JaQnAbOx

I have a question in regards to car payments and my savings account:

Lets say, I currently have an online savings account with 10k and im making about 50$ a month in interest.

I also owe 5k left on my car, and im being charged about 26$ a month in interest. I still have about 30 months worth of payments.

Is it better for me to pay off my car in full right now, or is there a benefit in continuing to pay off my car for the rest of the 30 months. Am I better off building credit? Is there an insurance benefit to paying off a car as well?

I am currently 25 and have good-great credit. Looking to buy my first home in about 3-5 years.

Thanks for any advice.

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Daedalus

You have good-great credit already, and if you have other credit lines you use responsibly then you probably don't need this loan to improve your credit rating. I had >800 credit score before ever having any kind of loan. There is no insurance benefit to paying off the car that I'm aware of.

If you only consider 2 options--paying off the car now or over time, you will have more money in your pocket by paying off the car now, ASSUMING savings rates do not increase by a good amount well before the loan is paid off (very unlikely IMO). You make less per month in savings interest than what you pay in loan interest, plus you're taxed on the savings interest whereas loan interest is paid with after-tax income.

That said, an extra $5k in the bank may allow you to act on good opportunities. The extra money you pay each month to loan interest over what you make on the savings is your cost of capital and opportunity. (Or the cost of having an emergency fund if something bad happens.)

If you said you were 100% certain you would not be given any opportunities or misfortunes for the next 30 months then I would say pay off the loan now. But it sounds like your real cost of having an extra $5k in the bank is pretty small...sounds worth it to me. I would keep paying the loan off and, in fact, I'm carrying loans on 2 cars because my real cost of having the cash on hand is maybe 2% over my ING account and I get to invest in things that I expect will pay even more.

Last point is that I'm assuming you won't be tempted to spend the $5k on an unwise purchase or act more loose with your funds because in the back of your mind you know you have that money sitting there. Sounds like you're responsible, but if there's a good chance of this then pay off the car now.

DarkFury

Wow.. you are getting 6% interest from the bank? Dayuuum, that's pretty dayuum good. Is that money tied up into a CD? Or is that regular savings?

As far as the car loan... well, I'd say keep your money in the bank and if you have enough money from your disposable income, then you could step up your payments there to get it paid off within the following year (and still keep that killer interest coming to you from the bank.)

I sure wish I had 6% APR return on my money... I have over 10K in the bank and it doesn't net me anywhere near that much per month (Thank goodness my 401K and Roth plans are doing much better than my local bank...)

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Maarchk

Its a matter of interest rate vs interest rate.

It the rate making you money is better than the rate taking your money, then you are doing it right. If the rate making you money is less than the rate taking your money you should pay off the loan.

For example, i have 100 in the bank, and a 100 loan.
The 10k in the bank has monthly 6% interest, the loan has monthly 5% interest.

You would make 6 dollars on interest, and lose 5 dollars loan interest. thus you net 1 dollar. Thats good. You should pay off your loan slowly in this instance as you are doing better having the money in the bank.

If on the other hand the bank gives you 5% and the loan takes 6%.

You make 5 dollars and lose 6 dollars, so every month you lose 1 dollar. In that case you should take the bank money and pay off the loan. That puts you at a monthly change of 0 dollars which is better than losing 1 dollar.

Coming out of school i had a car loan at 5% and a school loan at 3%. Since the car loan cost me more, i paid it off quickly while i paid the school loan minimums.
I also have a 0% loan from part of my school loans and i pay that at the minimum because it is literally free money and there is no reason to rush to pay that off since any interest i get from the bank is better than 0.

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zippyjuan

From a financial standpoint, the question is what is the interest rate on your car loan? If it is higher than the interest you are getting at your bank, then it would make sense to pay down the car loan- otherwise, continue payments as usual.

It is also a good idea to maintain a banking balance in some sort of fairly liquid account that can cover say six months of living expenses- your emergency fund in case you are unable to work for whatever reason.

Sounds like you are pretty good at handling your money.

Yeah- what he said
Looks like we posted at the same time but he explains it better.

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Daedalus

You can't ignore taxes in a real-world comparison. You're taxed on the $6 interest in the example. If your marginal state/fed tax rate is 33.3%, for instance, you would pay $2 in tax, making your effective return $4.

Kevster

If it were me, I'd pay off that car in a heartbeat. I'd then Reallocate that money being spent on the car payment to an investment account and invest in various ETFs, SPDRs, etc.

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JaQnAbOx

yea i think i may just pay off the car. my friend brought up a good point. the 5k in car payments is also including the interest+principal. If i pay it off now, i may also save about 300$ in interest or so.