What Would You Do?: Should I Pay Off My Car Loan?

Should I Pay Off My Car Loan Follow Me on Pinterest

2010 Honda Civic

Welcome to the forth edition of “What Would You Do?”! If you have a question and would like to know what others would do please contact me and I’ll keep it in mind for future editions of “What Would You Do?”. Recently I’ve asked Should I Buy a SmartphoneShould I Buy the NeatDesk or NeatReceipts Scanner and What Would You Do With $1,000,000! Now on to today’s What Would You Do…

Should I Pay Off My Car Loan?

Let’s get the basics out of the way up front. Currently I owe a little over $4,000 on my 2010 Honda Civic car loan and have 9 payments left! My interest rate is 0.9% and I have the cash in the bank specifically to pay it off.

A Quick History Lesson on Why I Took Out a Loan

If you recall, I actually wrote a whole post on why I took out a car loan over at Budgets are Sexy but a quick summary follows. I was offered 0.9% financing for 36 months and at the time I was earning more than that in my ING Direct Savings account. I had saved up enough to buy the car in cash but figured it wouldn’t hurt to keep the money in savings knowing that I wouldn’t touch the money unless it was a severe emergency.

Luckily there were no major emergencies at all, let alone one big enough to drain my emergency fund and my car fund. Instead the automatic loan payments have been coming out on time every month and I don’t even have to think about my loan.

Another reason I took out a car loan was that I wanted to add an installment loan to my credit report to improve my credit score. The reason I did this was I knew I might want to buy a house in the future, which I did. By adding an installment loan, the credit mix component of my credit score increased which helped raise my score overall.

Is It Still Worth Having the Loan?

The amount of money sitting in my car loan payoff fund gets smaller every month. Now, at just a little more than $4,000 I wonder if it is worth keeping the money in savings or if I should just pay off the loan. My interest rate is now 0.1% lower than my car loan interest rate and I already have bought a house. I no longer have a need for the loan on my credit history.

It is nice to have the money in the bank still but I’m not going to use it for anything other than paying the loan off.

So, what would you do? Would you pay the loan off today or would you let the automatic payments come out for the next nine months? Why would you do what you choose?

Photo By: Raptor Alpha

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About Lance Cothern

Lance Cothern, a Certified Public Accountant (CPA) licensed in the Commonwealth of Virginia, is the founder of Money Manifesto. You can read more about him here or connect with him on Facebook, Twitter, Google+ or Pinterest.

Comments

  1. With such a low interest rate I would invest the money you have set aside to pay off the car. It really depends on your entire financial situation, though, so I guess I can’t say for certain what I think you should do.

  2. I would throw more money at the loan…maybe like $1,000 a month, but not all of it at once. *shrug*

  3. I’d do bigger payments but would still keep some of the money back. This way in case something does happen you’ll have access to it.

  4. I’m with DC, invest that money somewhere more profitable instead. Even in a very secure investment you can get a lot more than 0.9%. I’d either do that or just clear it off in one payment to simplify your monthly finances. I’m in a similar situation with about the same amount left on my car loan, but it’s sitting in a 0% balance transfer right now. So it makes me in even less of a rush to pay it off.

  5. I’m with DC and Jeremy. I would make money on it while I can. Your interest rate is SO low.

  6. Yes, I would pay it off today. You have accomplished the goals you set for that loan/fund so now just be done with it. I would not invest it for only 9 months as other commenters have suggested as that is an extremely short timeframe. Just make sure you won’t be penalized for paying off the loan early – I was hit with a $50 fee when I paid off my car loan, but that was because I did it within the first year of the loan.

  7. I would save the money and possibly put it into a car fund. That way, when time comes to replace the car, it’s all paid for before you go shopping. And if you want a bigger/better car next time, you can boost the fund up in the meantime. If you then get another 0.9% deal, then you could consider investing the money in something like preference shares which pay around 7-8% and are relatively risk-free price-wise.

    Or you could keep it saved up for your stated goal of (at some point tin time on the future) make a nice dent in your girlfriend’s student debt.

    Either way, it’s nice to have choices! :)

  8. I personally would just pay the car off and be done with it. The money that you have deducted out of your savings account each month could instead be added back to that account and saved for a new goal. It’s a good feeling to have things paid for in full.

  9. Tough call since ING is .8% and the loan is .9%. At this point you really aren’t paying that much in interest, so I would probably just continue to make payments on the car so I could have greater liquidity if need be.

  10. By the book, you should invest it in something with a better return. I would probably just pay the sucker off so you can move on to other things. It just feels good to pay off a car and get that title in the mail!

  11. We took out a car payment for our loan as well. I personally think you can invest your money and DEFINITELY get a better return, so that’s what I would do.

  12. I wouldn’t pay it off. If you are paying 0.9% interest you can easily invest that money and be better off. Even an online savings account will allow you to nearly break even.

  13. I hate debt, but that’s my personal feeling. If it’s bothering you, I’d pay it off just for the peace of mind.

  14. I hate debt and would pay it off as soon as humanly possible! Put that loan behind you and move on to other financial goals! =)

  15. I like the suggestion of making bigger payments. I understand being super debt-adverse but that interest rate is so low you can earn more money basically everywhere.

    I’m looking at getting a car and I found the same thing. 0% or 1% financing, but my savings accounts are earning more than that =\ kind of talks you out of paying cash.

