The wisdom of prepaying notes (car, home, etc.)

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Tiger 385
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The wisdom of prepaying notes (car, home, etc.)

Post by Tiger 385 » Sun Apr 28, 2019 3:19 pm

Hello all,

I'm trying to wrap my head around something and was hoping y'all could help.

I currently have two financed possessions: (1) my home (purchased for $239k, owe about $185k, 7 years in to a 30 year fixed note) and (2) my car (purchased for $51k, owe $44k just starting an 84 month note). The notes are $1450k/month and $650/month and the rates are 3.5% and 5.5%, respectively. I have been paying a steady $1700/month on the home, which obviously includes about $250 of prepayment. I travel a lot for work and am reimbursed for my mileage. I know plenty will knock my long car note, but it was about lowering the monthly price. I can afford it and always intended to prepay it quickly. I also keep vehicles for at least 10 years, have never purchased a new car (or any car) before this one, and needed something safer and more professional than what I was driving. Now that I'm actually fixing to start prepaying the car (have about $1,000 of mileage reimbursements fixing to come in), I've started to think about it more, and I'm now wondering whether I be doing this at all?

I realize that prepaying will decrease the total interest I pay over the life of the note. But housing and transportation are costs I will bear in some form or degree forever. They may go up or down, but they are never free. As I think about it more and more, it strikes me that by prepaying my house and car, I will be simply pre-paying my future unknown fixed costs. And I can get more than 3.5% and 5.5% in the market, so even if I ultimately pay more in interest, I would have made that and then some had I invested the surplus. Am I missing something here? I'm drawn to the idea of having a paid off car, but is that gut desire blinding me to a more financially prudent approach?

For the record, money not used to pre-pay my home or car will not be spent. It will go into my personal brokerage account, so there is no risk of lifestyle bloat here. My original plan was to prepay the car and, when it was paid off, continue depositing the note payment and all mileage reimbursements into a segregated fund to seed my next purchase in 10+ years.

About me:
*Age: 37
*Single with no dependents. Would like to be married in 5 years and children would likely follow
*Annual income: varies but pre-tax is $180k to about $240k per year
*Collective Tax Rate for state, federal, and self-employment is 38%
*401(k): $220k (I have maxed every year since I paid off my student loans a few years ago and my goal is to continue maxing. I became a k1 in late 2017, so I can contribute the lesser of 25% of AGI or $55k each year. I put in $52k last year. My 401k is Boglehead-approved save the fact that I have no bond allocation. I am comfortable with the risk I'm running at this point in my life.
*6 months of cash in hand in a high yield money market
*Individual Brokerage: $84k of securities, most of which are in Boglehead-approved ETFs. The rest are "fun" investments, mostly in high-dividend stocks (XOM, GAIN, CIM, NLY, ATT, etc.) and penny stocks.
Insurance: auto and home with $1mm umbrella, long-term disability, health with HSA (which I fully fund each year), vision, dental

Any and all constructive thoughts are welcome.

Cheers

Jags4186
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Re: The wisdom of prepaying notes (car, home, etc.)

Post by Jags4186 » Sun Apr 28, 2019 3:48 pm

Pay the car off as quickly as possible. I will speak from experience:

Paying $650 for a brand new $50k car is palatable. Paying $650/mo for a 6 year old car with 100,000 miles and another year of payments will start to give you the upgrade itch. Especially when you get a $2000 repair bill on top of your payments. You will of course want an equivalent or better car at that point. If you’re driving 2,000 miles/mo you are destroying your car. You will get yourself on to the car hedonic treadmill.

Pay if off quickly feel the pain of how much you spent and enjoy having no payment. You’ll quickly forget about upgrading when you will be going from no payment to a new big payment.

iudiehard1
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Re: The wisdom of prepaying notes (car, home, etc.)

Post by iudiehard1 » Sun Apr 28, 2019 4:13 pm

Logic like this is why banks have really tall buildings downtown. You say you paid off your student loans? Why did you do that? Was the interest rate too high? Why not apply the same logic to those as well.
Proverbs 13:20 - Walk with the wise and become wise, for a companion of fools suffers harm.

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CAsage
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Re: The wisdom of prepaying notes (car, home, etc.)

