CD vs car-loan payment

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MotoTrojan
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CD vs car-loan payment

Post by MotoTrojan » Sun Aug 13, 2017 2:36 am

Curious if I am missing anything, or if anyone knows of any great CD rates I should be looking into.

Getting ready to get a windfall, and planning to use it to fill up my 6-month Emergency Fund, purchase more equities at my AA, and possibly put some $ towards my car loan at ~$32K, 1.9%, with 40 months remaining.

Considering putting ~$13.5K towards the car, which would have it paid off in ~2 years. Alternatively I could put that money in an Ally 1.5% Raise Your Rate 2-year CD, and maintain some liquidity, should there be a substantial enough market event to warrant a lump-sum investment, and then continue the car-loan to its original term. By my quick calc, I'd be losing a bit over $400, assuming no change in interest rates.

This screams market timing, by holding a less-risky AA (plan is 100% equities) but it also feels more acceptable, as the money is earmarked for a sound purpose, but placed in a more liquid/revokable location.

Thoughts? Am I wrong to think this would be a no-brainer, assuming I could find a CD that returned >1.9% after-tax?

runner3081
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Re: CD vs car-loan payment

Post by runner3081 » Sun Aug 13, 2017 7:12 am

You already listed it, the Ally No Penalty 11-Month CD w/25K deposit is 1.5%.

Very popular on the forums.

The answer to your questions comes down to the interest rate on the car loan. It it is less than 2%, go for it. Otherwise, it might not make sense to have a car loan with cash to pay it off.

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welderwannabe
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Re: CD vs car-loan payment

Post by welderwannabe » Sun Aug 13, 2017 8:25 am

I would either dump the money into the market now or pay down the loan. One or the other. Keeping the money on the sidelines earning 40 basis points less than the Interest you are paying on your car loan, solely so you can have the money available as dry power, doesn't make sense to me.

MotoTrojan
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Re: CD vs car-loan payment

Post by MotoTrojan » Sun Aug 13, 2017 9:22 am

welderwannabe wrote:
Sun Aug 13, 2017 8:25 am
I would either dump the money into the market now or pay down the loan. One or the other. Keeping the money on the sidelines earning 40 basis points less than the Interest you are paying on your car loan, solely so you can have the money available as dry power, doesn't make sense to me.
Closer to 100bp after taxes too.

mega317
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Re: CD vs car-loan payment

Post by mega317 » Sun Aug 13, 2017 11:55 pm

I think this might be a "money is fungible" situation (I've never posted that before!). Why not put some specific amount more or less than 13.5k into this plan? Once the windfall is yours it's just like your other money.

In general I think it can sometimes make sense to pay for liquidity--I have written about doing that with a cheap car loan when I was anticipating a home purchase during the term of the loan--but not to time the market.

And if nothing else, the downfall of this idea is "assuming I could find a CD that returned >1.9% after-tax?"

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White Coat Investor
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Re: CD vs car-loan payment

Post by White Coat Investor » Mon Aug 14, 2017 12:03 am

MotoTrojan wrote:
Sun Aug 13, 2017 2:36 am
Curious if I am missing anything, or if anyone knows of any great CD rates I should be looking into.

Getting ready to get a windfall, and planning to use it to fill up my 6-month Emergency Fund, purchase more equities at my AA, and possibly put some $ towards my car loan at ~$32K, 1.9%, with 40 months remaining.

Considering putting ~$13.5K towards the car, which would have it paid off in ~2 years. Alternatively I could put that money in an Ally 1.5% Raise Your Rate 2-year CD, and maintain some liquidity, should there be a substantial enough market event to warrant a lump-sum investment, and then continue the car-loan to its original term. By my quick calc, I'd be losing a bit over $400, assuming no change in interest rates.

This screams market timing, by holding a less-risky AA (plan is 100% equities) but it also feels more acceptable, as the money is earmarked for a sound purpose, but placed in a more liquid/revokable location.

Thoughts? Am I wrong to think this would be a no-brainer, assuming I could find a CD that returned >1.9% after-tax?
Why would you have an emergency fund when you already had the emergency?

https://www.mrmoneymustache.com/2012/04 ... emergency/

What is your emergency fund for if not to use to do things like buy a needed car when you don't have money saved up to do so elsewhere?
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

MotoTrojan
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Re: CD vs car-loan payment

Post by MotoTrojan » Mon Aug 14, 2017 9:28 am

White Coat Investor wrote:
Mon Aug 14, 2017 12:03 am
MotoTrojan wrote:
Sun Aug 13, 2017 2:36 am
Curious if I am missing anything, or if anyone knows of any great CD rates I should be looking into.

