Do you like to pay off debts?
 

Got a CD coming up. You know what the current CD rates are, almost none. Car loan is at a "good" 3.9%.

Two thoughts.

1. Pay off car loan, do the math. It's more advantageous to pay off the car loan. Do the math.

2. What's wrong with debts? We all got debts. We can't expect to buy a $35K car with cash. Most of us don't. There is nothing wrong with debts as long as it's manageable. It is normal to have a car payment and house payment. That's being responsible.

I'm in-between these two school of thoughts.

Will I put my family as risk if I pay off the car? I would go from 12 month of security to 6 months of security - if I was to loose my job, for example.

If I don't have a car payment, what would I do with the money? Save it? No. I will need to send my son to pre-school soon. Pre-school is expensive (more than a car payment).

What would you do?

Thanks

I'm actually paying off my car which has a 4.5% rate on it, since the cash is earning me nothing, and the risk of trying to get 5% out of it on the stock market isn't worth it.

You're probably better off paying off debts, but that's just me. :2cents:

Pay off the car.

^
+1. 6-months of security is a great buffer. Good planners usually shoot for 3-months.

Can you put your money to work for more than 3.9%? If not, then it's better to pay off your car loan.

If you keep your car payment, you'd have your car payment PLUS pre-school payments.

6 months of lost income security is pretty good. That, plus whatever unemployment benefits you're eligible for, would probably sustain you for a little while if (God forbid) you lost your job.

You need to look at your loan's amortization table and figure out how much interest you still owe. If you are in the tail end of your loan then you probably don't owe much interest.

But, since you have another big monthly bill coming up you may want to get the loan off your plate so that you feel better.

I don't see a table. The car loan is with Honda Financial, but I can see from history, that the interest amount is less and less each month.

I'm only into the loan for 1 year out of 5, so I'm sort of starting out. But I guess, paying it off sooner would still be better, even if I'm paying more interest now vs 4 years later?

BTW, I looked at the exact amount. I think I'll be about 2K short, so even after this lump sum from CD, I'll still be making monthly for about 4 more months.

:scratch:

Does your loan allow you to pre-pay, i.e. pay off some of the principal early, so that no interest accrues on paid-off principal? If so, you will be paying less interest than stated in the amortization table, and paying the loan off earlier. :2cents:

Oh, and yes, put half of the CD money into the car loan and the rest into an internet bank money market account.

Debt-free since '03 :D

You never know when the worst can happen, it's best to owe as little as possible to the bank IMO.

The less debt you have....the better.

^ yep- pay off the car. I did the same and I had a 2.95% loan a couple years ago. Remember, you will be getting a 2.5% tax free return paying off the loan- that might be closer to a 4 or 5% CD depending on your tax bracket.

I don't do CDs unless they pay at least 3%. I'll put my money in Silver before locking into a 1.x% CD for a year.

Best of luck!

I talked to Honda Financial person, and (I hope they understand what I was saying) she said if I was to make a lump sum, it will go toward "principle." However, my payment schedule don't change. So the ratio of interest vs principle don't change either.

The loan does not re-calculate.

cd's don't pay much after all the fees.

Yes- you don't have a variable rate loan so the payment amount remains constant until the loan is paid off. If you pay off loan, you won't have any payments. Another way you can go is simply round up to nearest $50 or $100 and you will get a 4 or 5% return on the extra money going towards principal.

Yes, the the duration of your loan will decrease as you pay off principal. The way the stock market is performing now, you may be more successful investing in equity but I doubt a CD is the way to go. Keep in mind to that net profit is a fraction of your gross after income tax while your car payments are after tax dollars assuming you are not expensing your car for business.

Paying off debt is pretty much always a good plan. In some cases it might be argued that it's not the BEST plan, but it's pretty much never a BAD plan.

If you don't have anything "better" to do with the cash, payoff the car. But don't "waste" it, put it to work for you.

I just don't like owing money in general. Home mortgage being the exception because of obvious tax benefit.

I got lucky I'm only paying 1.9% on my car loan

Can't think of one person I know who enjoys debt. :)

I used to own a GM car and got 0% for 60 months. I kind of "like that."

No payment is always better than payment. But when you look at the big picture, we still have to pay (for the car) one way or another.

Obviously don't like debt but I chose to invest the money I would have used to pay off my wife's car.

Made out way better than I would have if I paid off the bedt.

I'm in the same dilemma with an unexpected tax return. Got ab out $4k back, wondering if I should invest it or help pay down the loan on the MDX. It's obviously won't pay it off completely but it will help.

That's your answer right there. You're getting a guaranteed after-tax 3.9% return. That's not available anywhere else, as far as I'm aware.

What's "right" with debt? If you think being the American version of financially normal is okay, then greatly underfund your retirement, overbuy your house, get a new car too often, and use credit cards to sponsor a lifestyle you cannot afford. That's being a "normal" American. If that suits you, have at it.

The more you owe, the more you're owned. Debt = chains around your life, no exceptions.

