Have some extra cash saved up thinking about paying off car

I would eliminate the note on a depreciating asset - WITH the caveat that you do not let this drive a decision to turnover the car and get into another note immediately.

If you know yourself and know this is going to happen (i.e. getting into another new car and new car note in short order) - then the long-term best return on the money will likely be paying down the mortgage or buying mutual funds. You can buy mutual funds and add to them in preparation for:

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3)Continue saving in preparation for buying some real estate as an investment in a year or 2

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Stay away from:

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)Invest in the stock market (would be my least desirable choice from MPOV

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or:

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5)Blow it on strippers and blow

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Hope this helps.

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I didn't think of paying it off due to it being a depreciating asset.

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Whether the asset is appreciating or depreciating is literally irrelevant to this calculation.

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I'm confused. What does this have to do with anything?

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Because if you're borrowing money on an appreciating asset, your future gains can justify servicing the debt over the life of a loan.

Financing a depreciating asset is dumb (sometimes necessary, but still financially dumb) - you're paying for something, with interest, over time that is never worth what you're paying for it as you go.

Here's an example:

I borrow $50,000 to buy real estate (a lot) in a rapidly expanding, growing area. I take a 10 year note, and pay 5% APR (for simplicity's sake). That's about $530 per month. At the end, all of my scheduled payments total just under $64k, obviously, $14k of that was interest. At 6% appreciation, that property should be worth (with only maintenance, no improvements) about $100k. So, I've made a $36k profit on that loan.

Now - take the other example (what all this has to do with things):

I go to one of them fancy German car dealers. They loan me 50k at 3% for 10 years (somewhat unusual, but 10-year financing is available - I'm trying to get it as close to an apples-to-apples comparison as I can).

That note is going to be about $480 dollars, also for 120 months. I will pay a total of just under $58k. (And even over 6 years, I would pay about $5k in interest of 3% on $50k) - got it? I've paid $58k for a car that is worth, what, $10k to $12k in 10 years? (Or, perhaps as much as $30k in 6, after paying $55k?)

So, I've lost, anywhere from $25k to $40k on that transaction - now - I've got to have a car, but had I paid cash, I would have only lost the actual depreciation (which I at least got the use of) rather than depreciation PLUS interest.


Is it making sense now? Buying these new cars cost MILLIONS in opportunity costs over time. Buying (not every five years, mind you, because the transaction costs eat into that) real estate or other appreciating assets, smartly, with borrowed money MAKES you money over time.

That's the difference between borrowing money for an appreciating asset versus a depreciating one.

It may be a depreciating asset but if your interest rate is low I would continue to pay it off monthly and build up your credit. You never know when you may have to take out a loan for unforeseen circumstances and need good credit.

What's irrelevant?

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So your theory is that it's better to buy things that increase in value rather than decrease. Great. What does that have to do with which loan he should pay off first?

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You eliminate the debt securing the depreciating asset. I didn't make this up. This is sound financial decisionmaking. Even if it were 0% APR - that just means you paid too much at purchase - get rid of the debt regardless of the APR. The mortgage interest (aside from being tax deductible) is going to pay you back at some point.

If there were a more dramatic difference in APR (e.g., a credit card bill at 16%, a car note at 9% and a mortgage at 5% - you obviously reduce those in that order), that could tip a short-term or even mid-term decision, but a point or two does not.

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if your interest rate is low I would continue to pay it off monthly and build up your credit

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This is also a good point. I own a double in Lakeview (live in one side and rent out the other). So far this has worked out great and I could really see myself buying another one in the future if I come across the right deal. Since this is the case, I know I need to have my credit score high (at ~705 now) and my cash flow up. However, I hate having all this cash just sitting there in my account and not doing anything. Now I might be even more confused I think I need to talk to my financial advisor

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Because if you're borrowing money on an appreciating asset, your future gains can justify servicing the debt over the life of a loan.

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Ace, sorry but I believe you're confusing yourself here.

You are of course completely correct that borrowing at a low rate to purchase an asset that appreciates at a higher rate can be a great way to go.

But that only concerns the decision of whether to finance or not. Once you've already done it, whether the asset is appreciating or not is irrelevant to the question of which loan to pay off first.

The only way in which the asset might play a role is that if the loan is secured by the asset and it isn't sufficiently insured for loss or damage. That is a possible justification for focusing on the car note - not because the car depreciates, but because it depreciates faster than the loan amortizes, which means that if the car gets totaled the OP will have to pay off the entire note immediately even though the insurance settlement won't be enough.

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I would eliminate the note on a depreciating asset

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What does it depreciating have to do with it? Its still going to depreciate no matter what and doesn't make much of a difference whether its paid off or not.

You end up with the same amount of $$$ in the end no matter what.

As for the original question, its always nice to have less bills, on a psychological level, but its smarter to put the money towards the higher interest rate loan.

But in the end, I would bet the difference of 1.5% on 20k, over however many years it would take to pay off the car, is only $500 or so. So then its just up to you whether its worth $500 to not have to deal with another bill or not

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I guess I see it as cutting losses - some of y'all don't see it that way. Agree to disagree.

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But you're not cutting any losses, you are just shifting it around. If he didn't have any other debt besides the car, then yes, paying it off makes sense. But he is talking about deciding which debt to pay down and the car is the lower % one.