Post by CAsage » Sun Apr 28, 2019 4:49 pm

The house mortgage is deductible (in most cases), but the usuriously high car loan is not. Pay the car loan off with double payments or any cash on hand in favor of paying down the mortgage! Your money market ain't paying better than 5.5% and you pay taxes on that!
Salvia Clevelandii "Winifred Gilman" my favorite. YMMV; not a professional advisor.

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Tiger 385
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Re: The wisdom of prepaying notes (car, home, etc.)

Post by Tiger 385 » Sun Apr 28, 2019 4:53 pm

iudiehard1 wrote:
Sun Apr 28, 2019 4:13 pm
Logic like this is why banks have really tall buildings downtown. You say you paid off your student loans? Why did you do that? Was the interest rate too high? Why not apply the same logic to those as well.
Some were much higher, 8.5%. And I'm not saying the logic can't be equally applied. I'm trying to get some additional thoughts on whether this is, in fact, logical.

mortfree
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Re: The wisdom of prepaying notes (car, home, etc.)

Post by mortfree » Sun Apr 28, 2019 4:55 pm

I do not believe a 7-year car loan is logical.

Topic Author
Tiger 385
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Re: The wisdom of prepaying notes (car, home, etc.)

Post by Tiger 385 » Sun Apr 28, 2019 4:57 pm

CAsage wrote:
Sun Apr 28, 2019 4:49 pm
The house mortgage is deductible (in most cases), but the usuriously high car loan is not. Pay the car loan off with double payments or any cash on hand in favor of paying down the mortgage! Your money market ain't paying better than 5.5% and you pay taxes on that!
Completely agree and will be directing any pre-payment money to the car over the house for the reasons you suggest. My question remains though: am I missing something in my analysis. I'm becoming more inclined to pre-pay nothing and simply put the excess into my individual brokerage. I've maxed out my deductible investments.

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Tiger 385
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Re: The wisdom of prepaying notes (car, home, etc.)

Post by Tiger 385 » Sun Apr 28, 2019 5:05 pm

mortfree wrote:
Sun Apr 28, 2019 4:55 pm
I do not believe a 7-year car loan is logical.
It may not be logical for you or many. Everyone's situation is different. I wanted a safer, nicer, newer car. And I can afford it. My CPA also tells me I can tax deduct it, which was a nice surprise. The delta on the interest rate was minimal for an 84 month versus a 36/48 month note. That being the case, I selected the lower payment. I can always pay it off faster, if I choose; I like the option. Phrased another way, I'm willing to pay a small premium for the option to pay less.

This is what got me to thinking about the issue I actually inquired about. Do you have any thoughts on that?

Rus In Urbe
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Re: The wisdom of prepaying notes (car, home, etc.)

Post by Rus In Urbe » Sun Apr 28, 2019 5:13 pm

OP writes:
I wanted a safer, nicer, newer car. And I can afford it. My CPA also tells me I can tax deduct it, which was a nice surprise.
I WANTED.....I CAN AFFORD IT....I CAN TAX DEDUCT IT.

Your choice. But. Whoa. These are the phrases that one uses to justify spending.

Since you asked, here are my thoughts:
Saving, saving, saving.
:moneybag :moneybag :moneybag :moneybag :moneybag
That is the way to wealth.

The choice is in your hands.
I'd like to live as a poor man with lots of money. ~Pablo Picasso

mortfree
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Re: The wisdom of prepaying notes (car, home, etc.)

Post by mortfree » Sun Apr 28, 2019 5:14 pm

Tiger 385 wrote:
Sun Apr 28, 2019 5:05 pm
mortfree wrote:
Sun Apr 28, 2019 4:55 pm
I do not believe a 7-year car loan is logical.
It may not be logical for you or many. Everyone's situation is different. I wanted a safer, nicer, newer car. And I can afford it. My CPA also tells me I can tax deduct it, which was a nice surprise. The delta on the interest rate was minimal for an 84 month versus a 36/48 month note. That being the case, I selected the lower payment. I can always pay it off faster, if I choose; I like the option. Phrased another way, I'm willing to pay a small premium for the option to pay less.

This is what got me to thinking about the issue I actually inquired about. Do you have any thoughts on that?


