Debt Question: Pay Off Auto Loan Or Distribute To Savings?

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bluerafters
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Debt Question: Pay Off Auto Loan Or Distribute To Savings?

Post by bluerafters » Wed Sep 27, 2017 2:28 pm

10 months into a 5 year auto loan, roughly $185 monthly, at roughly 4%. I also have 10k in a savings earning 1.2%. I make my monthly auto and I contribute monthly to my savings. Am I doing this backwards? I should use the savings to pay off the vehicle, in whole, now? I like the cushion, and, quite frankly, it was hard work saving that amount but I’m proud of the fact it’s there. And then I look at the interest disparity of the two... Thoughts?

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Toons
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Re: Debt Question: Pay Off Auto Loan Or Distribute To Savings?

Post by Toons » Wed Sep 27, 2017 2:31 pm

Yes you have done the math correctly.
Apply the 10k to the car.
Keep saving,
Pay it off.
A random thought ,,,,5 year auto loan,,,
Run from it in the future, :wink:
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

mc_cm
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Re: Debt Question: Pay Off Auto Loan Or Distribute To Savings?

Post by mc_cm » Wed Sep 27, 2017 2:41 pm

How many months savings does that $10k represent? If you have separate emergency savings then you can apply a portion of that to the car loan. Dumping money into a depreciating asset (the car) is not necessarily the best move. You could alternatively invest a portion of that $10k into stocks which should yield you more than that 4% rate. However, your next step should be made based on your answer to the first question. Think of this scenario. You throw the $10k at the car and its paid off. You now have $0 in emergency savings. You become victim of a hit and run and have to pay $4k for repairs. Where does that come from?

retire57
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Re: Debt Question: Pay Off Auto Loan Or Distribute To Savings?

Post by retire57 » Wed Sep 27, 2017 2:52 pm

Yep, it's all about the math. Pay the car off.

Also do the math on how much the 5 year loan would cost you. That’s the true price of the car. Yikes!
Last edited by retire57 on Wed Sep 27, 2017 2:55 pm, edited 1 time in total.

GuyFromGeorgia
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Re: Debt Question: Pay Off Auto Loan Or Distribute To Savings?

Post by GuyFromGeorgia » Wed Sep 27, 2017 2:55 pm

If that $10k is your whole emergency fund then I would hang on to it, or at least most of it. Instead of trying to increase your savings each month, maybe contribute the extra toward the car loan. I'd hate to pay off the car and then have to come up with $2000 to fix something.

runner3081
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Re: Debt Question: Pay Off Auto Loan Or Distribute To Savings?

Post by runner3081 » Wed Sep 27, 2017 2:56 pm

GuyFromGeorgia wrote:
Wed Sep 27, 2017 2:55 pm
If that $10k is your whole emergency fund then I would hang on to it, or at least most of it. Instead of trying to increase your savings each month, maybe contribute the extra toward the car loan. I'd hate to pay off the car and then have to come up with $2000 to fix something.
Completely agree with this. Do not drain the entire fund.

betablocker
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Re: Debt Question: Pay Off Auto Loan Or Distribute To Savings?

Post by betablocker » Wed Sep 27, 2017 2:59 pm

I'd keep the loan. The cash is valuable as liquidity. If you don't need the liquidity then invest it. The loan isn't that much. If you could find a cheaper loan elsewhere (HELOC,etc.) then you might want to swap it but at 4% I doubt you'll find it. Paying off debt is great if it is high interest rate debt or a ton of your net worth but a lot less effective when it is low interest rate, small dollar, and you can't get the cash back after you pay it off.

hightower
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Re: Debt Question: Pay Off Auto Loan Or Distribute To Savings?

Post by hightower » Wed Sep 27, 2017 3:00 pm

bluerafters wrote:
Wed Sep 27, 2017 2:28 pm
10 months into a 5 year auto loan, roughly $185 monthly, at roughly 4%. I also have 10k in a savings earning 1.2%. I make my monthly auto and I contribute monthly to my savings. Am I doing this backwards? I should use the savings to pay off the vehicle, in whole, now? I like the cushion, and, quite frankly, it was hard work saving that amount but I’m proud of the fact it’s there. And then I look at the interest disparity of the two... Thoughts?
Don't want to beat a dead horse, but you shouldn't have signed up for a 5 year auto loan in the first place. If it was hard work to save up 10k, you should make sure you do equally hard work to save up cash for a car purchase. Loans are too easy to sign up for and very hard to pay off. If I were you I would pay it all off now.

