- April 9, 2024
- Posted by: legaleseblogger
- Category: Related News
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## Debating on Paying Off Car Loans vs. Saving Money
Debating on whether or not to start throwing extra on our car loans or just put the money away into savings. We have one loan with a balance of $8,545 at 3.89% interest, payment is $233.92 a month, and has a payoff date of May 2027. Our other loan has a balance of $14,999 with an interest rate of 2.49%, payment is $391.11 a month, and has a payoff date of July 2027. The interest rates are very low, so I’m leaning towards not paying them off and saving the money in a HYSA or even a CD instead. However I can’t seem to shake the nagging feeling of wanting to pay them off early. Probably a hold over from my old Dave Ramsey following days. Any thoughts?
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Compromise. Pay off the lower balance vehicle with the higher interest rate, and continue slow paying the 2.49% loan.
Personally, I relate to the “ick” feeling of having a car loan. I had a 1.9% car loan rate and still ended up paying it off early. That’s said, there’s no way I would drain my savings account $15,000 to do so.
It’s ultimately your call to make. I’d personally make the regular payments and invest the difference. The average historic market return is well above your interest rate.
If you are actually going to save the money then it would technically make more sense to save it; however, it seems to me that a lot of times, people say they will just save that money but ultimately end up spending it because it is there.
I didn’t like the feeling of having car notes and paid them off for that reason.
Have a similar loan. My HYSA is paying a higher rate than my car loan, so it’s a no brainier to just pay regular payments. I also stopped paying extra on my mortgage. When rates go back down, I’ll reconsider.
Just pay it off and start saving for a new one
Double or more the principal on the smaller loan with the higher interest- the benefit is for the life of the loan and who knows what a hysa will yield in months to come. Plus hysa interest is taxable.
Keep in mind that you have to pay income taxes on the interest if you keep the money in a savings account. So if you are earning 4.5% interest it’s more like 3% after income tax.
I would invest in retirement IRAs first, but if you want the money sooner open a brokerage account and invest in ETFs.
You want to avoid a situation where you go underwater. Are the cars still worth the remaining loan balance? Financially, better off just sticking extra into an account.
What do you value more? I personally dislike debt and value monthly cash flow the most. Your values can be the opposite, and that’s a-ok.
For me, having the freedom to save, invest, and spend on my family as I like with an extra $625/mo makes me 10x happier than having 2 rigid monthly car payments.
As long as you have a solid emergency fund, the extra couple bucks from a higher rate HYSA doesn’t give me the same level of satisfaction and happiness as the freedom of free-cash-flow. Also, drive your car for 10-13yrs or till the wheels fall off to make the most of your fully paid off car in the long term.
You make money by having the same balance in a HYSA and it’s $500 for 2024. In other words, you make more interest income than the vehicles loan interest expense.
For 2024 and current balances and interest rates, paying off both loans early is throwing $500 of net interest income in the trash. You’ll be $500 richer at the end of 2024 by not paying off early.
Throwing $500 in the trash is something I try to avoid.
For that reason, I wouldn’t pay off early with today’s interest rates and the interest income you’ll earn.
But if the Fed cuts interest rates and the HYSA interest rates drop to be closer to your higher interest rate, then I’d pay off that note first.
Fund you emergency fund first. Then pay off any car loans above 5%. Then increase paying off car loans to make sure you are not underwater on the loans. Also if your car loans are greater then 48 months in length pay extra.
Last time I had a car loan was 10 years ago. By paying it off, not only did I save on interest, but insurance went from 140 to 40 a month because I put basic coverage on it. Still driving that car today. I was able to put all of the money I saved toward student loans and my house and now I’m completely debt free because of it.
From a financial perspective you’d better off putting the extra money in a savings account, provided that the interest rate exceeds the interest rate on your loan. Pretty simple really.
Depends on what your effective tax rate is. Your HYSA is going to yield 4.5-5%. Even if you used a MMkt mutual fund you be getting no better than 5.1%. Mark those down for your marginal fed + state tax rate and you’ll have your answer.
Simple math… if you’re going to earn more than 3.89% and 2.49% on the money after taxes, save the money. If you’re just going to let the money sit in a checking account and not earn interest, might as well pay them off, but you should be investing the money to earn more than the interest rate. Should not be difficult in the current environment, even if you have to go with a CD.
I’d probably keep the car loan. I wouldn’t trust myself to put an equal amount into savings every month if I were to pay it off.
Pay them off. The peace of mind is worth it. Especially when you start having to pay for repairs.
Also, listen to Dave.
Pay early then drive till wheels fall off
You’re not going to build a balance big enough in 3 years to make enough interest and likely rates begin to decrease this year. Pay off the debt. Make sure you have an emergency fund and pay off the cars.