I am currently considering paying off my car. I have a high interest rate and a high monthly payment. I currently owe about $6k on it, but with interest and payments works out to $8k. Should I keep making payments? or pay it off and save $2k? (but use $6k in savings).
If the interest rate on the loan is higher than the interest you’re getting on your savings(and it is), pay off the loan.
of course, you want to make sure there are no early payoff penalties, either.
Paying it off makes financial sense, but there are other things.
Are you secure in other areas? Mostly housing. You can live without a car a lot easier than you can live without a house? Can you afford a root canal or to have a minor medical procedure? If those this come up right after you pay off your car, how will you cope? If you can cope just fine, than pay it off. If you’re unsure, I’d hold off.
I think a bit of money in the bank helps your mind sleep better at night. Yes, I know it makes no sense financially but there are other things besides that too.
If you can afford to pay it off, pay it off.
Listen to what he says.
I was recently in the same position, payoff balance in reach of what I had in the bank. I did the mental math and decided that I had enough cushion. Remember, you can put your monthly car payment into the bank. Which is what I did. Happy to have the payment gone from the monthly budget and not pay the interest on the rest of that loan. Plus, I had the resources to cover an emergency while replacing some of my savings money.
But - your situation may be different. Any large financial decision should be put through the sleep well at night test.
Assuming you’ve been making payments regularly and you’re trying to build up your credit score; paying off your loan early makes you look better not worse.
So next time your in the market for a new car maybe you wont have to pay such a high interest rate.
Thank you for all your responses. It seems to make more sense to pay it off, but I will check to make sure there is not a penalty, hadnt thought of that. The monthly payments feel like a sucking wound on my bank balance, and I figure if its not there, its going to make me sleep better at night. I will have less money in reserve, but there will still be a little.
I take it my insurance for covering the depreciation will be null and void if its paid off? or is that picked up by my auto policy?
Are you asking about the loan gap coverage? If so, you will need to call your insurance agent/company and get it removed. That would also be a good time to review your policy and make sure you are covered otherwise. Probably looking at a small reduction in your rates.
What kind of cash reserve will that leave you? If you take $6k out of a big emergency fund, no big deal, but if you only leave yourself a few hundred dollars, it doesn’t make as much sense.
Do you have a cite for this? As far as I know F.I.C.O scoring does not take into account how quickly a loan is paid off.
Can you refinance your loan now at a lower rate?
No, sorry. It’s just something I’ve always been told. I never really questioned the veracity of it.
Personally, I do know that when I’ve looked at my own credit scores, it was noted that some of my loans were paid off early. Still, I couldn’t tell you if that itself contributed to my over all score.
No, but it does take into account how much of your credit balance is tapped. Paying off a loan = lower debt = better score.
It would leave me with maybe a couple grand in savings. Im curious about having it paid off though and what that would do to my score.
Another option would be to see if you could refinance the car loan to one with a lower rate. Keep roughly the same payoff date and you’d benefit from the lower payment. We did this with my car (initial 5 year loan, at 2.5 years the rates had dropped a bit so we refinanced, saving 1% on the rate… have kept making the old payments and will be done with it at least 6 months before the original loan matured).
The hitch is that the refinanced loan would be a “used car” loan which might not have the same rate structure (i.e. higher rate) than a new car loan. We happened to be with a credit union where new / used loans were at the same rate.
Re paying it off now: Would you have the discipline to keep making the payments to yourself, thereby rebuilding the savings you’ve depleted in paying it off?