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flamesabers
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Re: Debt Question: Pay Off Auto Loan Or Distribute To Savings?

Post by flamesabers » Wed Sep 27, 2017 3:02 pm

I think it depends. Is this $10k the only savings you have for a rainy day? How much do you have left to pay on your car loan?

The gap in interest rates is even worse then first glance when you consider the interest you earn from your savings account is taxable while the interest you pay on your car loan isn't tax deductible. In the future I would suggest avoiding car loans unless you can get a 0% loan or a rate very close to zero. Usually if you need to take a loan to buy a car that's a definite sign that you can't afford the car in the first place.

bluerafters
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Re: Debt Question: Pay Off Auto Loan Or Distribute To Savings?

Post by bluerafters » Wed Sep 27, 2017 3:37 pm

Toons wrote:
Wed Sep 27, 2017 2:31 pm
Yes you have done the math correctly.
Apply the 10k to the car.
Keep saving,
Pay it off.
A random thought ,,,,5 year auto loan,,,
Run from it in the future, :wink:
Yeah. I know. At the time I had no choice. :oops:

bluerafters
Posts: 32
Joined: Mon Sep 18, 2017 7:14 pm

Re: Debt Question: Pay Off Auto Loan Or Distribute To Savings?

Post by bluerafters » Wed Sep 27, 2017 3:39 pm

runner3081 wrote:
Wed Sep 27, 2017 2:56 pm
GuyFromGeorgia wrote:
Wed Sep 27, 2017 2:55 pm
If that $10k is your whole emergency fund then I would hang on to it, or at least most of it. Instead of trying to increase your savings each month, maybe contribute the extra toward the car loan. I'd hate to pay off the car and then have to come up with $2000 to fix something.
Completely agree with this. Do not drain the entire fund.
Food for thought and a cautionary note...

retiredjg
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Re: Debt Question: Pay Off Auto Loan Or Distribute To Savings?

Post by retiredjg » Wed Sep 27, 2017 4:01 pm

It sounds like the money in savings is your emergency fund. I would not use it to pay off a car loan.

But if what you currently have is enough of an emergency fund (beginning E fund should be 3 months of expenses at a minimum) then you could stop adding to it and send that extra money to the car loan instead of more to savings at this time.

bluerafters
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Joined: Mon Sep 18, 2017 7:14 pm

Re: Debt Question: Pay Off Auto Loan Or Distribute To Savings?

Post by bluerafters » Wed Sep 27, 2017 4:18 pm

hightower wrote:
Wed Sep 27, 2017 3:00 pm
bluerafters wrote:
Wed Sep 27, 2017 2:28 pm
10 months into a 5 year auto loan, roughly $185 monthly, at roughly 4%. I also have 10k in a savings earning 1.2%. I make my monthly auto and I contribute monthly to my savings. Am I doing this backwards? I should use the savings to pay off the vehicle, in whole, now? I like the cushion, and, quite frankly, it was hard work saving that amount but I’m proud of the fact it’s there. And then I look at the interest disparity of the two... Thoughts?
Don't want to beat a dead horse, but you shouldn't have signed up for a 5 year auto loan in the first place. If it was hard work to save up 10k, you should make sure you do equally hard work to save up cash for a car purchase. Loans are too easy to sign up for and very hard to pay off. If I were you I would pay it all off now.
Point taken.

bluerafters
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Joined: Mon Sep 18, 2017 7:14 pm

Re: Debt Question: Pay Off Auto Loan Or Distribute To Savings?

Post by bluerafters » Wed Sep 27, 2017 4:22 pm

betablocker wrote:
Wed Sep 27, 2017 2:59 pm
I'd keep the loan. The cash is valuable as liquidity. If you don't need the liquidity then invest it. The loan isn't that much. If you could find a cheaper loan elsewhere (HELOC,etc.) then you might want to swap it but at 4% I doubt you'll find it. Paying off debt is great if it is high interest rate debt or a ton of your net worth but a lot less effective when it is low interest rate, small dollar, and you can't get the cash back after you pay it off.
Appreciate all the comments. A good couple things to think and mull on. I do appreciate everyone taking the time to post.

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