Also, depending on your financial situation and income, a $35k car might not be a smart thing to begin with, regardless if it's financed or paid off.

Remember that if you pay off your car loan, your emergency fund can go further because you will have reduced monthly expenses.

Liking mortgage debt because of tax deductions is like saying you like to pay a dollar to save a quarter. You still owe money, and you still pay interest on it.

Good point.

Time value of money

Obviously if you have the money to pay off the car note and not touch your emergency funds, this a non-issue. BUT I am assuming you are withdrawaling from the emergency fund to pay off the note.


Car loan: $10,000 (say $500 a month)
Emergency fund: $15,000
Monthly expenses (in addition to car loan): $1,000

Scenario 1
Pay off car loan
Emergency fund = $5,000
How long can I pay my expenses: 5 months

Scenario 2
Don't pay off car loan
Emergenct fund = $15,000
How long can I pay my expenses: 10 months


So I can live on my emergency fund twice as long if I don't pay off the car note.

Using your examples. Sure, it's nice to have extra security. But is 10 months too much?

Yes, I know some of you can make more by investing, but that's not me. It would just go back into CD for another year @ 0.0000009% return (just kidding on the rate).

I think only the individual can answer that as everyone's situation is different. I have 5 dependents, wife doesn't work. If I have a heart attack today, and survive, I would need to be on disability for quite a long time and need to have cash around to pay the mortgage.

If you are young and single maybe you don't need a fund at all because you can always move back in with mom/dad.

Sure you can survive longer not paying the car off, but after 10 months in scenario #2 you will have to sell you car because you're dead meat because you still need to make those $500 car payments. In scenario #1, you can legally scale back things like collision/comprehensive on your car insurance (if you are really desperate) and survive a little longer by not having such a high burn-rate.

What about the near term future like in 10 months?
Providing you don't need the emergency fund at the beginning, you are better off paying off the loan because of the savings in interest. You would have 10K+interest in 10 months time if you saved the payment savings and that would last another 10 months based on a $1000/month burn rate and no car payment.

Incorrect. At the beginning of a mortgage, a disproportionate amount of the mortgage is based on principal interest which is tax deducted. Equating saving a quarter with spending a dollar is a fallacy. You don't know what tax bracket I'm in, the fact that I deducted $69000 in federal income tax from my home for 2010 and how much my home has appreciated since I bought it.

I can make a good assertion that your bracket is less than 35% since that is the top bracket and you need to be pulling in 379K to even get there for FED taxes.

So DMikon is actually pretty close. A dollar write-off saves you 35 cents for fed plus another 9 cents if you live in a high tax state like CA- so that is 44 cents tops and just 35 cents if you live in Florida or Nevada. So you will need to spend more to save less on taxes- it's just the amount that is in question.

The other assumption is if you will be able to CONTINUE writing off mortgage interest in the future. There is a growing faction in congress that is looking at this subsidy as something to remove or phase out to help balance the budget. I wouldn't bet against this faction when things become clear that something needs to happen to either reduce consumption or boost revenues. The Obama budget 'freeze' certainly isn't going to do much in this regard.

Having paid off the house loan 8 years ago, I'm not missing my write-off for interest. The Canadians don't have this deduction and they seem to have a healthier housing market than the U.S. too.

1. If you considered the quarter as an assumption of 25% tax rate, that was not the intent. It was just an example that you're spending more to save less. I don't see the fallacy here.

Regardless of your tax bracket, you are still paying interest on your debt. Take interest paid on mortgage, subtract taxes refunded via deduction, and that is how much you've lost in interest. What part of that loss due to interest is good?

2. Your home appreciation is irrelevant. I think your home is capable of appreciating in value without a mortgage.

Guys, in the fantasy world you think we all live in, yes I would pay cash for my house, cars, have a fully funded retirement plan, college funds......

How many people do you know that pay cash for a car let alone a house? (Ken stay out of this) :tomato:

These hypothetical situations give me a headache. This question is ridiculous and it's amazing we're debating the benefits of having no debt (me included). /rant

And for the OP's next thread.....


Do you like Root Canal?

Paying cash for a car is attainable for the majority of people. Say you drive a TL now, and you have a 5 year loan at X%. You will pay it off at some point in the future. When you do, keep making those payments to yourself in a savings account for another 5 years. Then, BAM, you can buy your next TL with cash and even have money left over.

You may think so, but I find it educational. You offered some good insights. Thank you. If this is ridiculous, stay out of it.

And coming from a Senior Moderator - my next thread is asking if members would like a Root Canal?

Do you think I would waste people's time like that?

:popcorn:

Well - I'll tell you what I just did. I had some extra cash that could either be put into the market, or money market, or CD and instead I just paid off my car loan that was at a 4ish% rate. I couldn't be happier that my loan is paid off, but I plan on paying myself the same amount and not just blowing that cash on something else.

In my defense, I don't have kids!! Otherwise I'd be in just as much debt :tomato: