahead and do that. Or put it into your RSP retirement savings and get an immediate tax break on top of the rate of interest you'll be earning.

Depends if you want to deal with monthly payments. Some people are sick of the obligation after awhile, which they shouldn't have obligated themselves into in the first place.

 

[91TTZ]

Originally posted by: nitsuj3580
I bought my car almost 3 years ago. I took out a 5 year loan which works out to about $300/month payments.

Interest rate is like 3.x percent. I'm able to pay off the balance of the car now if I so choose and it won't financially cuff me or anything.

I know the rule of thumb is that if I can make more money greater than the interest rate of the car, I should do that but I figure I can invest that $300 I wouldn't be paying on the car anymore.

So should I pay off the remaining balance of the car or keep paying $300/month for the next 2 years to finish out the duration of the loan?

I know on the loan I had before, it wouldn't make one bit of interest if I paid it off the next day or paid it off over 4 years. The interest was already calculated from the beginning, and the terms of the loan stated that I had to pay that interest in full, even if I paid off the loan early.

So check your loan agreement.

 

[austin316]

Originally posted by: FrankyJunior
Definitely pay it off. Why shell out 3.x percent interest if yo ucan jsut pay it off? If you had 0% financing then there's no way you should pay it off. But yuou're paying out extra money you don't have to so why keep doing that?

He should not pay it off, since there are a number of investments in which he can make more than the 3% he currently is paying.

 

[racolvin]

Forget interest rates, investments, and all that mess .... I can only tell you how great it feels to have it paid off. To not write that check anymore is a wonderful feeling. To not be in debt anymore is a tremendously liberating experience. Now I realize you may have other debts of course but each one you can get rid of and NOT replace it another debt is a very good thing. My wife and I went through the exercise of paying off everything we could: cars, student loans, credit cards, etc and now the only thing we make a payment on is the mortgage - no other debt at all and it feels incredible. And its amazing how quickly you can build some savings if you're disciplined about taking what you used to shell out in payments and stick them in a money market account.

 

[nakedfrog]

Originally posted by: Vic
Keep making payments. The 3.x% interest rate is comparable to the current rate of inflation (meaning that it is now essentially "free" money), and your savings could make at least 3% in an ingdirect account, where they would provide a nice cushion should you come across any future financial challenges. If you have any other debts, like high interest credit cards, pay those off first.

Originally posted by: nakedfrog
If you pay it off now, that's $300 per month you can put into something that won't depreciate.

Pardon me, but this is really really bad logic. His low-interest car loan payments are probably almost all principal right now, which means that whether he pays $300 per month for the next 2 years, or pays it all of in full right now, the actual total amount paid will be roughly the same. And as long as he intends to keep the collateral until it's paid off, it doesn't matter whether it depreciates or not. In the meantime, one should not turn down cheap money.

:roll:
My logic is no worse than yours. It's tomayto vs. tomahto.

 

[RossMAN]

Originally posted by: 91TTZ

Originally posted by: nitsuj3580
I bought my car almost 3 years ago. I took out a 5 year loan which works out to about $300/month payments.

Interest rate is like 3.x percent. I'm able to pay off the balance of the car now if I so choose and it won't financially cuff me or anything.

I know the rule of thumb is that if I can make more money greater than the interest rate of the car, I should do that but I figure I can invest that $300 I wouldn't be paying on the car anymore.

So should I pay off the remaining balance of the car or keep paying $300/month for the next 2 years to finish out the duration of the loan?

I know on the loan I had before, it wouldn't make one bit of interest if I paid it off the next day or paid it off over 4 years. The interest was already calculated from the beginning, and the terms of the loan stated that I had to pay that interest in full, even if I paid off the loan early.

So check your loan agreement.

That would be a rule of 78's type of loan which is rare these days. Chances are the OP has a simple interest loan where the per diem is calculated on a daily basis. So the longer the loan, the more interest you pay.

I do agree with your suggestion though, read the original loan documents.

 

[johnjbruin]

I am in the same situation but my five year is at 1.9%. So my money is sitting in ING.

 

[Vic]

Originally posted by: nakedfrog

Originally posted by: Vic
Keep making payments. The 3.x% interest rate is comparable to the current rate of inflation (meaning that it is now essentially "free" money), and your savings could make at least 3% in an ingdirect account, where they would provide a nice cushion should you come across any future financial challenges. If you have any other debts, like high interest credit cards, pay those off first.

Originally posted by: nakedfrog
If you pay it off now, that's $300 per month you can put into something that won't depreciate.

Pardon me, but this is really really bad logic. His low-interest car loan payments are probably almost all principal right now, which means that whether he pays $300 per month for the next 2 years, or pays it all of in full right now, the actual total amount paid will be roughly the same. And as long as he intends to keep the collateral until it's paid off, it doesn't matter whether it depreciates or not. In the meantime, one should not turn down cheap money.

:roll:
My logic is no worse than yours. It's tomayto vs. tomahto.

No. The point is that the car will continue to depreciate regardless of whether he pays it off or not.
In the meantime, let's suppose he still owes roughly $7k on it with 2 years left (which should be about right, original balance was likely in the $17k range, OP please confirm). Residual interest on that $7k at 3% for remaining 24 month term will be a whopping ~$240 bucks (he's already paid ~$1,100 thus far into the loan). That's what he saves by paying it off now -- $240 whole dollars over 2 years. Wow.

Okay, so let's suppose your argument is cashflow. That's fine, $300 bucks per month is $300 bucks per month. Cashflow is nothing to sneeze at. But the depreciation of the collateral is irrelevent to cashflow. It will continue to depreciate so long as he owns it, loan balance on it or not. My final point is that he saves virtually nothing by paying it off now, and that (while he might free up some cash flow), he sacrifices liquid assets by doing so, for very little gain. For example, let's say he has an emergency and needs that $7k (or a portion of) sometime down the line. If he used that $7k to pay off his car, will he be able to borrow it again at as low a rate as 3%? That answer is almost certainly no. Do you see my point?

 

[Vic]

Originally posted by: johnjbruin
I am in the same situation but my five year is at 1.9%. So my money is sitting in ING.

Which was the right move. Why? Because:
1) The interest rate on your car loan is less than the going rate of inflation -- that makes the loan to be "free money," where you actually make money by borrowing money.
2) The yield at ING direct is higher than the car loan rate -- once again, you are making money by borrowing money.
3) Depreciation and/or negative equity of/in the vehicle is irrelevant because you have the liquid assets to pay off the car loan at anytime you choose.
4) You have reserve liquid assets already set aside that can be used should you encounter most any type of financial emergency, i.e. job loss.

Now, if the loan rate on your car was much higher, say more than 5%, I'd say pay it off as the most important issue here is cost of funds.


edit: Is a rule-of-78s loan even legal anymore??