Payoff Car loan 0.9%?

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Payoff Car loan 0.9%?

Postby Andyrunner » Wed May 01, 2013 1:28 pm

I did a search found a simular topic a while ago and want to see if people still think it still is a good idea.

I have a loan with subaru with a balance of $17k @ 0.9% financing for 5 years. Just finished paying off student loans and are thinking of putting the extra money ($500 a month) to the car loan so we will only have our home as our debt. Should we be more agressive and pay this off faster or just invest the money in a mutual fund such as VFIIX? With an SEC yeild of 2% I would think it is a better then just applying extra cash to pay off the loan.
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Re: Payoff Car loan 0.9%?

Postby DaveG » Wed May 01, 2013 1:45 pm

Make sure you're comparing apples to apples. If your investment in VFIIX is in a taxable account, maybe you should compare the after-tax yield of the mutual fund vs. the interest rate on your loan.
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Re: Payoff Car loan 0.9%?

Postby momar » Wed May 01, 2013 1:52 pm

I would not pay it off. In fact, I would invest in stocks instead of paying it off.

I figure I could lose in any particular circumstance, but there are enough decisions like this over the course of a lifetime that I am pretty sure I will win.
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Re: Payoff Car loan 0.9%?

Postby harikaried » Wed May 01, 2013 2:03 pm

We're in a similar situation with a 0.9% Subaru loan with about 3 years and $20k remaining. We originally got the loan because we figured we would invest according to our asset allocation the cash that would have been used to pay for the vehicle, and we're still doing that. We'll keep making the required monthly payments and see in a few years if we end up ahead or behind.

To give some more context of when we got the car loan, we had emergency funds in cash earning ~1% in a savings account. We could have used a majority of that then refilled with monthly paychecks, and if we really needed to pay for an emergency during that time, we would probably have first used credit cards (total limits about the size of the emergency funds I believe) then sell positions in brokerage to pay those off canceling out some carryover capital losses.
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Re: Payoff Car loan 0.9%?

Postby crowd79 » Wed May 01, 2013 2:50 pm

The only "good" debts to have are student loans and a mortgage. All other kinds of debts or loans are consumer loans and are classified by many as "bad." I'd pay off the car loan.
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Re: Payoff Car loan 0.9%?

Postby Andyrunner » Wed May 01, 2013 3:00 pm

Thanks all for the feedback.
We have strong emergency funds so we may just up the amount into our taxable stocks account.
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Re: Payoff Car loan 0.9%?

Postby Default User BR » Wed May 01, 2013 5:25 pm

crowd79 wrote:The only "good" debts to have are student loans and a mortgage. All other kinds of debts or loans are consumer loans and are classified by many as "bad." I'd pay off the car loan.

That makes little sense. What does it matter what the loan was for at that rate? If I could, I'd borrow 100k at .9%. If nothing else, I could get 2.3% in my stable-value fund.


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Re: Payoff Car loan 0.9%?

Postby strafe » Wed May 01, 2013 6:07 pm

There's a psychic benefit from being debt-free. But paying off the car wouldn't make you debt-free; you'd still have mortgage.

Certainly the rate on your mortgage is greater than 1%, so if you pay off any debts, it should be principal reduction payments to the house.

If your mortgage is inexpensive (i.e. less than 4-5%) I would invest the extra savings (either in your retirement account or in a taxable investment account) and make the minimum required payments on both loans.

Congrats on paying off the student loans.

If I could borrow at 0.9%, I'd do so in a heartbeat.
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Re: Payoff Car loan 0.9%?

Postby tylerdurden » Wed May 01, 2013 6:28 pm

I would not pay off the loan. In fact, I had a 2-year 0.9% loan on the car I currently own, and it was the only car loan I did not pay off early. At that low an interest rate, you can use the money more efficiently elsewhere.
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Re: Payoff Car loan 0.9%?

