Should you rush to pay off a 0% interest loan?

[pennrj430]

Hi everyone, I have a basic question that I am torn over.. A friend of mine is debt free except for a car payment, and she is trying to determine if it's worth her putting a hold on her savings and paying it off over the course of the year using a big chunk of her savings and her income.

Normally I like Dave Ramsey's approach by stopping savings and paying off all debt. But, the thing that's making me question this is that the car loan has a 0% interest rate for the entire term of the loan. She will never pay any interest on it, but has 3 years left on the loan.

Should she just make the payments over the next 3 years, or is it worth her tightening the belt and banging it out over the next 9 or 10 months again using a chunk of her savings?

What would you do, and why?

Thanks!

[kork13]

That answer depends on two factors in my opinion:
1) If your friend DOES NOT pay off the car loan ASAP, what is she doing with the money? Is she saving/investing it? Or is it being spent on shoes & coffee? If she's saving or investing the money that would go to pay off the car loan ASAP, then she should continue to do that. But if she's just spending the money, then she should strongly consider paying off the loan in spite of the 0% interest rate.
2) Is she very debt averse? Does she cringe at the very thought of being in debt? Or is she okay with carrying the debt at 0%? If she hates the idea of being in debt, then for her emotional well-being, she should pay it off quickly.

But if she's okay with carrying the debt at 0% and she's saving the money right now, then I would recommend she just stick to that. The 0% rate is obviously not costing her anything at this point (she may have possibly over-paid for the car "in exchange" for the 0% rate, but that's another topic), so if she's comfortable with it and making smart choices with her money, there's no pressing need to pay off the debt immediately.

Dave Ramsey is great for people who are deep in debt and need constant motivation and reassurance to dig their way out. However, some of his advice is overly simplistic for people not in that situation. Yes, everyone should pay off their debts, but let's do it smartly, taking into consideration interest rates and what else is being done (or needs to be done) with a person's money.

[disneysteve]

Dave Ramsey would say to pay it off. I tend to disagree, but it really depends on what she would do with the money instead. If she is just putting into a savings account earning 0.5%, go ahead and pay off the loan. If, however, she is using the money to fund her Roth, for example, that's a much better choice than prepaying a 0% loan.

If she has a 6-month EF, maxes out her retirement savings, and wants to prepay the loan just to get rid of it, I think that's fine if it will give her peace of mind.

[pennrj430]

Thanks for all of your replies. It if were me, I would want to pay it off for peace of mind, but I understand both standpoints. Tough decision.

[cooliemae]

Dave Ramsey is great for people who are deep in debt and need constant motivation and reassurance to dig their way out. However, some of his advice is overly simplistic for people not in that situation. Yes, everyone should pay off their debts, but let's do it smartly, taking into consideration interest rates and what else is being done (or needs to be done) with a person's money.

I agree! Personally, I would be paying the minimum payments on the car and use any extra money to beef up my emergency fund and/or retirement funds.

Another reason not to pay off the 0% debt is the borrower's credit history/rating. If the borrower has poor credit or a short credit history, the continued car payment is a cost free way to increase their credit rating!

[snafu]

I'm guessing she has a good credit rating and isn't prone to excess consumer spending. Depending on age and employment/income stability, I'd be looking at a low cost Dividend Mutual Fund since interest rates on savings are lower than inflation. The DOW has moved from 13,104 [1/1/13] to 14,535 today.

Friend needs to be able to sleep at night so if she is over anxious she'll pay off the loan.

[Baby_nurse]

If its going to take a big chunk of her savings and income to pay it off, I would say no. I would build up her emergency fund and regular savings rather than tying up the money in a Roth or other retirement plan.

[ua_guy]

I would not pay off the loan, David Ramsey or whomever, be damned.

People get caught up in this "peace of mind" thing about paying off debt early and I think it's erroneous in this case. I understand when the interest is burdensome or not on favorable terms. But here-- If it's not costing you (your friend) anything to carry that debt, and there are other, more advantageous things to do with that money, even if it's sitting in a checking account at 0.25%, it's still better to have that money in your own accounts, versus sunk into a depreciating asset like a vehicle.

Cash is king. There's absolutely no reason I can think of why this person would want to carve out their savings to pay off a car that is costing them nothing to carry other than the monthly principal payment. You can DO things with cash in the bank. It's hard to do things with that cash tied up in a car (you have to sell the car, if you need that cash).

[natewebco]

I would pay it off. You are enslaved if you owe money to someone. Always better to be debt free.