We put 1/4 down (for the credit card points!) and financed the remainder at 1.6%/60 months (we went for the longest term we could get at the lowest rate, because I figured lower payments would be nice). Over the life of the loan, we'll pay a total of something like $650 in interest, which is pretty amazing.
We kind of decided that we'd sign when buying and think about it later. So the question is, now that it is later, what to do?
Options:
1. Transfer money from Capital One 360 this week to pay it off in full
2. Don't pay it off this week, but throw another 25% of the car price or something at it immediately so it will be paid off quicker
3. Stop fretting about it, pay it off over 5 years as planned, and enjoy having that money available to invest
The only other debt we have is something like $6500 of student loans (at 2.875%).
[One more wrinkle -- the loan is in my husband's name. His credit score is, apparently, 761, which I was surprised by, but he doesn't really use his own credit cards much and hasn't had a loan in his name. When he applied for a car loan from Lightstream before we went in to buy the car, they said he didn't have much credit history. So I'm not sure if holding onto the loan would be good for him. I'd like him to have a higher score than that if/when we ever look into buying an apartment.]
We put 1/4 down (for the credit card points!) and financed the remainder at 1.6%/60 months (we went for the longest term we could get at the lowest rate, because I figured lower payments would be nice). Over the life of the loan, we'll pay a total of something like $650 in interest, which is pretty amazing.
We kind of decided that we'd sign when buying and think about it later. So the question is, now that it is later, what to do?
Options:
1. Transfer money from Capital One 360 this week to pay it off in full
2. Don't pay it off this week, but throw another 25% of the car price or something at it immediately so it will be paid off quicker
3. Stop fretting about it, pay it off over 5 years as planned, and enjoy having that money available to invest
The only other debt we have is something like $6500 of student loans (at 2.875%).
Thoughts?
this is the route we took. we figured we could beat a 2% interest rate (we bought used) with even the most conservative investment options.
One wrinkle to this strategy -- does it make sense to pay it off versus paying off my student loans (which are at a higher APR)? Maybe, because it is a depreciating asset, but I'm struggling with figuring out what makes more sense.
My husband is like "Maybe we should borrow money from my parents to pay it off and then pay them back slowly?" Which, considering that we have the money and are in our mid-30s.
I agree I think he has that idea in his head because when he told them we planned to buy a car, his mom asked whether we need a loan. I'm sure she was trying to be nice but I found insulting, kind of?
Since neither debt is huge and you'd be paying them off from a savings account and not high-interest investments, I would pay both off and then add to investments what the two payments were each month.
People that use the "First Bank of Parents" - especially if they have the money annoy the shit out of me. You are an adult, stop using your parent's money (and I know in this case it was your H that suggested it).
I have one child that thinks it's ok to slowly pay First Bank of Mom back for his school loans* and the other child, that graduated AFTER him, will pay her loans off this year.
*about 1/2 of each kid's school expenses were paid by scholarships, we paid cash for some for each and the rest was loans that we split. We pay 1/2 and the kids pay 1/2.
Other than the school loans, though, our kids never ask us for money.
Post by illgetthere on Mar 1, 2015 11:30:26 GMT -5
$650 is not much to pay in interest over five years, but it is still $650. I wouldn't prioritize it over retirement, the higher interest student loan, etc, but I wouldn't willing pay interest just to be able to spend more each month. If you have a solid foundation, start paying off debt (with your money). You don't want to jump the gun though and have to charge or borrow later at a higher interest.
Because installment loans diversify the types of debt you accrue and pay, they can positively impact your credit score if you pay them on time. Types of credit used—what kind of credit accounts you have and how many of each—account for approximately 15 percent of your Equifax Credit Score.
So while it may seem like paying off a debt—such as an installment loan—early would reflect positively on your credit score, doing so actually has little impact.
In fact, a record of steady payments throughout the life of the loan may be more beneficial to your score than paying it off early. Approximately 35 percent of your credit score is based on your payment history, and a history of on-time payments can help you raise your score over time. If you’re making your monthly payments on your installment loans on time and in full, then each month you’re fortifying a healthy credit score.
An open account paid regularly is more beneficial to your credit score than a closed account, which is what your installment loan becomes once it’s paid off.
If you’re skimping on adding to your emergency fund in order to pay off an installment loan quickly, you may want to reconsider. That debt will be there until you pay it off, but an unexpected expense can creep up at any time. It’s better to be prepared for those curveballs than to be completely free of debt.
DH and I were just talking about this yesterday. We will likely need a new car in 3ish years and he wants to save save save so we can pay cash. I'd rather take a loan with a low interest rate so we can invest more of our money. I think this a great example of the MM learning curve. MM101 says buy a car and finance it because that's all you can/know to do. MM201 says car payments are bad and you should pay cash. MM301 goes back the other way and says financing is okay if it's a minimal interest rate and you can earn more money doing something else with that cash.
All that to say, I agree with you v. No rush on paying off the loan. Congrats on the new ride by the way!
$650 is not much to pay in interest over five years, but it is still $650. I wouldn't prioritize it over retirement, the higher interest student loan, etc, but I wouldn't willing pay interest just to be able to spend more each month.
In theory, if we don't pay off the loan early, the money we keep in hand would be put into the market where it would hopefully earn more than 1.6%. It would not be extra spending money.