  16. I had this exact same query a few months back. Ultimately, I decided to pay off my car; not because it would save me big bucks in interest, but simply because it always feels good to eliminate unnecessary debt!

  17. Being a BIG HATER of debt, I’d just pay it off and get on with it.
    You’ll feel great knowing you don’t owe $4k.
    Good luck!!

  18. Pay it off. You now have the installment on your credit report, no need to keep it around like a pet who keeps pooping on your carpet. Clean that thing up now!

  19. For me it would really depend on how much other much you have saved for an emergency fund. If you had plenty of other money then I’d pay it off in a heartbeat. You’re now losing money (albeit a tiny amount) to interest and it just doesn’t make sense to have the loan – especially if there aren’t any SAFE money options that are giving you more than .9% returns.

    • Excellent point as I wondered the same thing. How can one make a decision for him on this when we don’t know what the total amount is that he has in the bank. If he has 10 grand, then pay it off. If he will be virtually cleaned out, then no way do you pay it off. We must know that info, before we go any further.

  20. Do whatever gives you the least amount of stress. The interest rate difference is what, less than $3 over the next 9 months? If it’ll reduce your stress load to pay it off, do so. If having more cash on hand lets you sleep better at night, put it on autopay and ride out the next 9 months smoothly.

  21. I agree with many here, make larger payments but keep the chunk of it for emergencies. It can’t hurt to have some cash just in case.

  22. DC and Jeremy nailed it. Invest the money conservatively to beat the car loan rate. What’s a government bond pay? You’ll do much better there.

  23. If you cannot earn more than the interest you are paying, pay off the loan. It is as simple as that.

  24. Nope. I’d keep riding it out. At < 1%,there's just no need to cash in the chips. Hell, you could buy a few dividend funds, collect on them for the next 9 months, and still make more money than paying it off.

    I'm in the same boat and that's why I have the opinion I do. I've got a 0% loan that doesn't come due for two more years. Will I be paying it off at the next inlet of cash? Probably not – there's just no need to.

  25. Ordinarily, I’d say pay off the loan and get the guaranteed return. But .9% is so damn low you might as well keep your cash liquid.

  26. I’d pay off the loan and be done with it. You’re not earning more interest than you’re paying so not much point keeping that money in the bank.

  27. I would put $2000 at it and then keep the other $2000, and let the automatic payments take care of the rest. Will free you up a bit sooner ! :)

  28. Wow! Your interest rate is so low! I wish I could get a rate like that. I would probably invest the money and continue paying the loan off. That being said, I understand that the psychological component of paying off debt can be very rewarding and may warrant the idea of just paying off the debt and being done with it. Its a hard call.

  29. My take on this? Not worth doing if you can find a more profitable use for the money. The interest is so low that you may as well stay with the loan.

  30. Jason Clayton | frugal habits says:

    All the comments above are right, just depends on your personal opinion on debt. If you hate debt with a passion, pay it off. If not, keep it liquid and earn a higher interest rate on the 4k in savings. The rate is so low, you make more money investing/saving it. (as you already know)

    There is also value in having that extra 4k for emergencies. This gives me more peace of mind, then paying off the debt – but you have to decide what gives you the greatest peace of mind.

  31. As with most other things in life, it depends.

    IF
    You have enough liquid cash available for other purposes and
    You know you will not spend the 4K for something else and
    You can stand having the debt and
    Your car loan allows you to pay off early and
    ….
    anyway, you get the picture.

  32. Pay off immediately. Sounds like you’re all set for loans, you’ve got your emergency fund all set, so what do you need the funds for? Unless you havent’ maxed out your IRA, I’d just pay off that car and get that debt off your ledger. One less thing.

  33. Just pay it off and move on and start preparing bigger fish to fry. The loan is so small now it’s just an annoyance that distracts you from making more money. Clear the fog and focus on other things.

  34. I’d put the money in a retirement account. I don’t see a real benefit to keeping your money in savings and as you pointed out, that interest rate is killer. You could get larger returns if you put it in stocks in a retirement account. Even the tax benefits, alone, you’d get a good return for your investment.

  35. I’m all about cash flow these days and I hate monthly payments so I’d pay it off and start piling up the car payments in the saving account for the next car. Besides, with lower expenses you’d need less in your emergency fund.

    Some thoughts on investing as others have suggested…. that’s only a good idea if you won’t need the money in the next 7 to 10 years. Otherwise, you could be buying into an overpriced market only to see it dip and finding yourself behind… then if you need the money, you’re out of luck.

  36. Honestly, if you are already investing a fair amount in retirement or other investment funds, I’d probably settle for simplicity since it is only $4k and just pay the darn thing off. One less bill to pay and it will boost the amount you can invest in the next 9 months.

  37. Victoria @Lend Not Borrow says:

    I would pay it off. Monthly payments are no bueno. How nice would it be to have a paid for car in your driveway?

  38. Personally I would pay it off. For me, debt is like cancer, and tends to spread. If you keep everything entirely debt free all the time including your mortgage ultimately, it is a great feeling, keeps your finances simpler, and leaves you with no other choices besides investing or blowing your future money. Being debt free is a life style choice, and ultimately you are either in debt or not in debt, but being in debt is a mental burden that you don’t even realize is there until it’s gone. And it also lets you save at a very rapid rate once you have no boat anchors weighing you down. There is always some risk in investing, but there is no risk at all in paying off debt.

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