Pay off car loan?

[jmlrn]

I have 31 more months to pay off $11,400 on my car loan. The interest rate on the loan is 3.25%. I have $3500 maturing in a CD soon and money in a high yield savings account at 0.5%. Rather than put that $3500 in the savings account I'm thinking it's to my financial benefit to pay off the loan. I will have ample money in my checking account to cover a few months expenses as well as enough money in the high yield savings to cover a frugal year expenses once this is done. Thoughts? Any reason you can think of why I shouldn't do this?

[haapai]

I think that you can do better.  No matter how much your money is rotting in CDs or "high-yield" checking accounts, there is probably a better thing to do with it than pay off 3.25% debt two and a half years early. 

There have got to be options besides paying off a loan like that, that early and putting it all into a fluctuating stock market. 

Have you checked out the terms of your vehicle loan to determine what will happen interest-wise and payment-wise if you send them a check for twice (or six times) the usual payment?  Do you have the space and housing stability to play the grocery game?  Do you already have an after-tax investment account that you could add to slowly?  Do you have a 401(k) that you could temporarily crank up a bit higher?  How old is your fridge?  How old is your hot water heater?  Is there a more energy-efficient A/C system that would soak up this cash and release it back to you relatively quickly? 

[Deleted]

PLEASE check the fine print on your loan before you do this.  This is ancient history but I bought a Toyota in 1991 and financed it through the dealer.  (Big mistake, I know.)  They wrote it for a longer term than I wanted and also folded in the cost of the burglar alarm system (big mistake #2) that I had planned to pay up front.  No big deal, I thought.  Paid for the burglar alarm system as an addition to the first payment and also paid enough additional that I calculated as necessary to pay the loan off in 3 years.

Three years later I think I'm paid off and find I owe $1,000.  The finance charge, it turns out, is fixed at (# of payments X monthly payment-amount you borrowed) and the only break you get is if you pay it ALL off in a lump sum.  I was livid and at that point there was nothing I could do except vow never to buy another Toyota- and I haven't.  

Bottom line-make sure you get a break on the interest if you make a large partial payment- otherwise, hold onto your money.

[Lizard Queen]

Check out the I bond thread below this one. They're paying~7% right now.

[jmlrn]

Feb 7, 2022 13:43:37 GMT -5 Lizard Queen said:

Check out the I bond thread below this one. They're paying~7% right now.

I don't know the first thing about I-bonds. No one in our family ever had these. How do you even go about getting them?

[mollyanna58]

Feb 7, 2022 13:52:04 GMT -5 jmlrn said:

Feb 7, 2022 13:43:37 GMT -5 Lizard Queen said:

Check out the I bond thread below this one. They're paying~7% right now.

I don't know the first thing about I-bonds. No one in our family ever had these. How do you even go about getting them?

Online, at Treasurydirect.gov.  I just bought one last week; very easy process.

[minnesotapaintlady]

Feb 7, 2022 13:52:04 GMT -5 jmlrn said:

Feb 7, 2022 13:43:37 GMT -5 Lizard Queen said:

Check out the I bond thread below this one. They're paying~7% right now.

I don't know the first thing about I-bonds. No one in our family ever had these. How do you even go about getting them?

You buy them online through Treasury Direct (or you can have your tax refund issued in I bonds...then they're paper).

Be warned...their website is not the most user friendly, but it's the government...

www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_ibuy.htm

[nidena]

Read the whole YM conversation here: ymam.proboards.com/thread/64775/bonds 

[jmlrn]

Feb 7, 2022 14:03:41 GMT -5 mollyanna58 said:

Feb 7, 2022 13:52:04 GMT -5 jmlrn said:

I don't know the first thing about I-bonds. No one in our family ever had these. How do you even go about getting them?

Online, at Treasurydirect.gov.  I just bought one last week; very easy process.

Not sure I want to keep my money tied up for more than a year tho. Would it still be worth it if I cashed in after a year seeing I'd lose 3 months interest? I'm pretty sure I won't be getting any tax refund & will have to pay.

