Paying off a 0% interest car loan early?

[Bal.Leona]

Hi guys,

I have about 10.5k left and 4 years left on a car loan. (I know... next time it'll be cash!) It's at 0% interest and I have no problem making payments. It is my only debt. I've only had a car loan I paid off in 7 months and my student loans I paid off in 2 years as my credit history. I've never had a CC. My EF is at about 3-4 months, which I want to get up to 6. I'm also able to put about 10% into my 401k/ESOP to get the company match and to fully fund my Roth IRA. I've also opened a savings account at ING to start saving for my next car.

My question is: would there be any advantage to instead be putting this money towards paying off my car loan sooner? My thought is that earning even 1.1% interest is better than paying to a 0% interest loan, an the only benefit to paying off early would be for peace of mind and to reduce monthly expenses, but I wasn't sure if there might be something I forgot to consider.

I'd appreciate any insight or advice. Thanks!

[disneysteve]

I don't think you're missing anything. 1.1% interest isn't much but it is better than 0%. As long as you always make your payments on time, there is really no financial reason to pay off a 0% loan early.

[jpg7n16]

I just can never convince myself to tell anyone to pay off a 0% interest loan early.

In fact, I may be one of the odd ones - but if I could afford the car (1st criteria), I'd rather buy it with a 0% loan, than pay cash. You could instead invest in essentially risk free investments (money market, CDs, treasury debts, savings bonds, I-bonds, etc.) and earn more than 0%. There would be no added risk, and your cashflow would be spread out over time.

If you have a higher risk tolerance, I'd even invest in stocks. But that's not for everyone. Don't do this if you can't handle the risk.


I like your retirement savings amounts, and I like your idea of keeping the cash liquid earning anything in savings instead of paying extra on the 0% loan.

[bjl584]

In your scenario, I would say that as long as you are happy with the amount of cah flow that you have each month, then keep the loan and invest the money elsewhere.

If you absolutely hate debt, and you hate making a car payment each month, then pay it off.

[JoshuaHeckathorn]

Keep making your payments on the 0% car loan and continue to save and invest as much as you can elsewhere. As others have said, there's really no reason to pay it off early. And since you've never had a credit card, the positive payment history on the installment loan should be a great help to your credit scores.

[dczech09]

Since you've already taken the plunge and have the 0% loan, then yeah I agree, save money and continue making the minimums since you won't have any interest to worry about.

However I do want to point out that it is not advantageous to go out looking for 0% loans. The reason why is that the cost of interest is built into the price of the car when you buy. If you don't believe me, then explain why you could get the same car at a nice discount if you pay cash and negotiate?

Just putting it out there; I always feel the need to play devil's advocate

[Bal.Leona]

Thanks for the input! It sounds like it pretty much confirms what I thought.

Just to clarify: I've been paying on it for a year. I didn't go looking for a 0% loan, my previous car had been totaled and they had 0% financing available at the time. Rather than using all of the money I got as my insurance payout from the totaled car towards the purchase of another car outright, I used some of it as a downpayment and some to pay on my 6.8% interest student loans that I was able to pay off last year.

[jpg7n16]

Thanks for the input! It sounds like it pretty much confirms what I thought.

Just to clarify: I've been paying on it for a year. I didn't go looking for a 0% loan, my previous car had been totaled and they had 0% financing available at the time. Rather than using all of the money I got as my insurance payout from the totaled car towards the purchase of another car outright, I used some of it as a downpayment and some to pay on my 6.8% interest student loans that I was able to pay off last year.

IMO - That sounds like you made an excellent decision good job!

[littleroc02us]

For me it's not a question of percentages, I'm not one to keep debt around without it making me angry. I personally would pay it off sooner than make a measly 1.1%. If your talking about mathematics than anyone can do the math to say that keeping the debt around is a better decision because your making 1.1% on the savings account vs. 0% debt. Just depends on your attitude towards carrying debt around forever.

[DebbieL]

I just can never convince myself to tell anyone to pay off a 0% interest loan early.

In fact, I may be one of the odd ones - but if I could afford the car (1st criteria), I'd rather buy it with a 0% loan, than pay cash. You could instead invest in essentially risk free investments (money market, CDs, treasury debts, savings bonds, I-bonds, etc.) and earn more than 0%. There would be no added risk, and your cashflow would be spread out over time.

