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re: Have some extra cash saved up thinking about paying off car
Posted on 5/16/14 at 12:40 pm to Ace Midnight
Posted on 5/16/14 at 12:40 pm to Ace Midnight
quote:
It's a point and a half. Yes, the mortgage is over a longer term, but the car is better for cash flow AND net effect, particularly as the mortgage interest is tax deductible - that's got to be worth a point or so.
I conceded that the 1.5% was prob dick over the term that is left on his car note and that for peace of mind and not having another bill, it may be worth paying off the car.
My main point was back to you saying that paying off a depreciating asset somehow saves money in this instance. The fact that it is depreciating doesn't have anything to do with what he ultimately ends up with.
The car is going to be worth the same $$$ amount whether it is paid off or you owe on it. You will still have the same principal in the end and if you are just shifting the asset to where you are paying the interest, it is a wash.
2
Posted on 5/16/14 at 1:02 pm to Lsut81
To the OP, just to confirm... you don't have any other debt? No credit cards, installment loand, student loans, etc? Just the car and the house?
Also, to the OP... you said retirement is being otherwise funded... but what about a good ole 3 - 6 months emergency fund?
If one is going to have the belief that you should not have debt on a depreciating asset... that belief should still hold even if you took out the debt and are now considering paying off that debt in a lump sum. That's probably a strategic/tactical move more than a purely financial one. But... if you are of that mindset to not have debt on a depreciating asset... the fact that the debt already exists should not change that mindset.
If it was me, and if I had no other debt and a 3-6 months filled up emergency fund... I'd pay off the car loan and bank the balance. Whether you put it in a CD, your savings account, a low-risk investment, or play the market, depends on your tolerance risk level.
Also, someone commented that paying the debt monthly helps your credit. I don't agree. Your credit score is going to look better with a paid off installment note than it would owing money on an installment note. The fact that you had the debt and serviced it properly by paying it off will look fine to the score machine. And, by paying it off, you've lowered your debt ratio.
Also, to the OP... you said retirement is being otherwise funded... but what about a good ole 3 - 6 months emergency fund?
If one is going to have the belief that you should not have debt on a depreciating asset... that belief should still hold even if you took out the debt and are now considering paying off that debt in a lump sum. That's probably a strategic/tactical move more than a purely financial one. But... if you are of that mindset to not have debt on a depreciating asset... the fact that the debt already exists should not change that mindset.
If it was me, and if I had no other debt and a 3-6 months filled up emergency fund... I'd pay off the car loan and bank the balance. Whether you put it in a CD, your savings account, a low-risk investment, or play the market, depends on your tolerance risk level.
Also, someone commented that paying the debt monthly helps your credit. I don't agree. Your credit score is going to look better with a paid off installment note than it would owing money on an installment note. The fact that you had the debt and serviced it properly by paying it off will look fine to the score machine. And, by paying it off, you've lowered your debt ratio.
Posted on 5/16/14 at 1:14 pm to Lsut81
quote:
The fact that it is depreciating doesn't have anything to do with what he ultimately ends up with.
From a purely mathematical perspective, perhaps not. Overall, it remains the best play here - despite the mortgage at a slightly higher APR - pay the car. Even over investing in a mutual fund (again, with a slightly higher APR) - pay the car.
Depreciating assets should be debt free as soon as possible - for a whole host of good reasons.
Posted on 5/16/14 at 1:58 pm to Ace Midnight
I don't think there is a right and wrong answer here. It all depends on the persons situation. Personally, I would probably pay the car off. Then use the monthly note that you were paying to either pay extra on your house monthly or investing in something.
Posted on 5/16/14 at 2:05 pm to LSU1018
Haven't read every word, but didn't see the following:
home mortgage interest is deductible. That means it is probably as low of an effective interest rate as the car, or lower.
Paying off the car generates extra cash flow. That can be good or bad, but if you are responsible, that's a big plus.
home mortgage interest is deductible. That means it is probably as low of an effective interest rate as the car, or lower.
Paying off the car generates extra cash flow. That can be good or bad, but if you are responsible, that's a big plus.
Posted on 5/16/14 at 2:10 pm to LSUFanHouston
quote:
To the OP, just to confirm... you don't have any other debt? No credit cards, installment loand, student loans, etc? Just the car and the house?
No I do not have any other debt. I use my credit card for daily purchases to accumulate points and then it gets automatically paid off each month.
quote:
Also, to the OP... you said retirement is being otherwise funded... but what about a good ole 3 - 6 months emergency fund?
