Should I Pay Off My Car Loan Update

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2010 Honda CivicIn August I asked you, my readers, “Should I pay off my 0.9% car loan?“. If you’re new here or haven’t had a chance read that post first for some background. There were many different opinions on what I should do. After a few weeks of considering the facts I’ve finally come to a decision. However, first I’d like to take a minute to explain my thoughts on some of the comments I received.

Invest the Money

Right now the money to pay the loan off is in a savings account. That is about as safe as you can get (for the most part) and ING Direct is only paying 0.8%. Many readers pointed out that it would be pretty easy to get more than the 0.9% return I would need to break even if I invested the money.

I do think it’d be pretty easy to get more return but it would definitely come with risk. If I had a much longer time frame to pay the loan off I’d consider investing in more conservative investments. With only a few months left I didn’t want to risk losing the money I have set aside to pay the loan off just to make a few dollars in investment income.

Pay More Per Month

A few readers suggested that I increase my payment amounts to pay the car loan off faster. This was definite a possibility but didn’t make much sense to me in this situation. I feel this is a great thing to do if you don’t have the money to pay a loan off. I do have the money though so paying it off a little faster by increasing my payments wouldn’t be much different for me.

There isn’t any measurable financial gain with my interest rate being so low so I ruled this option out pretty fast. It’d be great if I was paying off credit card debt though!

Continue On As Normal

This was the option I was leaning toward before I wrote “Should I Pay Off My Car Loan?”. A couple readers suggested I follow this option to keep the cash available should I need it. I wouldn’t be losing much money but I definitely wouldn’t be making any money either. I do have other sources of cash available should I need them but having even more doesn’t ever seem like a bad idea to me.

Pay It Off Today

The final option that was suggested was just pay the car loan off today. Some readers said that investing the money wasn’t worth the risk and since I was actually losing money I should just pay the loan off today. I had already received the benefit of having a car loan in regards to my credit score. After all, one of the reasons I took out a loan was to improve my score for when I would eventually take out a mortgage. Some readers also noted the fact that the amount left on the loan wasn’t much anyway so why bother making payments any longer.

So What Did I Do?

I decided to pay my car loan off after considering all of the facts. Investing the money was too risky for me as my time frame was too short. If I was going to pay any extra on the car loan I wanted to just pay it in full and I felt I had enough other cash to cover any needs that might arise in the next few months before the loan would have been paid off anyway.

I had originally decided just to wait it out and pay the car loan according to schedule. The problem was I kept thinking about whether I should pay it off or not. It eventually got to the point where I decided it’d just be easier to quit worrying about it and pay the car loan off so that’s exactly what I did!

Did you think I’d end up paying off the car loan early? Have you had any debt pay off successes lately?

photo by: MSVG

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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. Adam Hathaway says:

    I had a feeling that you would choose to pay it off. I think this idea is the best one for you simply because it is the one you are clearly most comfortable with.

  2. I thought you might, though I still think you should have waited. I didn’t consider the fact that you would be thinking about the debt, which is a different non-monetary incentive to pay it off.

  3. Sounds like you’re prone to a fair bit of worrying – so it’s probably for the best that you paid it off.

  4. It was all good no matter which option you chose. I think the most important thing was actually deciding on one of them and taking action! Lots of people talk about what they want to do, but none it really matters until you make it happen. Nice job getting rid of that debt!

    • Jason Clayton | frugal habits says:

      I agree with My Money Design… it is all good no matter what you chose. Neither was a bad choice in my mind.

      There is a nice feeling being debt free from car payments. I’m looking forward to that again!

  5. Congratulations, you did well by paying your loan, one less weight and worry, even though it doesn’t make a lot of financial sense. I paid a good chunk of loan back in July and now, while I don’t absolutely need the money, I wish I hadn’t paid that much and kept a little buffer. But the feeling of paying off was amazing!

  6. With the amount of thinking you were doing about it, it was probably best you paid it off ;) Now you don’t need to worry either way. And as a champion worrier, it’s what I would have done.

  7. I think any time you have the opportunity to pay off debt on a depreciating asset, it’s an automatic decision. I give you two thumbs up for making the absolute right call!

  8. I would tend to think it was a good decision. If you’re able to pay it off and not be stretched too thin then I say go for it. I prefer to have as little of debt as possible, because it just frees up more money month to month. We just made the final payment on our car yesterday :) and it feels great to be free from that monthly payment!

  9. Ginny Clark says:

    Congratulations!

  10. We just took on a car loan at 1.49%. We could have take the money out of the bank or investments, but personally I don’t see the point for us. I have already earned enough ROI on the money that I could cash out and be flat at the end of the 5 year car loan.

  11. Normally, I would opt to invest the money because I would get a higher return. As I get closer to retirement, I am starting to get more conservative. If paying it off early provides comfort, why not.

  12. I like that the fact you were constantly thinking about it led you to change your approach. Now it’s over and done and you can’t go back :-)

  13. Well done! I thought you might choose this option the lower the balance got. I would do the same thing, but mostly because I hate debt! :)

  14. I bet it feels nice not having to stress about it. I have been thinking about upgrading my car because I found a great car with 2x the gas mileage for just a couple k more in price, but I decided against making the change because of the hassle. The stress factor needs to play a role in our decisions more often. :)

  15. For some reason, I also thought this is what you would do! We are deciding just to keep our loan and invest.

  16. David @ Skeptic Finance says:

    I think of paying off loans as reducing risk on other investments. Really what you’re doing is choosing between a low risk, low yield investment and a higher risk, higher yield one.

    I hadn’t read your previous post but it seems like there’s a trend among PF bloggers to pay things off early rather than investing. Maybe they understand risk or something.

    • When I took the loan out I promised myself I’d keep the money in my savings account to be able to pay it off if I ever had to so investing it wasn’t an option for me.

  17. This was all I’ve been worrying about, so I’m glad you updated us. Risk? A good choice if you had maybe 18 mos to pay it off: http://quote.morningstar.com/fund/f.aspx?t=BGNMX

  18. I usually think it’s best to pay off your loans if you have the money. I’d rather have a little less liquidity but know that I’m not losing money.. I mean whatever % your loans are at, if you pay off the loan you’re basically getting a guaranteed return on your money.

  19. Good show, good show. I applaud your choice.

  20. Oh what a great feeling that must have been! I too hope I can pay off my car loan sometime in the near future.

  21. I agree with your decision to pay off your loan. I feel that the average person would say that you could make more with that money investing it. However, the unfortunate truth is not all investments turn out profitable. By elminating that debt you increased your monthly cash flow! Keep up the good work!

  22. Tackling Our Debt says:

    If you had more time investing would have been a good way to go, as you clearly mentioned. Paying it off a few months early was a good choice. Congrats to you for having a fully paid for vehicle. It’s nice, isn’t it?

  23. For what it’s worth, I think you made a good choice. The difference between 0.8% interest and what you’d get at a different bank wouldn’t amount to much (unless you had over $10,000), and investing is too risky at this point. I would have said invest it back in March of ’09 though ;-)

  24. Good choice paying off the car. After owning many cars (with ludicrous payments!) I will never have a payment again. The argument over investing is usually moot; paying on a depreciating asset is simply bad finance. Pay it off and then get the money elsewhere. Nice job!

  25. I just did the same thing. I paid off my debt completely!!! And it feels gooood;) sold my home (I bought it 2 years ago in a neighborhood i did not like) Payed of my $4600 car loan ( that is what is left from a $35000 loan) and paid off a total of $8000 in credit card debt. Thank you lord. And, I still have $$ for the down payment on my next home purchase.

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