Payoff Auto Loan now or wait

[MKKShah]

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.

Just to be clear, I spent several hours deciding if I wanted a new car. I spent upwards of 12 hours to zero in on on the car that I liked and fit my needs. I spent another 18-20 hours shopping for cars, including test driving around 12 different ones. Doing all this with a full time job that requires almost 60 hrs per week commitment is in fact quite stressful.

Prior to stepping foot in the first dealership, I shopped for, and got myself pre-approved for an Auto Loan. To keep monthly payments low, and give me the most flexibility I went for a 72 month loan, and got pre approved for 3.25% APR. I had the pre approval letter with me.

Once I decided to make the purchase (and this was on a weekend day, pretty late in the day), the dealer wanted to see if they could finance the pruchase. I showed them my pre approval letter, and they immediately matched that. The only thing that they added on top was the GAP insurance, which I can revoke anytime.

The finance people at the dealership were both professional and courteous. I think the reason they literally beg you to finance through them is because, it is during the time you sign the purchase agreement / finance docs that they do their hard sell on warranties etc. They tell you that it just a few $s more in monthly payments. I chose not to take anything (since they were all ridiculously priced).

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?

Right on. Mine cost $600. I have already posted the form to decline it. I am not too worried about being upside down on the car. Worst case, I can pay the difference myself.

So I think I am clear now. I will be paying my monthly commitment, but will be paying down large chunks over the course of the next year. The target will be to payoff the loan in less than a year. So I might have spent less than $1000 on financing, and it won't look like a huge hit to my cash reserves.

Plus I intend to hold on to this car as long as is reasonably possible.

[Justin Pierce]

Interesting stuff that is discussed here. I always pay full up front so that I won't worry about anything else...

[violet80907]

Loan payment at current APR (3.25%, 72mo): $453/mo.
Loan payoff: $29,000.

I agree with the peace of mind that comes from not having a payment. But think about this from the investment standpoint. By paying cash for the car, you are effectively buying an investment that returns 3.25%. (The investment has an upfront cost, and maybe tax consequences, so it is a little more complicated, but not much.)

What do your other investments look like? Could you use a stable 3.25% "return"? If so, pay cash. If you would prefer to increase your exposure to higher paying, higher risk, investments, then invest the money in something else.

[Tree0164]

Since you already have the loan I would pay it off increments-such as Disney steve mentioned earlier paying $1000 a month until it is paid off.

[fsumom]

I'm sure you probably already received great advice, but I just want to correct one thing. It's not Gap insurance. It's just Gap. It's not insurance. It's protection and not guaranteed to even pay off the loan if the car is totaled. It's based on the value of the vehicle at the time of loss, what the insurance company is willing to give you and what you currently owe. I work for a credit union and Gap will cover up to 125% of the value at the time of loss but this is also dependent upon wear and tear. Also, I didn't read your entire post but depending on when you closed on the loan, Gap may be refundable. At my credit union it's refundable within 90 days.