Great message boards, learned quite a bit by just reading everything on here, so now it is time to pose a question!

I'm contemplating paying off my car loan, still owe 10K @ 6.6%, it's a 2006 Mazda 3 bought new in May 2006. I have been putting money away for a down payment on a house however I don't feel comfortable buying at this point, maybe another year. I'm 30, single, living in a small town with a very good job, but the small town is really killing my desire to be here long term. So I am pretty confident I have another year of renting to do before I consider buying again.

That being said, there is 15K in my "house" fund that I would use to pay off the car. The monthly 'car payment' would then get put back into my savings. Owning my car outright and not paying interest at this point is very intriguing.

If I paid off the car I'd still have about 10K of accessible cash in accounts if needed. Work is going well and I am not worried about job security, but in if things did take a bad turn I could sell the car if needed without worrying about being upside-down.

Thoughts?

If you want to pay it off, I would pay half. Then wait a few months and see if you situation is the same. You don't want to find yourself desperate for cash if something happens in 3-6 months. Then your regular payments and increases in savings won't make paying the balance very difficult.

Provided your loan has been open for 36 months, you will not gain anything credit-wise by keeping it open. Pay it off, and place the payment in savings.

You will more than make up the difference in a year's time with the payment and interest, pay the interest to yourself instead of the bank, and have a lower DTI for the mortgage prequalification.

Perhaps the original poster would wish his question moved to the money management forum for more advice?

That would be great if it will get more traffic, thanks!


I've thought about paying half now, half later and I guess I don't see an advantage to that. I do see that it would keep some extra cash in the bank (of course save some interest), but if something drastically did change I would still be expected to be making my car payment which would mean dipping into my savings anyway to do so. Having the car payment in that situation would be a burden.

At least if I own it out right now, it's mine, and no worries of repo or hurting my credit because I can't make payments if something happened. Plus I'd have transportation and the ability to sell it and get cash if it came down to that. Granted I'd take a loss, but I would have cash in hand.

moving to money management.

I think you need to go with your gut, because there is not a terribly strong financial argument preferring one alternative over the other.
You have car loan debt, but you are not getting killed on the interest. You have some nice liquidity now, but you'll still some even after paying off your car.

The financial issue with cars is to recognize that since they are a depreciating asset, you are guaranteed to lose money on that "investment" -- therefore obviously the most financially prudent thing to do is to buy the cheapest car you can tolerate. But you've already bought the car. Besides, I don't follow that advice in practice and most people don't either, because maximizing net worth is not actually anybody's #1 priority.

But here are some issues to think about:

I assume you have no other worse debts to deal with, but you don't explicitly say. If you have higher interest rate debt, pay that off first.

You don't say how you are saving or investing your cash currently. You can likely get a better return investing your money than paying off a 6.6% loan -- but needless to say that's not guaranteed, whereas retiring a loan is tantamount to a guaranteed return on investment.

As long as you continue to have that loan and not pay it off, every dollar you spend on everything is essentially borrowed at 6.6%. That's because you could choose to use that next dollar to reduce a 6.6% loan; so if you spend that dollar on anything else instead, the opportunity cost is 6.6% interest. So you got to ask yourself, if you were debt-free, would you procure a 6.6% loan to buy that candy bar? If the answer is no, then you should be paying off the debt.

kevin, in a non homosexual way, I love you. I swear I learn something or get a new (better) perspective on finances every time I read your posts.

Kevin20 makes very good points.

Keep in mind that any money paid in interest each month can be subtracted from what you gained in savings interest, in an overall general sense.

Because you would still have a good chunk of change still in savings, I would pay the car off. One, I'm not an advocate of paying interest at all if it's not necessary, and two, I'm a little biased in that I detest car payments to begin with.

The interest is not really where retiring the loan makes sense. However, what is often missed in this type of discussion is the reduction in insurance rates that might follow. The lender has the standard that they expect to be carried, and even if one retains full coverage, the fact that there is no lienholder gives the ability to play with deductibles.

As an example, I am a big fan of making sure comprehensive stays in place, but I have little use for the lower deductible on collision that the lender would require. Thus, with no lienholder, I can take the deductible on collision back up to $2500 or so. Depending on jurisdiction and vehicle type, the change in deductible (or even eliminating a coverage type altogether) can add up over what would have been the remaining life of the note...

Another thought would be if you could pull a good 0% offer with no fee (yes, they still exist). Pay what you could across the first eleven months and then make a decision in the 12th month to pull from the 'house' fund or let it revert to the go-to rate (some of which are STILL less than the 6.6% you are paying on the existing note).

There you have it, OP.