[CCL]

If you pay extra on the car loan, it would be the equivalent of tying it up for more than a year.

What about an IRA? I'd max those first before paying of a car loan, regardless of the interest rate. And as someone already mentioned, 401k. At the risk of sounding like Phil, that's where your future wealth is likely to come from.

[Tiny]

My Wild-Ass Guess is that you'd save about $350 in interest if you paid the loan off today...


If you were to buy a 10K I-bond today - you'd get the 7% interest for 6 months - and then whatever the new rate would be for 6 months (with inflation raging - it doesn't feel like the interest rate will drop dramatically - say to 2% or lower again - but nobody can guarantee what the rate will reset to in May.      I'm math challenged - but I think you will earn more than $350 in interest on 10K  in I-bonds held for 1 year or more at this point (you'd get the 7% for 6 months - and then 6 months of the new May rate) .   

If you pay off the loan you lock in the 3.25% savings and you no longer have 11K in cash to invest.

The current I-bond rate is 7% if you buy one (for say the maximum of 10K) you'll get that rate for 6 months. The interest rate will change in May of 2022 it may go up or down depending on inflation. Your 10K bond will get 6 months of the new may rate while you hold it for a year. I think you will earn more in interest on the IBond than you will spend on holding the car loan for 31 more months...

Alternatively - are you maxing your tax advantaged accounts - like a Roth, IRA or 401K? Could you put more in your HSA (if you are already using an HDHP with an HSA?)  Any of those would be a good spot for cash to be invested. 

If this is EF money and if you have a large EF - and if you would be ok locking it up in a one year (or longer CD) then moving it to Treasury Direct and buying an I-Bond(s) is not a bad idea - atleast for the next year or two. The money is available after 12 months.    If you pay off the car loan - you are "locking up" the money forever.  

Another thing to think about is what future Big Ticket item will you be buying within 31 months or maybe 48 months and how you will pay for that thing(s). You don't want to have to borrow money at perhaps more than 3.25% in the future... basically you don't want to pay off a 3.25% loan in a big lump sum and then turn around and borrow money at a possibly higher interest rate in the near future.


It's all a balancing act. My personal hindsight (having aggressively paid off loans in the past) indicates that you would be better off keeping the 3.25% as long as possible (maybe pay it off in full if there's no penalty or fees involved when it gets down to the last 2 or 3 payments - for the "feel good" ) and get your cash on hand "working hard for you" - either invested or some other way (I-bonds for a year or two OR to avoiding having to borrow money on some thing you want in the near future.) I've got a 4.125% mortgage with a 40K balance I could pay it off tomorrow - but keeping 40K invested/in cash is doing more for me (flexibilty wise) than paying it off right away. You should look at your overall financial picture and then choose what makes the most sense for your long term Big Picture. Being "debt free at all costs" is generally not the best plan - and that at "all cost" is what an aggressive payoff of a low interest debt usually is.

[Deleted]

Feb 7, 2022 15:46:02 GMT -5 Tiny said:

My Wild-Ass Guess is that you'd save about $350 in interest if you paid the loan off today...

Unless the loan is written the way the one on my Toyota was.

I agree with CCL, though. Even if the terms allow for a decrease in interest for partial overpayments, the only advantage the OP gets is that it's paid off faster so the benefit isn't realized immediately. The monthly payment doesn't go down. If the interest rate is 3%, it would be paid off about a year early.

[jmlrn]

Feb 7, 2022 15:46:02 GMT -5 Tiny said:

My Wild-Ass Guess is that you'd save about $350 in interest if you paid the loan off today...


If you were to buy a 10K I-bond today - you'd get the 7% interest for 6 months - and then whatever the new rate would be for 6 months (with inflation raging - it doesn't feel like the interest rate will drop dramatically - say to 2% or lower again - but nobody can guarantee what the rate will reset to in May.      I'm math challenged - but I think you will earn more than $350 in interest on 10K  in I-bonds held for 1 year or more at this point (you'd get the 7% for 6 months - and then 6 months of the new May rate) .   

If you pay off the loan you lock in the 3.25% savings and you no longer have 11K in cash to invest.