I agree that transportation will be a recurring cost.
Last edited by mortfree on Mon Apr 29, 2019 6:55 am, edited 2 times in total.

Mike Scott
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Re: The wisdom of prepaying notes (car, home, etc.)

Post by Mike Scott » Sun Apr 28, 2019 5:16 pm

Pay off the car asap.

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grabiner
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Re: The wisdom of prepaying notes (car, home, etc.)

Post by grabiner » Sun Apr 28, 2019 5:21 pm

Tiger 385 wrote:
Sun Apr 28, 2019 3:19 pm
I realize that prepaying will decrease the total interest I pay over the life of the note. But housing and transportation are costs I will bear in some form or degree forever. They may go up or down, but they are never free. As I think about it more and more, it strikes me that by prepaying my house and car, I will be simply pre-paying my future unknown fixed costs. And I can get more than 3.5% and 5.5% in the market, so even if I ultimately pay more in interest, I would have made that and then some had I invested the surplus. Am I missing something here?
See Paying down loans versus investing on the wiki.

If you pay down your loans, you get a risk-free return; you are pre-paying your known fixed costs. So the right comparison is to a low-risk return. Normally, you would have the option of selling a bond fund and paying down your loan, for a guaranteed return if the loan rate is higher than the bond rate, taking no more risk.

However, you don't have any bond funds to sell. Therefore, you are borrowing at 5.5% (3.42% after tax) with a three-year duration (average time for all future long payments) to hold stock. This is not clearly wrong, but you gain less than most investors do for taking stock-market risk.

I would still prefer paying off the car. Since it improves your cash flow, this would give you the opportunity to reduce your emergency fund, and get more money invested.

Conversely, I would not pay off the mortgage. Since you are single in a high-tax state, you are itemizing deductions; the mortgage interest is all deductible if you donate $2200 to charity, or mostly deductible if you donate less. Therefore, paying down that mortgage loan at 3.5% loan gives you 2.25% after tax (35% rate; it doesn't help with the 2.9% self-employment tax), and you can earn more than that on long-term low-risk bonds.
Wiki David Grabiner

delamer
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Re: The wisdom of prepaying notes (car, home, etc.)

Post by delamer » Sun Apr 28, 2019 5:23 pm

One of the regular posters here (whose name I have forgotten) would argue that you should compare the interest on your loan to the return on a no risk/very low risk investment. Because the prepaid loan is a guaranteed return while stock market returns are not.

You may decide that you do not completely agree, but it is a useful perspective to consider.

iudiehard1
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Re: The wisdom of prepaying notes (car, home, etc.)

Post by iudiehard1 » Sun Apr 28, 2019 5:23 pm

I’m not inclined to convince someone to think the way I think, but you asked. If you can indeed AFFORD it, then write a check for it. If you have to ask your Daddy (the bank) to help you with it, then you CANNOT afford it.

I suspect since you asked, you indeed know you should borrow money to buy cars. Houses are the only real exception, not because it is wise to borrow money at all, but houses over a long period of time go up in value. Cars are a terrible investment and lose value quickly. So, you should drive any car you like....but you should pay for that luxury instead of borrowing money and pretending you deserve it or better yet can afford it.

Rich people don’t have car payments. People that can truly afford it don’t have car payment. Broke and poor people ask “how much a month”.

I say that with love, so wake up and lose the car payment and never look back. Your wealth will benefit from it.
Proverbs 13:20 - Walk with the wise and become wise, for a companion of fools suffers harm.

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CAsage
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Re: The wisdom of prepaying notes (car, home, etc.)

Post by CAsage » Sun Apr 28, 2019 5:28 pm

You cannot guarantee what you will get in the market. Might gain or lose.... So the fair comparison would be what a dollar in your wallet can earn you today - guaranteed. Money Market or car loan? The mortgage is pretty darn cheap, and deductible, so I would let that ride. You aren't avoiding a future cost of buying your next car by stretching those payments out.... Though, after you pay it off, putting $650 a month back into your emergency fund or next car fund or other cash pot makes sense. Emergency funds can be fluid, and can also be covered by HELOC, as in there is more than one way to gain a fluid backup plan.
Salvia Clevelandii "Winifred Gilman" my favorite. YMMV; not a professional advisor.