Getting ready to get a windfall, and planning to use it to fill up my 6-month Emergency Fund, purchase more equities at my AA, and possibly put some $ towards my car loan at ~$32K, 1.9%, with 40 months remaining.

Considering putting ~$13.5K towards the car, which would have it paid off in ~2 years. Alternatively I could put that money in an Ally 1.5% Raise Your Rate 2-year CD, and maintain some liquidity, should there be a substantial enough market event to warrant a lump-sum investment, and then continue the car-loan to its original term. By my quick calc, I'd be losing a bit over $400, assuming no change in interest rates.

This screams market timing, by holding a less-risky AA (plan is 100% equities) but it also feels more acceptable, as the money is earmarked for a sound purpose, but placed in a more liquid/revokable location.

Thoughts? Am I wrong to think this would be a no-brainer, assuming I could find a CD that returned >1.9% after-tax?
Why would you have an emergency fund when you already had the emergency?

https://www.mrmoneymustache.com/2012/04 ... emergency/

What is your emergency fund for if not to use to do things like buy a needed car when you don't have money saved up to do so elsewhere?
Because I can go 6-months without a job while paying this payment, but couldn't if I spent my EF.

aristotelian
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Re: CD vs car-loan payment

Post by aristotelian » Mon Aug 14, 2017 9:49 am

Going for guaranteed lower return in CD makes no sense. Either invest in the market and go for higher return or pay off the loan directly. I would pay off the loan.

MotoTrojan
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Re: CD vs car-loan payment

Post by MotoTrojan » Mon Aug 14, 2017 12:11 pm

aristotelian wrote:
Mon Aug 14, 2017 9:49 am
Going for guaranteed lower return in CD makes no sense. Either invest in the market and go for higher return or pay off the loan directly. I would pay off the loan.
Thanks. Lower return seemed like a risk adjusted way to gain liquidity for any good buying opportunities. I'll probably just dump that amount into loan (nearly halving it) and rest into market.

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White Coat Investor
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Re: CD vs car-loan payment

Post by White Coat Investor » Wed Aug 16, 2017 12:53 am

MotoTrojan wrote:
Mon Aug 14, 2017 9:28 am
Because I can go 6-months without a job while paying this payment, but couldn't if I spent my EF.
That's not a mindset that is going to lead to building wealth. Focus on "how much" instead of "how much per month" and you'll do better.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

MotoTrojan
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Re: CD vs car-loan payment

Post by MotoTrojan » Wed Aug 16, 2017 1:16 pm

White Coat Investor wrote:
Wed Aug 16, 2017 12:53 am
MotoTrojan wrote:
Mon Aug 14, 2017 9:28 am
Because I can go 6-months without a job while paying this payment, but couldn't if I spent my EF.
That's not a mindset that is going to lead to building wealth. Focus on "how much" instead of "how much per month" and you'll do better.
Not sure I follow but appreciate the sentiment anyways. Made a spreadsheet to calculate growth with my expected investment rate, and a variable of how much to lump-sum invest vs. put towards the car. After visualizing that in 1-2 years it doesn't make much difference at all, I am comfortable putting a bit more towards the car (leaving about 12-15 months of payments remaining). I still feel safer with a healthy EF, but after the car is paid off I also plan to cut that back, since my monthly needs will be reduced. In due-time I expect this EF to be but a small portion of my portfolio.

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whodidntante
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Re: CD vs car-loan payment

Post by whodidntante » Wed Aug 16, 2017 4:26 pm

I took a car loan for 5 years at 1.89%. That is an anomalously low interest rate and I'm happy to accept it. I did and still do have the money, but I have no plans to pay it off early. Instead, the money is invested according to my desired asset allocation, and I place the money tax efficiently. I do not have a cash allocation and I don't own CDs, but if I did I would put them in pretax.

If you aren't already maxing all of your tax advantaged accounts, like 401k, Roth IRA, and HSA, use the money for that.

MotoTrojan
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Re: CD vs car-loan payment

Post by MotoTrojan » Wed Aug 16, 2017 4:47 pm

whodidntante wrote:
Wed Aug 16, 2017 4:26 pm
I took a car loan for 5 years at 1.89%. That is an anomalously low interest rate and I'm happy to accept it. I did and still do have the money, but I have no plans to pay it off early. Instead, the money is invested according to my desired asset allocation, and I place the money tax efficiently. I do not have a cash allocation and I don't own CDs, but if I did I would put them in pretax.

If you aren't already maxing all of your tax advantaged accounts, like 401k, Roth IRA, and HSA, use the money for that.

Currently no 401k but part of my thinking of paying off done of the car is to insure I can fully fund 401k/Roth down the road, when I do get one (at a young startup).

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