The current I-bond rate is 7% if you buy one (for say the maximum of 10K) you'll get that rate for 6 months. The interest rate will change in May of 2022 it may go up or down depending on inflation. Your 10K bond will get 6 months of the new may rate while you hold it for a year. I think you will earn more in interest on the IBond than you will spend on holding the car loan for 31 more months...

Alternatively - are you maxing your tax advantaged accounts - like a Roth, IRA or 401K? Could you put more in your HSA (if you are already using an HDHP with an HSA?)  Any of those would be a good spot for cash to be invested. 

If this is EF money and if you have a large EF - and if you would be ok locking it up in a one year (or longer CD) then moving it to Treasury Direct and buying an I-Bond(s) is not a bad idea - atleast for the next year or two. The money is available after 12 months.    If you pay off the car loan - you are "locking up" the money forever.  

Another thing to think about is what future Big Ticket item will you be buying within 31 months or maybe 48 months and how you will pay for that thing(s). You don't want to have to borrow money at perhaps more than 3.25% in the future... basically you don't want to pay off a 3.25% loan in a big lump sum and then turn around and borrow money at a possibly higher interest rate in the near future.


It's all a balancing act. My personal hindsight (having aggressively paid off loans in the past) indicates that you would be better off keeping the 3.25% as long as possible (maybe pay it off in full if there's no penalty or fees involved when it gets down to the last 2 or 3 payments - for the "feel good" ) and get your cash on hand "working hard for you" - either invested or some other way (I-bonds for a year or two OR to avoiding having to borrow money on some thing you want in the near future.) I've got a 4.125% mortgage with a 40K balance I could pay it off tomorrow - but keeping 40K invested/in cash is doing more for me (flexibilty wise) than paying it off right away. You should look at your overall financial picture and then choose what makes the most sense for your long term Big Picture. Being "debt free at all costs" is generally not the best plan - and that at "all cost" is what an aggressive payoff of a low interest debt usually is.

I did max out my IRA. I don't max out my 403B because I have no guaranteed hours at my job. I may work 12 hrs one week & 36 hrs the next, sometimes none at all. I think an I Bond w
ould probably be a good idea. I have a brokerage account with stocks but that can be so volatile. I never thought of I bonds as an option but I'll definitely consider that instead of paying off the loan.

[haapai]

Feb 7, 2022 15:46:02 GMT -5 Tiny said:

My Wild-Ass Guess is that you'd save about $350 in interest if you paid the loan off today... 

I'm a big fan of actually calculating the dollars and cents behind any financial decision or choice between options.  Sometimes doing so can yield the surprising result that a decision that you are agonizing over will cost surprisingly little. 

So I calculated the payment ($383.89) and the total interest paid if a person just paid the minimum until it disappeared ($500.68). 

I also calculated the total interest that would be paid if someone chose to pay off the loan when the balance dipped below 4607 which is roughly 12 payments.  The thinking was that at this point, someone maintaining a 12-month emergency fund in a high-interest savings account yielding less than 3.25% after tax, would choose to pay off the loan from savings and still maintain a 12-month emergency fund.  The total remaining interest oaid following that strategy is $420.60. 

I did not calculate the interest earned in the high-yield account over these periods.  You'll have to calculate that (tiny) offset yourself and compare it to the proceeds possible if other options are pursued. 

I wouldn't sweat the 3-month penalty for early withdrawal too much.  Calculate it instead. 

[minnesotapaintlady]

Honestly, I hate debt and would probably be throwing funds at it to get it paid off ASAP.  I mean it's 11K.  Whether you pay it down or throw the $3500 into some other investment probably isn't going to be life altering for you financially (unless you pick the next bitcoin to put it in!) 

[Lizard Queen]

Actually, partially paying down without paying off is riskier than putting the money in an ibond until the entire loan can be paid off with it. You're tying up the cash, and saving less than you'd earn from the gov, which could be considered a risk-free return.