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Tiger 385
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Re: The wisdom of prepaying notes (car, home, etc.)

Post by Tiger 385 » Sun Apr 28, 2019 5:30 pm

Rus In Urbe wrote:
Sun Apr 28, 2019 5:13 pm
OP writes:
I wanted a safer, nicer, newer car. And I can afford it. My CPA also tells me I can tax deduct it, which was a nice surprise.
I WANTED.....I CAN AFFORD IT....I CAN TAX DEDUCT IT.

Your choice. But. Whoa. These are the phrases that one uses to justify spending.

Since you asked, here are my thoughts:
Saving, saving, saving.
:moneybag :moneybag :moneybag :moneybag :moneybag
That is the way to wealth.

The choice is in your hands.
Your comment has a Scrooge McDuck tone about it. You can't take it with you, and that being the case, it seems terrible to deny yourself something you want, need, and can (actually) afford just to avail yourself of even more savings (that you apparently believe should never be spent). I'm saving a great deal and on-target with my retirement goals. I'm just trying to figure out if there may be something I'm missing here regarding prepayments.

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Tiger 385
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Re: The wisdom of prepaying notes (car, home, etc.)

Post by Tiger 385 » Sun Apr 28, 2019 5:35 pm

grabiner wrote:
Sun Apr 28, 2019 5:21 pm
Tiger 385 wrote:
Sun Apr 28, 2019 3:19 pm
I realize that prepaying will decrease the total interest I pay over the life of the note. But housing and transportation are costs I will bear in some form or degree forever. They may go up or down, but they are never free. As I think about it more and more, it strikes me that by prepaying my house and car, I will be simply pre-paying my future unknown fixed costs. And I can get more than 3.5% and 5.5% in the market, so even if I ultimately pay more in interest, I would have made that and then some had I invested the surplus. Am I missing something here?
See Paying down loans versus investing on the wiki.

If you pay down your loans, you get a risk-free return; you are pre-paying your known fixed costs. So the right comparison is to a low-risk return. Normally, you would have the option of selling a bond fund and paying down your loan, for a guaranteed return if the loan rate is higher than the bond rate, taking no more risk.

However, you don't have any bond funds to sell. Therefore, you are borrowing at 5.5% (3.42% after tax) with a three-year duration (average time for all future long payments) to hold stock. This is not clearly wrong, but you gain less than most investors do for taking stock-market risk.

I would still prefer paying off the car. Since it improves your cash flow, this would give you the opportunity to reduce your emergency fund, and get more money invested.

Conversely, I would not pay off the mortgage. Since you are single in a high-tax state, you are itemizing deductions; the mortgage interest is all deductible if you donate $2200 to charity, or mostly deductible if you donate less. Therefore, paying down that mortgage loan at 3.5% loan gives you 2.25% after tax (35% rate; it doesn't help with the 2.9% self-employment tax), and you can earn more than that on long-term low-risk bonds.
Thank you. This is helpful and a perspective I had not considered.

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Tiger 385
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Re: The wisdom of prepaying notes (car, home, etc.)

Post by Tiger 385 » Sun Apr 28, 2019 5:40 pm

CAsage wrote:
Sun Apr 28, 2019 5:28 pm
You cannot guarantee what you will get in the market. Might gain or lose.... So the fair comparison would be what a dollar in your wallet can earn you today - guaranteed. Money Market or car loan? The mortgage is pretty darn cheap, and deductible, so I would let that ride. You aren't avoiding a future cost of buying your next car by stretching those payments out.... Though, after you pay it off, putting $650 a month back into your emergency fund or next car fund or other cash pot makes sense. Emergency funds can be fluid, and can also be covered by HELOC, as in there is more than one way to gain a fluid backup plan.
Thank you. This is also helpful. And your suggestion about a separate car fund was my prior practice. After I paid off my student loans, I knew I would need a car at some point relatively soon (I drove my old, 14 year one to 190,000+ miles), so I started putting about $500/month into a side account--akin to making a payment. If I paid the car of asap, my plan was to restart this process. Cheers.

boomer_techie
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Re: The wisdom of prepaying notes (car, home, etc.)