Postby runner9 » Wed May 01, 2013 6:59 pm

As I'm debt adverse, I would probably put extra towards the mortgage first, as I'm guessing it's a higher interest rate, even after tax deduction.
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Re: Payoff Car loan 0.9%?

Postby grabiner » Wed May 01, 2013 9:26 pm

crowd79 wrote:The only "good" debts to have are student loans and a mortgage. All other kinds of debts or loans are consumer loans and are classified by many as "bad." I'd pay off the car loan.


Whether a debt is good or bad to take out in the first place is independent of whether it is good or bad to pay off.

Student loans and mortgages are considered to be "good" debts because they allow you to purchase things of long-term value (a college degree and a house) which are usually too expensive to buy with cash. But once you have taken out a loan, it is irrelevant what the loan was originally used for (except for the tax treatment, and the consequences if you default); the loan is just a commitment to pay a certain number of dollars at a certain time. Making an extra payment of $1000 on a 4% loan with five years left will reduce your payments by $1217 in five years, regardless of whether that loan is a mortgage, student loan, auto loan, or 4%-for-life credit-card balance transfer. Thus you need to decide whether this is the best use of the money.

Given the low rate, I wouldn't recommend that the OP pay off the car loan if he can instead invest the money in an IRA or 401(k), or if his mortgage is at a significantly higher rate.
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Re: Payoff Car loan 0.9%?

Postby Default User BR » Thu May 02, 2013 12:14 am

strafe wrote:There's a psychic benefit from being debt-free.

For some people. Others don't care.


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Re: Payoff Car loan 0.9%?

Postby TomatoTomahto » Thu May 02, 2013 7:34 am

tylerdurden wrote:I would not pay off the loan. In fact, I had a 2-year 0.9% loan on the car I currently own, and it was the only car loan I did not pay off early. At that low an interest rate, you can use the money more efficiently elsewhere.

Absolutely agree. For the past 30+ years, I've bought cars for cash. But, we have a cheap car loan (cheap defined for my purposes as lower than the inflation rate) that I have no intention of paying off early. We got rid of our mortgage in around 8 years, but this car loan will be with us to the end.
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Re: Payoff Car loan 0.9%?

Postby Tom_T » Thu May 02, 2013 8:00 am

Andyrunner wrote:I did a search found a simular topic a while ago and want to see if people still think it still is a good idea.

I have a loan with subaru with a balance of $17k @ 0.9% financing for 5 years. Just finished paying off student loans and are thinking of putting the extra money ($500 a month) to the car loan so we will only have our home as our debt. Should we be more aggressive and pay this off faster or just invest the money in a mutual fund such as VFIIX? With an SEC yeild of 2% I would think it is a better then just applying extra cash to pay off the loan.

Another vote for keeping the car loan. The total interest on a five-year, 17K loan at 0.9% is $391. That's $78/year. In the grand scheme of things, that is almost nothing. If you have more productive uses for the extra $500/month (invest, build up savings, etc.), I'd keep the loan.
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Re: Payoff Car loan 0.9%?

Postby Toons » Thu May 02, 2013 8:08 am

I would pay off the loan :happy
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Re: Payoff Car loan 0.9%?

Postby Sunny Sarkar » Thu May 02, 2013 8:37 am

I had a 1.9% auto loan - which I didn't need to take in the first place - but I made calculations that I'd be better off taking the loan and putting my money into the mortgage instead since the mortgage interest rate was higher. But after one year into the auto loan, I decided to pay it off anyway. There's just this thing about eliminating debt that I like too much - and I'll be the first to admit that I can't explain this rationally.
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Re: Payoff Car loan 0.9%?

Postby jay22 » Thu May 02, 2013 8:48 am

I was in the exact same boat, OP. Although I don't have any mortgage, I payed it off in one year anyway. I don't like debt of any kind. It just seems to be a mental block to me. Being debt free gives a liberating freedom to me which is priceless.
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Re: Payoff Car loan 0.9%?