[minnesotapaintlady]

Feb 8, 2022 14:13:31 GMT -5 Lizard Queen said:

Actually, partially paying down without paying off is riskier than putting the money in an ibond until the entire loan can be paid off with it. You're tying up the cash, and saving less than you'd earn from the gov, which could be considered a risk-free return.

True, but if you're sitting on more than a year's worth of expenses in a regular savings account I'd argue there's not a whole lot of risk to tossing $3500 at a loan.

[haapai]

I'd like to point out that whether you choose to pay off this loan or not, the problems of too much cash earning nothing and inflation will probably come back immediately.  This is not a bad problem to have.  Many folks never figure out how to fold money or pay off debt.  You appear to have gotten quite good at those and it is time to move onto more interesting subjects. 

Yeah, it's a hell of a mind-flip!

[Lizard Queen]

Feb 8, 2022 14:36:07 GMT -5 minnesotapaintlady said:

Feb 8, 2022 14:13:31 GMT -5 Lizard Queen said:

Actually, partially paying down without paying off is riskier than putting the money in an ibond until the entire loan can be paid off with it. You're tying up the cash, and saving less than you'd earn from the gov, which could be considered a risk-free return.

True, but if you're sitting on more than a year's worth of expenses in a regular savings account I'd argue there's not a whole lot of risk to tossing $3500 at a loan.

I guess if the risk to your cash flow is negligible, then you should try to earn more, rather than less.

[minnesotapaintlady]

To me, paying down debt is as legitimate of a want as anything else.  If she would have posted about wanting to spend $3500 on a vacation nobody would say she'd be better off investing it.  But, not everyone is as bothered with owing as I am.

[Lizard Queen]

Feb 8, 2022 16:27:14 GMT -5 minnesotapaintlady said:

To me, paying down debt is as legitimate of a want as anything else.  If she would have posted about wanting to spend $3500 on a vacation nobody would say she'd be better off investing it.  But, not everyone is as bothered with owing as I am.

Yeah, if she's that bothered by it, she could probably get into her EF and just pay that whole bugger off.
But, going back to my finance classes. Leverage amplifies your returns as well as losses due to risk. This option being discussed is negating most of the risk. It's a no-brainer mathematically.

[Tiny]

This is just a Thought Experiment:

Does looking at the Future Vehicle Expense make a difference in the decision?

The car will eventually need to be replaced. And this is about paying off a car loan. where a new car loan will probably be needed in 8 or 10 years when a new vehicle is purchased.

Would it be better to think of the 11K that's currently in savings (and would go to pay off the loan) as money for a "long term" need - and instead get it invested? Thus providing a down payment on the next vehicle (or perhaps being able to pay cash - no debt needed)?

Of course the future cost of a new vehicle (say 8 to 10 years from now) and the interest rate on car loans is unknown.

And it's assumed that once the car loan is paid if full - the current payment amount will be directed to a "new car fund" - versus being directed to something else.

Maybe I'm overthinking it.... but I was gobsmacked by the price paid by a friend for a 3 year old gently used middle of the road vehicle last year. And that made me think my future vehicle purchases would be a big expense and/or big monthly payment.

[qofcc]

That's your only debt or highest interest debt?

[Rukh O'Rorke]

Another vote for ibonds

[countrygirl2]

I can't stand debt, don't care what the interest is. I would pay it off asap, throw everything at it. That's just hubs and I and it has served us well through the years.

There used to be all kinds of hidden penalties and issues with paying off early. However, I believe the Truth in Lending Laws made lenders clarify and also not do things like that. It is much better.

[geenamercile]

I am another one who can't stand debt, so I would pay it off for peace of mind.  At the same time, my pension is under an older plan and I still pay into SS and will get that as well.  I do the yearly meeting with the advisor so feel pretty comfortable with my retirement plan, and what I do have saved.  Not having debt allows me to adjust each month if I want to save the extra, or use it for something.    

[jmlrn]

I did the $10,000 I-Bond. Thanks for all the input.

[mamasita99]

Mar 1, 2022 20:31:47 GMT -5 jmlrn said:

I did the $10,000 I-Bond. Thanks for all the input.

I learned about those on this forum, and signed up as well.