If you have a higher risk tolerance, I'd even invest in stocks. But that's not for everyone. Don't do this if you can't handle the risk.


I like your retirement savings amounts, and I like your idea of keeping the cash liquid earning anything in savings instead of paying extra on the 0% loan.

There is really no such thing as a 0% car loan (or for anything for that matter). You can and will get a better price if you are able to pay in cash on the spot. Trust me, they have built interest into the purchase price when they offer "0%" loans. There is no free lunch.

For the OP, now that you actually have the loan (which believe me they built interest into the price) there is no advantage whatsoever to you paying it off early since you've already had the interest put into the price of the car (it won't save you anything to pay it off early).

[Bal.Leona]

There is really no such thing as a 0% car loan (or for anything for that matter). You can and will get a better price if you are able to pay in cash on the spot. Trust me, they have built interest into the purchase price when they offer "0%" loans. There is no free lunch.

For the OP, now that you actually have the loan (which believe me they built interest into the price) there is no advantage whatsoever to you paying it off early since you've already had the interest put into the price of the car (it won't save you anything to pay it off early).

I'll certainly keep that in mind for the next one. I had only had the totaled car for a year and a half, and unfortunately did not have the chance to save up cash yet. I have learned a lot about personal finance in the past year, though, and hopefully I'll be able to be ready when the next time I need to buy a car comes around.

[wincrasher]

Really that depends on the deal you made. I once bought a car for $500 below invoice and still got a 0% 5 year loan. So I thought that was a better deal than paying cash (there was no rebate choice on that one).

Another thing to consider is the effect of inflation. Think it's running around 3% now. So in theory, you are getting more goods now for those dollars that have a declining value.

[DebbieL]

I repeat - they have always built interest (cost of money) into the equation for 0% offers. If you can't get a better deal paying cash, you should get someone else to do your negotiating.

[bones72]

Yep, everyone's right. Usually the manufactors offer a 2-6000 rebate in lieu of 0%. Drive your ride until the wheels fall off, or your lifestyle really changes.

[wincrasher]

Debbie, I think you are confused about what cost of cash is factored here. The automaker finance arms are only paying 1 or 2%, or even less to provide financing. But the cost of cash they are including in their invoice price to the dealer is the cost of the inventory sitting on their storage lots. Nobody really knows what that is, but sounds like it's plenty if they offer a $5000 rebate. But some of these rebates could also be generating a loss on a particular vehicle, which they will do to get rid of the product, hoping that the profits made off popular models more than offset this cost.

Anyone can buy a car at invoice price - it's pretty much the given on models that aren't moving too quickly these days. That's why there are so-called "doc fees" these days ranging from $300 -$800 on top of tax, title, etc. All the dealers know you can get all the invoice info off the internet. So if you are getting invoice, less the holdback, you might be a few hundred dollars below invoice price - that is pretty much a good deal. If something has been sitting around for awhile, they may go lower.

Your argument is that a big discount can be had for paying cash. To me, that would be buying significantly below invoice price (I'm talking thousands here). That is just generally not the case. I've bought many cars in my day. You have to buy an ugly duckling to get an extreme deal. Also, on something that is moving fairly well, they'd (the dealer) definitely prefer you financed (with them) - they make money off it. According to dealers I know, about 1/3 of buyers pay cash. They aren't giving away the store for that 1/3.

The manufacturers offer the 0% or rebate to move product that is sitting around and costing them money each month. They aren't lowering invoice prices to dealers (granted, there are some secret incentive deals to move volume or particular models). But key to the best deal is if you can choose the rebate and pay cash. If there is no rebate, then the equation changes quite a bit.

If you are really a good negotiator, you may be able to dip into a dealer's honey pot - those secret incentives and discounts. Again, a dealer may be sitting on inventory that is costing him money each month and may have to sell at a loss to get rid of it. But that could be just that, selling at a loss.

In the end, my point is that automotive financing cost is not built into the cost of the car. Only the costs to carry the inventory until it is sold. And I'd assume that varies across models and is matched to production capability and a forecast of the popularity of that model.

Currently I'm struggling with the prospect of ordering a car and paying cash. The model I'm interested in is a hot seller, so I may have to pay invoice price plus a little. Granted, this should be the way to get the best price, since the manufacturer and the dealer have literally no cost to floorplan (inventory cost) for the car. So I'm mulling.