I just meant my 401k gets automatically deducted from my check each week and is maxed out each year and then I always max out my Roth the last month possible. I also have the emergency fund set aside in my business account that my double is set up in. I am not planning on spending all my cash I just want to put some of it to work.
quote:
Also, someone commented that paying the debt monthly helps your credit. I don't agree. Your credit score is going to look better with a paid off installment note than it would owing money on an installment note. The fact that you had the debt and serviced it properly by paying it off will look fine to the score machine. And, by paying it off, you've lowered your debt ratio.
This is the best advice yet. Thanks!
Posted on 5/16/14 at 3:03 pm to Ace Midnight
quote:
I think insurance is irrelevant
If the asset is insured for the full value due on the note, then it doesn't matter. But that isn't the case for cars.
The fact that the loan was used to buy the car (the depreciating asset) isn't what's relevant here - what matters is that the note is secured by the car until it is paid off. This means that if you lose the car you have to pay the difference between what's left on the note minus the insurance check.
But look at a different example. Suppose I borrow against my home equity in order to finance the car (I am not saying this is a good idea). This timethe car is not secured by the loan at all and the HE loan should be considered completely independently of the asset it financed.
Posted on 5/18/14 at 10:42 am to foshizzle
I wouldn't pay off either with the extra money. The 3.5% is just above inflation rate. doesn't really make sense to pay it off. Also I wouldn't pay off a house note because you can deduct the interest on the note so in reality you really are not paying 5% but closer to upper 3%(depending on your tax bracket).
I would be better to invest the extra money in something that generates more than that 3.5% annually which is pretty easy to find.
I assume you max out your IRA each year. If you don't then that is a no brainer where you extra cash should go.
I would be better to invest the extra money in something that generates more than that 3.5% annually which is pretty easy to find.
I assume you max out your IRA each year. If you don't then that is a no brainer where you extra cash should go.
Posted on 5/18/14 at 11:28 am to Cold Cous Cous
quote:
Whether the asset is appreciating or depreciating is literally irrelevant to this calculation.
This. Figure out the true interest rate of your mortgage(after tax deductions) and then pay off whichever one is higher.
Also, at only 28 I would consider investing at least some of it. You are young enough to take risks.
Posted on 5/18/14 at 1:16 pm to Ace Midnight
quote:
Depreciating assets should be debt free as soon as possible - for a whole host of good reasons.
You tend to overlook the opportunity cost of utilizing a lot of personal assets, which may be tied up in better performing investments, all in the mindset of never financing a car. The OP states he has cash, but using it to pay off the car note is not necessarily a given. Someone may enter into a financing transaction knowing other funds will free up for other uses during the early years of a loan and come out ahead paying the loan rate.
With low mortgage rates, it is not a given the OP is able to deduct mortgage and taxes,either.
Dude should have gotten a .5-.75% loan from PenFed on the vehicle purchase and obtained max sales concessions upfront. I don't buy into blanket anti-debt ideology, it's more of a pick and choose the best overall option and go with it.
This post was edited on 5/18/14 at 1:20 pm
Posted on 5/18/14 at 1:49 pm to Ace Midnight
quote:
Depreciating assets should be debt free as soon as possible - for a whole host of good reasons.
I'd be curious to hear some of these. Other than what foshizzle mentioned on insurance, is there anything other than a general fear of debt?
quote:
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.
Also, you're leaving out the opportunity cost of investing the cash that you paid on that car when you bought it. Unless you plan to leave that money sitting in your checking account for 10 years, you aren't effectively paying 6k in interest. And definitely not MILLIONS.
Sure it's nice to be debt-free, but if someone is offering me financing at 3% or less I'm going to take that all day and pay it off as slowly as I can. It's not hard to understand that a dollar today is worth a hell of a lot more than $1.10 in five years. The future value of the asset is completely irrelevant to the financing of it and shouldn't be considered in most situations.
This post was edited on 5/18/14 at 2:04 pm
Posted on 5/18/14 at 7:43 pm to tirebiter
quote:
With low mortgage rates, it is not a given the OP is able to deduct mortgage and taxes,either.
This. I have this discussion at least twice a week it seems. Realtors hate me for it! Combine low mortgage rates with a low-property-tax state, with low housing values, with an increasing standard deduction, and more than a few middle class homeowners don't have enough deductions to itemize. Or, they are itemizing, but not by much.
It's not uncommon for people to have a total of property taxes, mortgage interest, state income tax, and charitble deductions totalling $15,000. If $7,000 of that is mortgage interest, it's a bit of a misnomer to say all $7,000 is tax deductible. Really, it's only the amount of the itemized deductions that exceed the standard deduction.
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