Kevin gave you the classic and time tested method. Centex gave you the Creditboard/Fatwallet perspective - which is out of the box thinking. I mean, where else than these 2 boards will you get advice that might save you approx $1000 per year right off the bat.

Thanks for all the feedback, at this point I think Kevin is spot on when saying go with your "gut", which is really telling me to just pay off the car.

My car loan is the highest interest loan I have, next would be my student loans which should be dropping from 4.25% to 3.25% in the next month or so (consecutive on-time payments). Paying off the car now would save me just over $2000 in interest versus monthly payments for the life of the loan.

I don't have anything real notable on CCs, a few hundred here/there on separate cards for utilization. I do have an IRA which gets $250/month, 5% donation to my 401K each pay check then about $220 goes into an HSA every month. I'm currently getting my HSA back up above my deductible, once it is there I'll reduce that contribution and divert that to my savings.

My main "house" savings account I speak of is in a former "high-yield" online savings account with fnbodirect. It's very sad to see it drop from the 5.5% I started with down to 1.5% today....ugh.

Centex makes a very valid point on the 0% perspective. I'm due to go searching for a 0% for 12 months credit card again, maybe that is the ticket. My scores are just below 800, talking 785 - 797 last time I checked in April, I would think I could still have a chance at finding one in this market?

With those scores, hell yeah :-)

Here and Here.

Thanks for the links!

I also found some AMEX cards, I don't have one of those yet. But is a loan payoff considered a "purchase"? Would a bank take a credit card as payment?

Oh, I don't think I would have a problem with the credit line needed, my top three cards are 20k (BofA), 20K (Chase), 12K (Scheels Sports).

while the bank holding the note might not take a card for payoff, they would certainly apply a paper BT check to the account...

Well, I applied for the CITI card LBCS had linked, was approved, but only for 6K which was a huge disappointment (you couldn't specify on the app how much you were looking for). During the activation process I talked to a rep and inquired about an increase to 10K and was told another HARD pull would be required!! 2 Hard pulls to maybe get to 10K.......unimpressed, almost canceled the card on the spot.

I may just max this card out and pay the remaining balance with cash right now.

Bummer.

EDIT: Logged into my account, and it states 0% for 6 months on balance transfers, not 0% for 12 months the application stated.....
EDIT2: Terms of the balance transfer states they can review your credit before doing a balance transfer, so another pull....

Thinking this card is not worth the hassle.

Payoff as much debt as you can. You save on interest and if times get tough, you don't have all of those payments to make.

Keith

Yeah, but if times get tough, its also nice to have the extra liquidity available, especially when the rate is a rather reasonable 6.6%.

I looked at it in a similar way to Kevin20 (as is often the case).

Depending on the OP's tax bracket, I don't think its unreasonable to expect that the OP would need to earn an 8% taxable return to yield a 6.6% return after taxes. An 8% no risk, tax free return is very very good when the federal funds rate is at or around 0%.

That same amount, parked in 12 month CD would earn maybe 4% at best (more likely around 2.5%). So if the OP intends to keep the funds in an ultra safe investment if he chooses not to pay off the car, then at the end of 1 year, he'd have more cash if he paid off the note. Of course, the interest over a year will work out to be like $450, so its pretty immaterial in the grand scheme of things.

Liquidity to do what? Make the car payment?

emergency fund? makes sense to me.

Or rent, or to buy food, or to gas up the car, or replace the tires, or to pay the credit card bills.

A credit card is great if you're laid off for a month, but sooner or later, bills come due. Not having a car payment is great, but it doesn't mean much when you're eating ramen noodles because your next unemployment check doesn't come for a week.

I was being half-serious, half-facetious. It seems like a wash either way. If you save the money for an emergency fund (which I am a big fan of, btw), then you might have to use it to pay the car payment anyway. If you pay off the car early, you won't have as much burden in an emergency, so you wouldn't *need* as much to begin with in the event of an emergency. Then again, in a really dire scenario, you could just not make the car payment, if absolutely necessary.

I was also being somewhat of a Devil's Advocate, but I will admit my bias against car payments in general. 6.6% is good, but 0% is better.

Because it is something of a wash, I don't think there is a pat answer. You have to know your situation. You can't know the future for certain, but you should be able to have some kind of idea and assess some kind of risk.

As you can see in my original post, I'm in the "pay off the car" camp too. There is no investment he can make with the case that will have a comparable return with really no risk. Especially since he'll still have decent liquidity after its paid off.

But in these uncertain times, there is something to be said for having an extra large cash cushion provided the money is cheap (the interest rate is low).

6.6% isn't quite cheap enough for me. If I was a real estate agent (and as such, had less job security), I might think differently.