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spinoff thread - why pay off a car as soon as possible?
Posted on 6/22/21 at 3:04 pm
Posted on 6/22/21 at 3:04 pm
In the the 150k inheritance thread, the consensus advice for serious answers was to pay the car off first, because it's a depreciating asset.
I don't understand this logic. The car is depreciating at the same rate, regardless of how fast you pay off the note. If the car note is 5% apr, and you can get better than a 5% return on an investment, why wouldn't it be optimal to invest it?
I don't understand this logic. The car is depreciating at the same rate, regardless of how fast you pay off the note. If the car note is 5% apr, and you can get better than a 5% return on an investment, why wouldn't it be optimal to invest it?
9
Posted on 6/22/21 at 3:05 pm to el duderino III
because the interest is compounding on the loan balance not the book value of the car
Posted on 6/22/21 at 3:05 pm to el duderino III
I disagree with "pay it off as soon as possible". You pay off your highest interest debt first, whatever that may be.
If you have a 0% car loan and a 6% home loan, paying off the car would be dumb.
If you have a 0% car loan and a 6% home loan, paying off the car would be dumb.
Posted on 6/22/21 at 3:06 pm to el duderino III
quote:Because people are unwise when it comes to maximizing wealth. Paying off any note, if it is less than inflation, or even less than the alternative of investment gains, is not wise at all.
why pay off a car as soon as possible?
Posted on 6/22/21 at 3:08 pm to el duderino III
quote:
If the car note is 5% apr, and you can get better than a 5% return on an investment, why wouldn't it be optimal to invest it?
yes it would be
quote:
the consensus advice for serious answers was to pay the car off first, because it's a depreciating asset.
The car will depreciate no matter what. It is independent from the method of payment.
quote:
why pay off a car as soon as possible?
Most people like the "feeling" of being debt free, even if it is worse for them financially. Also most don't understand the concept of TVM.
Posted on 6/22/21 at 3:12 pm to el duderino III
Depends on the interest rate on the car loan.
If it was like 0%-2%, then doesnt make a ton of sense to pay it off probably.
If it was 3-5%, arguments probably made either way.
If it was like 6%+, probably best to just pay it off. Especially if it was really high like 9-15%.
That all being said, it could also just be a monthly payment off the books to improve cash flow as well regardless of interest rate if you just want/need some more cash flow. So that all being said, even if it was a pretty low interest rate, and say had only like $10k left on it, I'd probably just take $15-$20k of the $150k, pay it off to get some monthly cash flow freed up, take that remaining $5k-$10k to go on a honeymoon that poster hadnt been on yet...then invest the rest of the $130k-$135k.
If it was like 0%-2%, then doesnt make a ton of sense to pay it off probably.
If it was 3-5%, arguments probably made either way.
If it was like 6%+, probably best to just pay it off. Especially if it was really high like 9-15%.
That all being said, it could also just be a monthly payment off the books to improve cash flow as well regardless of interest rate if you just want/need some more cash flow. So that all being said, even if it was a pretty low interest rate, and say had only like $10k left on it, I'd probably just take $15-$20k of the $150k, pay it off to get some monthly cash flow freed up, take that remaining $5k-$10k to go on a honeymoon that poster hadnt been on yet...then invest the rest of the $130k-$135k.
This post was edited on 6/22/21 at 3:15 pm
Posted on 6/22/21 at 3:15 pm to iAmBatman
quote:
Most people like the "feeling" of being debt free, even if it is worse for them financially. Also most don't understand the concept of TVM.
It's also better for your cash flow to have one less bill. Something might happen in the future to reduce your income.
You could sit on cash but you don't know for sure how much inflation will reduce the value. You could put it in stocks but those are volatile in the short term, forcing you to sell at a loss if you NEED CASH NOW.
Get rid of the car note and 6 (or 12) months of expenses becomes a lower amount. You can put the savings into something else.
Posted on 6/22/21 at 3:18 pm to Chucktown_Badger
quote:
You pay off your highest interest debt first, whatever that may be.
This.
Interest rates = bleeding money. Stop the biggest leak first (high interest rate), then paying off the debt that has the next highest interest rate, and so on. Credit cards usually have the highest interest rates, then possibly vehicle(s) depending on your credit situation when you purchased.
Que the "oh he leakin, somebody call da ambalance!" video.
This post was edited on 6/22/21 at 3:20 pm
Posted on 6/22/21 at 3:21 pm to Bestbank Tiger
quote:
You could sit on cash but you don't know for sure how much inflation will reduce the value.
it would also reduce the FV of the debt you owe.
debt is a hedge against inflation
Posted on 6/22/21 at 3:23 pm to Bestbank Tiger
quote:
if you NEED CASH NOW.
Sorry couldnt help myself
Posted on 6/22/21 at 3:34 pm to Bestbank Tiger
quote:
It's also better for your cash flow to have one less bill.
But here's the thing...getting rid of that bill also gets rid of your available liquidity (because you're using it to pay off the car). So you're talking as if paying things off early contributes to your savings later, when it's the opposite.
