Payoff Auto Loan now or wait

**siggy_freud** · 12-19-2012, 03:15 PM

Unlike some here, I'm comfortable having a car payment. If I were comfortable in the job, I'd put down enough to cover any new car depreciation, and then make payments on the rest. That way, if things changed, I wouldn't have to pay to get out of the car payments and could, at worst, break even.

That said, at 72 months you may depreciate faster than you pay it off, so I'd stick with 60 max, and 36-48 ideally. I generally finance at 48-60 and pay it off quicker as money allows.

**disneysteve** · 12-19-2012, 03:20 PM

I totally understand the psychological part. I bought a car in June. I could have taken money out of savings to pay for it upfront but I took out a modest loan (13K) and I've been sending in $1,000/month so it will be gone in about a year or less (I'll probably make a larger payment near the end to get rid of it). I don't mind the minor carrying cost for a short period to let me pay it out of current income and leave my savings intact.

**siggy_freud** · 12-19-2012, 03:29 PM

Keep in mind OP, there is a middle ground between your two stances. It appears that you didn't or weren't intending to put money down. But you're also considering pay cash outright. Why not put down something like 30%, so you're in the black on value, and have reduced your monthly commitment a bit?

I bought a 35k car awhile back, but put down 15k, so my payments were much more manageable.

**MonkeyMama** · 12-19-2012, 05:56 PM

We personally pay cash for our cars. If nothing else, it keeps us well within reason with our car purchases. Which is kind of moot in your case since you already bought the vehicle.

I totally agree with siggy. Why would you take Gap insurance if you could easily pay it down enough to remove that expense? Sounds like you need some sort of middle ground. Do you have any pressing need for the $29k in savings. ??

Payments and commitments just make life more complicated, in my opinion. Just one more big bank or financial institution to answer to and jump through hoops for. No thanks!

**kaleida** · 12-19-2012, 05:59 PM

I think an important factor is how quickly can you rebuild an emergency fund? How long would the "omg I have no emergency fund, what will I do if I lose my job" feeling last? Months or years?

Also, how stable is your job situation? That matters too. Is your company profitable? Are you a key player?

If it's less than a year to rebuild your emergency fund and your job situation looks very stable then I would go for it - pay if all off. If it's more than a year or if there's any uncertainty about your job situation then I'd pay off as much as you feel comfortable without completely wiping out your emergency fund.

**MKKShah** · 12-19-2012, 06:32 PM

Originally posted by kaleida View Post

I think an important factor is how quickly can you rebuild an emergency fund? How long would the "omg I have no emergency fund, what will I do if I lose my job" feeling last? Months or years?

Also, how stable is your job situation? That matters too. Is your company profitable? Are you a key player?

If it's less than a year to rebuild your emergency fund and your job situation looks very stable then I would go for it - pay if all off. If it's more than a year or if there's any uncertainty about your job situation then I'd pay off as much as you feel comfortable without completely wiping out your emergency fund.

I will not be paying off the car from my EF.

In the event of complete loss of income, the emergency fund will still be able to carry me for close to a year. Other liquid assets in very safe investments can carry me for another year and half.

My employer provides a very generous health plan that does not need any expenditure from me at all.

**MKKShah** · 12-19-2012, 06:41 PM

Originally posted by MonkeyMama View Post

We personally pay cash for our cars. If nothing else, it keeps us well within reason with our car purchases. Which is kind of moot in your case since you already bought the vehicle.

I totally agree with siggy. Why would you take Gap insurance if you could easily pay it down enough to remove that expense? Sounds like you need some sort of middle ground. Do you have any pressing need for the $29k in savings. ??

Payments and commitments just make life more complicated, in my opinion. Just one more big bank or financial institution to answer to and jump through hoops for. No thanks!

Just as I mentioned before, I will be cancelling GAP very soon. So that is not an issue.