Postby Andyrunner » Thu May 02, 2013 9:08 am

We only owe about 50% of our house (ages 30 & 28), so we are doing good there. Wife really doesn't want to put it on the house, because of writing off the interest (we are at a 2.5% 15 year loan), which doesn't make financial sense but I wont pick that fight.

Looking at it more, I might just add the extra funds to my current taxable VFICX fund instead of VFIIX. Thoughts on that?
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Re: Payoff Car loan 0.9%?

Postby sesq » Thu May 02, 2013 9:10 am

I think there is a benefit to paying off debt, but unless you have some cashflow concerns I'd send any extra to the mortgage.
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Re: Payoff Car loan 0.9%?

Postby Dulocracy » Thu May 02, 2013 9:41 am

If you consider that the loan interest is lower than inflation, you are actually paying less than the total loan value. Under no circumstances would I pay off the loan. Put the money into a mutual fund. Even an I-Bond (which is inflation protected) will give you a little over 1% interest AFTER inflation. Unless you have a psychological (not psychic) reason that you just do not like debt, there is no reason to pay it off based on what you have stated. Of course, I always felt that psychological/emotional reasons for investing were not the best reasons. I like numbers, and I base my decisions off of what is most probable. (For example, it is quite probable that if you set the money aside in a stock mutual fund for a long term investment, you would do much better than 0.9%. If you are holding it short term, I would look at something less volatile, but you get the idea.)
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Re: Payoff Car loan 0.9%?

Postby diasurfer » Thu May 02, 2013 9:58 am

Pay extra on the mortgage, not the car loan. See grabiner's post.
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Re: Payoff Car loan 0.9%?

Postby archbish99 » Thu May 02, 2013 10:11 am

Andyrunner wrote:Wife really doesn't want to put it on the house, because of writing off the interest (we are at a 2.5% 15 year loan), which doesn't make financial sense but I wont pick that fight.


Not the most eloquent speaker ever, but I've always found thisto be a useful visual example. Particularly love the end.
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Re: Payoff Car loan 0.9%?

Postby momar » Thu May 02, 2013 10:12 am

Dulocracy wrote:If you consider that the loan interest is lower than inflation, you are actually paying less than the total loan value. Under no circumstances would I pay off the loan. Put the money into a mutual fund. Even an I-Bond (which is inflation protected) will give you a little over 1% interest AFTER inflation. Unless you have a psychological (not psychic) reason that you just do not like debt, there is no reason to pay it off based on what you have stated. Of course, I always felt that psychological/emotional reasons for investing were not the best reasons. I like numbers, and I base my decisions off of what is most probable. (For example, it is quite probable that if you set the money aside in a stock mutual fund for a long term investment, you would do much better than 0.9%. If you are holding it short term, I would look at something less volatile, but you get the idea.)

A new i bond will not give you any interest after inflation.
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Re: Payoff Car loan 0.9%?

Postby Default User BR » Thu May 02, 2013 10:31 am

Andyrunner wrote:We only owe about 50% of our house (ages 30 & 28), so we are doing good there. Wife really doesn't want to put it on the house, because of writing off the interest (we are at a 2.5% 15 year loan), which doesn't make financial sense but I wont pick that fight.

Personally, I wouldn't accelerate payment of either loan. I would invest any extra to plan.


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Re: Payoff Car loan 0.9%?

Postby Dulocracy » Thu May 02, 2013 10:40 am

momar wrote:A new i bond will not give you any interest after inflation.


My understanding is that I-Bonds have two rates of interest: The set rate and the rate based on inflation. Is the set rate 0 now? I thought it was at a bit over 1%.

Even if it is 0%, keeping the money in an inflation protected account would likely beat the 0.9%, and a stock or bond fund would be likely to much outperform the 0.9 over a period of time.
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Re: Payoff Car loan 0.9%?

Postby momar » Thu May 02, 2013 10:43 am

Dulocracy wrote:
momar wrote:A new i bond will not give you any interest after inflation.


My understanding is that I-Bonds have two rates of interest: The set rate and the rate based on inflation. Is the set rate 0 now? I thought it was at a bit over 1%.