Post by boomer_techie » Sun Apr 28, 2019 5:45 pm

iudiehard1 wrote:
Sun Apr 28, 2019 5:23 pm
I suspect since you asked, you indeed know you should borrow money to buy cars.
I think you mean:
I suspect since you asked, you indeed know you should not borrow money to buy cars.

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Re: The wisdom of prepaying notes (car, home, etc.)

Post by HEDGEFUNDIE » Sun Apr 28, 2019 5:57 pm

See if you can get a HELOC to pay off the car to save interest.

Regattamom
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Re: The wisdom of prepaying notes (car, home, etc.)

Post by Regattamom » Sun Apr 28, 2019 6:05 pm

Tiger 385 wrote:
Sun Apr 28, 2019 3:19 pm
And I can get more than 3.5% and 5.5% in the market, so even if I ultimately pay more in interest, I would have made that and then some had I invested the surplus. Am I missing something here? I'm drawn to the idea of having a paid off car, but is that gut desire blinding me to a more financially prudent approach?
How do you know you can get more than 5.5% in the market?

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Re: The wisdom of prepaying notes (car, home, etc.)

Post by grabiner » Sun Apr 28, 2019 7:14 pm

Tiger 385 wrote:
Sun Apr 28, 2019 5:35 pm
grabiner wrote:
Sun Apr 28, 2019 5:21 pm
Conversely, I would not pay off the mortgage. Since you are single in a high-tax state, you are itemizing deductions; the mortgage interest is all deductible if you donate $2200 to charity, or mostly deductible if you donate less. Therefore, paying down that mortgage loan at 3.5% loan gives you 2.25% after tax (35% rate; it doesn't help with the 2.9% self-employment tax), and you can earn more than that on long-term low-risk bonds.
Thank you. This is helpful and a perspective I had not considered.
I use the same logic with my own mortgage. I am also single, in a high-tax state (MD), and I pay more than $10,000 in state tax and donate more than $2200 to charity. Therefore, I would itemize deductions even if I paid off my mortgage. And since my mortgage, with ten years left, is 2.625% pre-tax, 1.79% after federal and state tax, it wouldn't be worth paying off completely, as I can earn more than that on a municipal-bond portfolio. (Another reason for me not to pay it off completely is that I would have a large capital gain from stock sales if I did that.)
Wiki David Grabiner

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Re: The wisdom of prepaying notes (car, home, etc.)

Post by jharkin » Sun Apr 28, 2019 7:16 pm

240k income should easily be able to pay cash for a car like that. Especially with a house worth only 1X annual income.

Ztx
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Re: The wisdom of prepaying notes (car, home, etc.)

Post by Ztx » Sun Apr 28, 2019 7:19 pm

Tiger 385 wrote:
Sun Apr 28, 2019 5:05 pm

It may not be logical for you or many. Everyone's situation is different. I wanted a safer, nicer, newer car. And I can afford it. My CPA also tells me I can tax deduct it, which was a nice surprise. The delta on the interest rate was minimal for an 84 month versus a 36/48 month note. That being the case, I selected the lower payment. I can always pay it off faster, if I choose; I like the option. Phrased another way, I'm willing to pay a small premium for the option to pay less.

This is what got me to thinking about the issue I actually inquired about. Do you have any thoughts on that?
I'm curious - was the car purchased for business? If not I would really like to know how to tax deduct my car! It's my understanding that you can't deduct car for personal use.

Triple digit golfer
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Re: The wisdom of prepaying notes (car, home, etc.)

Post by Triple digit golfer » Sun Apr 28, 2019 7:40 pm

5.5% annually for seven years is far from a guarantee in the market. Pay off the car loan and take the guaranteed 5.5% interest income.

If you do just one thing, at least take the $250 per month extra you're putting toward the mortgage and redirect it to the car loan.

crystalbank
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Re: The wisdom of prepaying notes (car, home, etc.)

Post by crystalbank » Sun Apr 28, 2019 8:18 pm

Like may users already suggested, I would payoff the car loan faster than the mortgage. But looks like you have everything else under control so it's upto your personal preference if you want to pay'em off or not.

adam1712
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Re: The wisdom of prepaying notes (car, home, etc.)

