LaCostaRacer

Back in 2006, the 2.9% financing deal was very compelling for my TL loan so I took it. Now in 2009, I'm seeing CD rates as low as 1.09% for a 3 month and just 1.98% for a 12 month CD.

i just completed the mouse-clicks at owner's link to pay off the balance tomorrow! This loan would have been paid off in August so I'm not going to save a bunch of interest.

Anyone else consider doing this? Seems kind of silly having CD's that I pay tax on the interest when I have a 2.9% loan out that I can't write off. I figure this is like getting a 6 month 4.5% CD when you factor in taxes.

T Ho

I don't have a car note, but I'm currently holding cash in my ING Savings account over paying off my Home Equity line. ING pays 1.85% this month, and HELOC is variable, currently sitting at 2.87%. For the <1% difference (since I can and do write off the HELOC interest), I'm feeling a bit more secure building up the cash pile in this climate.

When things start to stabilize, I'll decide whether the cash goes to the HELOC or investing. Right now, I like the security blanket.

Mongolian

Very wise of you. Here is another perspective: If you earn interest, you pay taxes on that plus the interest expense that you will have on the length of the loan. It's a double whammy.

I've off my car as soon as I hit my reserve. I did not see the point of paying interest AND paying taxes on interest that I earned.

LaCostaRacer

Yes, the way way stocks are looking, I would be a little leary of investing heavily in the stock market with your savings. It's a little ironic, but I can argue that purchasing my TL actually saved me money. I pulled enough money out of my E*Trade account to pay cash for the car; however, 2.9% financing when I could make 5% in a down stock market with CDs looked very compelling so I took the loan and moved my excess funds into a money market fund and laddered some CDs. These CD's have since matured and I'm looking at the 1.9% rates for a 12 month CD which prompted the payoff. I'm still pretty invested in the stock market but have a 45% cash position until a bottom is detected. (I see a dow=4500 as a real possibility now, but have to hedge a little.)

I think the moral to the story is pay off the highest interest rate loan first with discretionary cash since the rates earned are below your loan rate most likely. I had just 6 months remaining so this is a no-brainer in my book.

The HELOC is usually amortized with a 20yr rate so keeping cash may make sense if you're anticipating a job loss or a need for cash in the future. Many HELOCs are clamping down and leaving people stranded in the middle of remodeling projects now because the lines are getting reduced with no notice.

special-ed

That's why I've never understood why people keep long-term money in a CD!?!

You lose on taxes paid on annual interest then on top of that you lose compounding interest on that money you paid for taxes if it were in a deferred account.

In addition, since you're principal is getting eaten up by not only annual taxes on interest but also on inflation, you're left with less principal to gain compound interest. There's a reason why CD's are aka "Certificates of Depreciation."

Unless the money held in a CD is used with the intention of a very short-term immediate goal or used as an emergency fund for liquidity reasons, why would you put it there? Safety? FDIC is already going insolvent with artificial propping from the Fed thus putting tax-payer dollars "to work."