My dilemma is, is it worth incurring $3000 in finance costs to spread out the payments over a period of 6 years, or should I just pay it off.

**disneysteve** · 12-19-2012, 06:57 PM

Originally posted by MKKShah View Post

is it worth incurring $3000 in finance costs to spread out the payments over a period of 6 years

Why pay $3,000 for anything if you don't have to? That's a pretty big chunk of change.

If you really don't want to pay it all at once, do it in 3 or 4 smaller payments over a few months.

**kaleida** · 12-19-2012, 07:44 PM

Originally posted by MKKShah View Post

I will not be paying off the car from my EF.

In the event of complete loss of income, the emergency fund will still be able to carry me for close to a year. Other liquid assets in very safe investments can carry me for another year and half.

My employer provides a very generous health plan that does not need any expenditure from me at all.

Well there you go! I think it's a no-brainer then. Pay that thing off in one fell swoop!

**MKKShah** · 12-19-2012, 08:57 PM

From a purely mathematical point of view, it is indeed a no brainer. I have cash sitting around and doing nothing, while I owe 3.24% on this loan. The $3000 could be used towards the cars maintanence over the same period.

The psychological part of having to part with such a large sum is indeed tough.

I am now leaning towards settling the debt on one shot as part of the first payment itself. Instead I am thinking of paying $40 into an account to build it for car maintenance.

**bjl584** · 12-20-2012, 04:18 AM

From the information that you provided concerning your finances it looks like you should pay off the loan all at once.

I would like to know, as someone else pointed out, why you bought GAP insurance? There is no risk of falling behind on the car.

Is there a reason you financed the car in the first place? Was it just psychological?

**MKKShah** · 12-20-2012, 07:41 AM

Financing was done just for peace of mind. The dealership did all the paperwork for the sale, and sets me up with a bank for the loan. Clearly, if the bank is lending me that kind of money, they will be careful to review and make sure all the docs are in order.

Also, the car purchase took just a matter of minutes.

Again, I will be cancelling GAP.

I am leaning towards DisneySteve's suggestion, and will be paying it off in a few large chunks over the next few months. Tax returns, a couple of bonuses this year, and some stock options at work will wipe out much of the loan. The rate is also pretty low. Low enough to not matter a whole lot in a year.

**bjl584** · 12-20-2012, 07:57 AM

Sounds like you made a good purchase and have a solid plan.

Just out of curiosity, what kind of car did you buy?

**ua_guy** · 12-20-2012, 08:36 AM

Something smells a little fishy to me, and to the OP - it's not really a dig, but this scenario seems to be missing a lot of information.

So, you found a car you wanted to purchase, you had the cash to pay for it, but you financed it instead (which is fine) --but the concerning part is the bit about "the car purchase took a matter of minutes" and "the dealership did all the paperwork, and the bank will do a careful review to make sure all the docs are in order".

Do you know exactly what terms you signed up for? Car dealerships aren't exactly known for doing things in your best interest.

If you're waffling over whether to pay the car off or keep the cash, the two questions you face, and one you've already answered: 1) If you pay it off now, do you have enough emergency fund to carry you through at least 6 months of expenses? (you answered yes) and 2) Is there anything else you had planned to use that money for down the road, in the next year, etc.

Here's what I'd do:

If you keep the loan, nuke the gap insurance. FYI -- never take dealer gap insurance until you've checked with your own bank or credit union. I'm not kidding. Dealer wanted almost $700 for gap on my sister's new car purchase. I told her to check with her credit union. It was ridiculously cheap in comparison, something like $80. So yes, get rid of the gap insurance and pay down the loan so you won't be upside down if you are.

If you don't want to keep the loan, you can pay it off in a single payment. OR, pay it off over 3-4 months. You might change your mind about paying it off completely and you'll thank us later when you still have 50-75% of that cash still in the bank if you want to use it for something else.

Last question... What did ya buy? How do you like it?

Payoff Auto Loan now or wait