Post by adam1712 » Mon Apr 29, 2019 10:32 am

Being 100% stocks in investments and keeping long-term loans is more risk than I would take. But it's up to you as long as you understand the risk.

I'm almost 100% stocks in my investments but I'm aggressive in paying down mortgages and don't have car loans. I do this for a couple reasons.
1) The risk free rate for safe bonds is about 2% which I think stocks are very likely to outperform long-term while the probability of outperforming 4-5% is much less certain over the life of a loan.
2) I choose to pay off debt when my stock investments are doing well but only pay the minimum when my stocks have done poorly. This gives me a re-balancing bonus if it exists and keeps me from buying a lot when the market is high.

Bottom line, the expected return might be a little higher when you use debt as leverage but there's diminishing returns even if things go well. I don't think it's worth the risk.

Cody6136
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Re: The wisdom of prepaying notes (car, home, etc.)

Post by Cody6136 » Mon Apr 29, 2019 10:54 am

Tiger 385 wrote:
Sun Apr 28, 2019 5:30 pm
Rus In Urbe wrote:
Sun Apr 28, 2019 5:13 pm
OP writes:
I wanted a safer, nicer, newer car. And I can afford it. My CPA also tells me I can tax deduct it, which was a nice surprise.
I WANTED.....I CAN AFFORD IT....I CAN TAX DEDUCT IT.

Your choice. But. Whoa. These are the phrases that one uses to justify spending.

Since you asked, here are my thoughts:
Saving, saving, saving.
:moneybag :moneybag :moneybag :moneybag :moneybag
That is the way to wealth.

The choice is in your hands.
Your comment has a Scrooge McDuck tone about it. You can't take it with you, and that being the case, it seems terrible to deny yourself something you want, need, and can (actually) afford just to avail yourself of even more savings (that you apparently believe should never be spent). I'm saving a great deal and on-target with my retirement goals. I'm just trying to figure out if there may be something I'm missing here regarding prepayments.
Okay, no Scrooge here. I'll give you the advice that Goofy would. Make sure that you get your gorgeous car detailed every year or two..it will seem new to you. Get the headlamps buffed, which also makes the car look brand new.

BUY AND HOLD!!!

Drive that thing into the ground! Your future self will thank you!!

Admiral
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Re: The wisdom of prepaying notes (car, home, etc.)

Post by Admiral » Mon Apr 29, 2019 11:01 am

My $.02.

That is a terrible loan at a terrible duration. What you SHOULD do for the next car is save the money (invested or not, up you you) until you can afford the car in cash, or put down a very large amount so you can get the shortest possible loan term with the most easily affordable payment. If the mileage is deductible, then you'll save some money in April.

When car loans were 1 or 2%, even 3%, a loan was acceptable (if not ideal) because you could beat those rates (or at least come out near even) investing relatively conservatively rather than paying cash.

5.5% is ridiculous for a loan that buys a depreciating asset. Why is your rate so high? Do you have poor credit?

Have you looked at leasing, since this is a business use?

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RickBoglehead
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Re: The wisdom of prepaying notes (car, home, etc.)

Post by RickBoglehead » Mon Apr 29, 2019 11:06 am

CAsage wrote:
Sun Apr 28, 2019 4:49 pm
The house mortgage is deductible (in most cases), but the usuriously high car loan is not. Pay the car loan off with double payments or any cash on hand in favor of paying down the mortgage! Your money market ain't paying better than 5.5% and you pay taxes on that!
"usuriously high car loan" made me smile. What's your time perspective?

Bought a home in 1987. Rate at one point was something like 12%.

A 5.5% car loan is not "usuriously high" period. It is high compared to the low rates of the past few years. But for today, that's a NORMAL rate IMO. Subsidized rates do exist, sometimes they cost lost rebates.
Avid user of forums on variety of interests-financial, home brewing, F-150, PHEV, home repair, etc. Enjoy learning & passing on knowledge. It's PRINCIPAL, not PRINCIPLE. I ADVISE you to seek ADVICE.

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Re: The wisdom of prepaying notes (car, home, etc.)

