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?”.
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?