But we of course can't know what will happen in the stock market over the next 5 years.
Post by thedutchgirl on Mar 1, 2015 12:05:32 GMT -5
I'd probably want to throw a bit more at principal because it is a depreciating asset (to make sure you are never under water on it), and then I'd make the payments for a while to up your husband's credit score.
If your student loans are down to $6500, I'd probably pay those off today, perhaps illogically, just to say the student loans were done.
We usually take out 5 or 6 year car loans, then pay it off within about 3 years, usually paying monthly payments for most of the time and then a few big payments at the end. The basic theory is we stay ahead of the car's depreciating value and get it paid off before it's worth less than the loan. This usually also works out to pay off the car by the time any warranties run out. So then any big repair costs as the car ages and you don't have any warranty will occur after the car is paid off. What I really hate is a $400/500 monthly payment and then a big repair bill.
If the money you would use to pay off the car and SLs is invested, it makes the most financial sense to leave it invested and pay off both loans according to schedule. If it's just sitting in a bank account, then it's probably best to either invest it or pay off the SLs.
However, when we were in a similar situation a few years ago, we made the payments for a few months, then just said F it and paid off the debt. It was our only debt, and it was just easier and tidier to pay it off.
You've already taken out the loan. Put it on auto-pay and use it to build the credit score. I'd invest the money even over paying off the student loans probably unless you are really close to being done.
$650 is not much to pay in interest over five years, but it is still $650. I wouldn't prioritize it over retirement, the higher interest student loan, etc, but I wouldn't willing pay interest just to be able to spend more each month.
In theory, if we don't pay off the loan early, the money we keep in hand would be put into the market where it would hopefully earn more than 1.6%. It would not be extra spending money.
But we of course can't know what will happen in the stock market over the next 5 years.
I think it is safe to work under the assumption that it will do better than 1.6% over 5 years.
I know my car loan had an early payoff penalty if I paid it off in less than 1 year. I don't think it was much (maybe a couple hundred dollars?) but you may want to check if you have one of those if you are considering paying it off to avoid a few hundred dollars of interest.
I'd probably pay on it a year or 3 because it will help the credit score and bc investing the money will be a better rate of return. 1.6% is very close to free money. Somewhere around year 2 or 3 I'd reevaluate, just bc I'd be annoyed at having the payment and could more easily finish it off at that point.
I'd just round up the payment each month to the nearest hundred. That way, it would be paid off some early and your H could gain a bit more credit history.
The only thing that makes me feel motivated to pay off more is being "underwater" on the car. I bought a commuter car 2 years ago when my other commuter car (long paid off) started crapping out. When I did our year-end review I realized I owed like 16k on the commuter car but the KBB value was like 13k. So if I were in an accident, I'd be 3k "short."
I also subscribe to Suze Orman's philosophy of financing a car for 3 years. But what we do is finance for 5 years just to have the buffer, and then at the end of 3 years we just pay off the rest of the balance from savings. Now, if our savings account were making 5% like in the olden days, there's no way in hell I'd pull money out to pay off a 1.9% loan!!!
So to answer the Q - Keep paying the monthly payments to help build credit up. Check in every year to see where else your money could work for you?
We have a three years remaining on a five year loan at 0.9% on one of our cars, and we have no intention of paying it off early. I don't think I would even start thinking about paying off a loan early until the interest rate hit at least 2%. I would rather keep my money in the market.
If H needs to build up his credit history, I would just make the monthly payments and not look to pay it off early. If you guys find the monthly payments annoying, pay it off then.
I'd just round up the payment each month to the nearest hundred. That way, it would be paid off some early and your H could gain a bit more credit history.
This is what we've always done. It's helped us pay off all our cars 1-2 years early on a 5 year loan.
We financed whatever we couldn't put on our cc when we bought our car. I think it's 1.9%. We are just making the $950/month payment. I see no reason to pay it down early.
the general consensus on the board is not to pay down a mortgage but invest instead, The same logic should apply.
I was in the same position 2 years ago and we chose #3. I think it's the best way to have debt - frees up cash, builds credit, etc. Still glad, still doing it.
We financed whatever we couldn't put on our cc when we bought our car. I think it's 1.9%. We are just making the $950/month payment. I see no reason to pay it down early.
the general consensus on the board is not to pay down a mortgage but invest instead, The same logic should apply.
Holy fuckballs. Does your car give you a handjob every time you drive it?
The comparison to a mortgage is not quite on point since a car is always a depreciating asset while a house is - at least theoretically - an appreciating asset.
HOWEVER, when someone has an interest rate as low as v does, I would apply the same logic and would not pay it off early. In this case, I wouldn't even worry too much about being underwater on the car because a) she didn't buy a terribly expensive car, and b) knowing what we know of their overall financial picture, they could pay off the loan in the future even if they were underwater.
Post by tacosforlife on Mar 1, 2015 15:33:34 GMT -5
Another reason to pay the SL first (assuming you are going to accelerate any debt payoff, which I don't think is necessary): if you woke up tomorrow with no money, you have options with a car loan. You can sell the car and pay it off if you're not underwater, you can let it be repossessed, you can be discharged from it via bankruptcy, you can use it to drive to your shower cam job. You don't really have the same options with student loans.
Not that any of this is going to be a reality for you.