Post by Admiral » Mon Apr 29, 2019 11:12 am

RickBoglehead wrote:
Mon Apr 29, 2019 11:06 am
CAsage wrote:
Sun Apr 28, 2019 4:49 pm
The house mortgage is deductible (in most cases), but the usuriously high car loan is not. Pay the car loan off with double payments or any cash on hand in favor of paying down the mortgage! Your money market ain't paying better than 5.5% and you pay taxes on that!
"usuriously high car loan" made me smile. What's your time perspective?

Bought a home in 1987. Rate at one point was something like 12%.

A 5.5% car loan is not "usuriously high" period. It is high compared to the low rates of the past few years. But for today, that's a NORMAL rate IMO. Subsidized rates do exist, sometimes they cost lost rebates.
In March 2019 the average 48 month loan for a new car was 4.72%.

5.5 may not be "usurious" but for that long of a term...it's really bad.

Rus In Urbe
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Re: The wisdom of prepaying notes (car, home, etc.)

Post by Rus In Urbe » Mon Apr 29, 2019 11:19 am

OP says:
I wanted a safer, nicer, newer car. And I can afford it. My CPA also tells me I can tax deduct it, which was a nice surprise.

Rus in Urbe wrote:
I WANTED.....I CAN AFFORD IT....I CAN TAX DEDUCT IT.
Your choice. But. Whoa. These are the phrases that one uses to justify spending.
Since you asked, here are my thoughts:
Saving, saving, saving.
:moneybag :moneybag :moneybag :moneybag :moneybag
That is the way to wealth.

The choice is in your hands.

OP responded: Your comment has a Scrooge McDuck tone about it. You can't take it with you, and that being the case, it seems terrible to deny yourself something you want, need, and can (actually) afford just to avail yourself of even more savings (that you apparently believe should never be spent). I'm saving a great deal and on-target with my retirement goals. I'm just trying to figure out if there may be something I'm missing here regarding prepayments.

Cody6136 » Mon Apr 29, 2019 10:54 am
Okay, no Scrooge here. I'll give you the advice that Goofy would. Make sure that you get your gorgeous car detailed every year or two..it will seem new to you. Get the headlamps buffed, which also makes the car look brand new.
BUY AND HOLD!!!
Drive that thing into the ground! Your future self will thank you!!
I don't think OP is open to suggestions about frugality. OP says he's "saving a great deal" and "on-target with...retirement goals." As long as OP has determined that, apparently, OP is not interested in the view that spending less (whether advice from Goofy or from Yours-Truly Scrooge) would result in a better outcome. My guess is that OP will tell himself he "can afford" the next new shiny object. OP seems to think that frugality only means "to deny yourself something you want." Frugality is, of course, a far more profound choice than that. And so . . . whatever!

After looking at his age, income, savings and savings rate ---- I'm sticking with my opinion. Quack Quack Quack.
I'd like to live as a poor man with lots of money. ~Pablo Picasso

Thegame14
Posts: 1080
Joined: Mon May 07, 2018 11:53 am

Re: The wisdom of prepaying notes (car, home, etc.)

Post by Thegame14 » Mon Apr 29, 2019 11:30 am

mortfree wrote:
Sun Apr 28, 2019 4:55 pm
I do not believe a 7-year car loan is logical.
neither is a $51K car

MP173
Posts: 1996
Joined: Fri Dec 07, 2007 6:03 pm

Re: The wisdom of prepaying notes (car, home, etc.)

Post by MP173 » Mon Apr 29, 2019 11:51 am

OP states he needs a car safer and more professional for work and is re-imbursed for travel.

I am in the same situation. I didnt purchase a 51k car, but have no problems given your finances in you doing so.

A potential issue is being upside down on the car when you are ready to trade in. What I do is double my car payments each month. I typically finance for 36 months and pay off in 18 months.

You have travel reimbursements coming in regularly...why not throw a large chunk of the month travel stipend into the car payment and reduce that 84 months down to 48 months? By that point you might have repair/maintenance costs and utilize your reimbursements to cover that. Use your personal free cash flow to pay down the car note and then to save for a large down payment on the next vehicle.

How many miles are you driving for work? If you are getting reimbursed you probably cannot deduct your car miles on taxes.