Even if it is 0%, keeping the money in an inflation protected account would likely beat the 0.9%, and a stock or bond fund would be likely to much outperform the 0.9 over a period of time.

The fixed rate has been at 0 for a long time. The new inflation rate was announced as 1.18%. Whether this is better or not depends on your marginal tax rate when you pay the tax.

I agree with buying a stocks instead of paying down a loan like this.
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Re: Payoff Car loan 0.9%?

Postby Dulocracy » Thu May 02, 2013 10:51 am

momar wrote:
I agree with buying a stocks instead of paying down a loan like this.


:sharebeer
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Re: Payoff Car loan 0.9%?

Postby mmmark » Thu May 02, 2013 4:10 pm

i'm in the same situation. personally, i'm accelerating both my student loan payments and my car loan payments because i want them gone. even if it doesn't make financial sense to pay them off because the interest rates are low, i look forward to the satisfaction of having them gone.

pay the car off and own it.
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Re: Payoff Car loan 0.9%?

Postby Dulocracy » Thu May 02, 2013 4:25 pm

mmmark wrote:personally, i'm accelerating both my student loan payments and my car loan payments because i want them gone.


With all due respect, the OP seems to be asking about what is better. You are paying off your loans because you want them gone, but why should the OP pay off a loan because you want yours gone?

mmmark wrote:even if it doesn't make financial sense to pay them off because the interest rates are low


Recognizing that it does not make financial sense to pay them off, and considering the OP's question as to which is financially better, is that not projecting your emotional condition on the OP? Don't get me wrong: I too will do silly things for the emotional satisfaction of it (and posted about the same in a post titled Satisfying the Emotional Need to Actively Participate here: viewtopic.php?f=10&t=114424). If the OP wanted to make the decision based on emotion, however, my inclination would be that the OP would do so without discussing it with us (since we have no way of knowing the OP's emotion).

As a previous poster said, absent a cashflow problem, invest the money.
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Re: Payoff Car loan 0.9%?

Postby mmmark » Thu May 02, 2013 4:29 pm

it didn't seem to me to be a purely financial question from OP's perspective. but i'll let OP answer that.
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Re: Payoff Car loan 0.9%?

Postby abuss368 » Thu May 02, 2013 8:47 pm

I would invest the difference. Perhaps if it provides peace of mind, you could consider adding an additional small amount to the payments each month to accelerate the payoff somewhat.
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Re: Payoff Car loan 0.9%?

Postby abuss368 » Thu May 02, 2013 8:56 pm

Default User BR wrote:
strafe wrote:There's a psychic benefit from being debt-free.

For some people. Others don't care.


Brian



Warren Buffet was on CNBC and noted how he is anti-debt as well (his partner Charlie Munger employed leverage) and having no debt provided peace of mind and allows one to focus on the asset side of the balance sheet. Excellent advice.
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Re: Payoff Car loan 0.9%?

Postby Random Musings » Thu May 02, 2013 9:29 pm

A 0.9% rate, IMHO, is not material enough to worry about paying off. If anything, you have liquidity. One conservative option may be to put those dollars into I-bonds.

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Re: Payoff Car loan 0.9%?

Postby sls239 » Fri May 03, 2013 5:42 pm

I'd pay it down 50% in the first year, then take 2 more years to pay off the rest.

New car loans at .9% will reduce the value of the same car used - which would be your car if you needed to sell it.

After 3 years, the car is likely to start needing a little more put into it like tires and such so not having a car payment makes these things very easy.
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Re: Payoff Car loan 0.9%?

Postby Dulocracy » Sat May 04, 2013 10:14 am

sls239 wrote:New car loans at .9% will reduce the value of the same car used - which would be your car if you needed to sell it.


Whether or not having car loans at 0.9% will devalue cars (an argument I will not get into at this time) is irrelevant. The 0.9% car loans exist, and OP's paying this off will not do anything to stop them from existing. The OP should, therefore, take advantage of what is available.
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