Also, I was in your situation and have twice paid off a mortgage (in addition to car loans). I increased my monthly mortgage payment by $100 per month until I was $1000 per month above the payment. The mortgage melted away. I have a variable income and to me the critical aspect was to reduce fixed costs to cover the slow periods (such as 2008-2009). It was very nice in those years to have no mortgage or car payments.

Sounds like you are doing well on personal savings, perhaps tweek it by dividing your personal cash flow into retirement, loan repayment, and non retirement savings.

Good luck.

Ed

Starfish
Posts: 1175
Joined: Wed Aug 15, 2018 6:33 pm

Re: The wisdom of prepaying notes (car, home, etc.)

Post by Starfish » Mon Apr 29, 2019 11:57 am

Unlike other people I don't care if the loans are for cars, mortgage, studies or daily expenses. Splitting them based on the purpose of the loan si just mental accounting. It is only about the terms of the loan.
A 7 years 5.5% loan it's an expensive loan. Normally I would say pay it off ASAP.
If the interest is tax deductible, for your income looks a lot more palatable. Similar with the mortgage (assuming your mortgage is not tax deductible). In this case you don't really have any reason to pay it off ahead.
But man, a car as expensive as 20% of your house. That's an unusual ratio...

delamer
Posts: 8081
Joined: Tue Feb 08, 2011 6:13 pm

Re: The wisdom of prepaying notes (car, home, etc.)

Post by delamer » Mon Apr 29, 2019 12:43 pm

While interest percents are very important, sometimes the dollar amount affects a decision.

With the car loan, if held for 84 months, the interest will be just over $9,000.

That’s hard to wrap the mind around. You can buy a serviceable car for that much.

JoeJohnson
Posts: 390
Joined: Wed Jun 08, 2011 2:34 pm

Re: The wisdom of prepaying notes (car, home, etc.)

Post by JoeJohnson » Mon Apr 29, 2019 2:04 pm

delamer wrote:
Mon Apr 29, 2019 12:43 pm
While interest percents are very important, sometimes the dollar amount affects a decision.

With the car loan, if held for 84 months, the interest will be just over $9,000.

That’s hard to wrap the mind around. You can buy a serviceable car for that much.
Dollar values aren't a great metric. A house loan at 2% would result in significant interest paid, but relatively few would advocate to pay it off.

OP: if you really want to keep the car loan, refinance to a better rate. 5.5% isn't great. You can save money with refi

Dottie57
Posts: 6338
Joined: Thu May 19, 2016 5:43 pm

Re: The wisdom of prepaying notes (car, home, etc.)

Post by Dottie57 » Mon Apr 29, 2019 2:21 pm

Op

In 13 years you will be 50 and in the age group where it starts to be hard to find a job after job loss. I would try to payoff the home loan by age 50. You will have fewer expenses at 50, so job loss is less problematic.

inbox788
Posts: 6393
Joined: Thu Mar 15, 2012 5:24 pm

Re: The wisdom of prepaying notes (car, home, etc.)

Post by inbox788 » Mon Apr 29, 2019 2:28 pm

Starfish wrote:
Mon Apr 29, 2019 11:57 am
Unlike other people I don't care if the loans are for cars, mortgage, studies or daily expenses. Splitting them based on the purpose of the loan si just mental accounting. It is only about the terms of the loan.
A 7 years 5.5% loan it's an expensive loan. Normally I would say pay it off ASAP.
If the interest is tax deductible, for your income looks a lot more palatable. Similar with the mortgage (assuming your mortgage is not tax deductible). In this case you don't really have any reason to pay it off ahead.
But man, a car as expensive as 20% of your house. That's an unusual ratio...
median home value $226,700
https://www.google.com/search?q=median+home+price+us
average price of a new car $33,666
https://www.google.com/search?q=median+new+car+price
real median household income $59,039
https://www.google.com/search?q=median+ ... +income+us

I don't think 20% or 15% ratio is that unusual. It's a little higher than the median, but that could simply be a sign that home value is low, not that car is high, especially if you take income ratios into account. If you looked at income ratio's OP's may be unusually low.

OP, if you have to think about it, you've found your zone of indifference, so just pay it off, and stop wasting time thinking about it.

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