This post was edited on 6/22/21 at 3:35 pm
Posted on 6/22/21 at 3:41 pm to el duderino III
If you are narrowly looking at ridding of debt, the posters who speak to putting debt interest (ie, the cost of money, in borrowed funds terms) in their descending rank order to prioritize the sequence of ridding of debt...are generally right.
If you are more broadly thinking of building wealth, I would look at the spread (ie, what can be earned with the $ less the cost of debt). For example, if the $150k can earn 7% net of taxes, and the car loan specifically is say 1.9%, then I would by all means target 5.1% spread.
Dave Ramsey would fang me for this! And if you value "no debt" peace of mind, he is right and I am less right. Me, I seek + spreads.
If you are willing to accelerate wealth building (re: car loans), after you make your last payment, keep paying the note (to yourself!). This is personal but I hold on to new cars for ~12-14 years and have been fortunate to use these savings to have an option next time for new car (ie, pay cash (that I have never done) or use the dealer's money and invest said cash for positive spread).
I love the intangibles of wealth more than I love cars so this is personal for everyone. My 2 cents (pun intended).
If you are more broadly thinking of building wealth, I would look at the spread (ie, what can be earned with the $ less the cost of debt). For example, if the $150k can earn 7% net of taxes, and the car loan specifically is say 1.9%, then I would by all means target 5.1% spread.
Dave Ramsey would fang me for this! And if you value "no debt" peace of mind, he is right and I am less right. Me, I seek + spreads.
If you are willing to accelerate wealth building (re: car loans), after you make your last payment, keep paying the note (to yourself!). This is personal but I hold on to new cars for ~12-14 years and have been fortunate to use these savings to have an option next time for new car (ie, pay cash (that I have never done) or use the dealer's money and invest said cash for positive spread).
I love the intangibles of wealth more than I love cars so this is personal for everyone. My 2 cents (pun intended).
Posted on 6/22/21 at 3:50 pm to el duderino III
quote:
If the car note is 5% apr, and you can get better than a 5% return on an investment, why wouldn't it be optimal to invest it?
Show me where you can get a 5% guaranteed return with zero risk.....
Posted on 6/22/21 at 5:05 pm to dragginass
quote:
Show me where you can get a 5% guaranteed return with zero risk.....
He can't, but if you keep paying a car note there is a 100% chance you will lose money, in interest and depreciation. Why lose on the car note when you can invest that money and have a higher chance of making money off your investment?
Posted on 6/22/21 at 5:55 pm to el duderino III
For me, I’ve experienced truly hard times (only food was deer I shot, fish I caught, veggies I grew and stuff family gave me). I’ve had times where I didn’t have reliable transportation. I’ve had times I didn’t know how I’d pay my house payment.
So for me it’s about never experiencing that again. If I own my car, own my home, I’ve got less of a “nut” to scrounge up each month.
Having as small a “nut” as possible is a key to life, imo. Think of it like insurance. Maybe I’ll never be rich, but I can assure you I will never be homeless or stuck without transportation again. I will not have to harvest something to survive the month.
Experience shapes our opinions and for me the times of true poverty I’ve lived through, the background i grew up in (damn near entire family worked in cotton mills) all makes me averse to debt (risk) and value paid off homes and cars.
So for me it’s about never experiencing that again. If I own my car, own my home, I’ve got less of a “nut” to scrounge up each month.
Having as small a “nut” as possible is a key to life, imo. Think of it like insurance. Maybe I’ll never be rich, but I can assure you I will never be homeless or stuck without transportation again. I will not have to harvest something to survive the month.
Experience shapes our opinions and for me the times of true poverty I’ve lived through, the background i grew up in (damn near entire family worked in cotton mills) all makes me averse to debt (risk) and value paid off homes and cars.
Posted on 6/22/21 at 6:10 pm to el duderino III
quote:
If the car note is 5% apr, and you can get better than a 5% return on an investment, why wouldn't it be optimal to invest it?
maybe, but there's something to be said about the psychological factor of not having another monthly payment.
I've never had a car payment in my entire life. Every vehicle I've ever owned, outside the first one I got as a teenager from family, I've paid cash for that I saved up myself. And yeah, I'm sure there are times when it would have on paper been slightly more beneficial to invest instead. But the thing is...I DESPISE having monthly payments, on ANYTHING. Phone bill, gas bill, power bill, you name it. I hate it. So anythign I can do to get rid of a bill is a win for me mentally. Also, I don't make a ton of money so every bit I do make each paycheck I like putting towards investments or savings or things that are going ot be beneficial to me, I would much prefer that over having to allocate a few hundred bucks of it towards a car.
Posted on 6/22/21 at 6:13 pm to cgrand
quote:
because the interest is compounding on the loan balance not the book value of the car
For the life of me I can’t figure out why this matters.
The question is whether or not you should pay cash or finance over x years at y rate. What you’re actually buying doesn’t matter, but I’m open to someone explaining otherwise.
Posted on 6/22/21 at 6:15 pm to dragginass
quote:
Show me where you can get a 5% guaranteed return with zero risk.....
I don’t think anyone believes it is a risk free decision. That’s a straw man.
Posted on 6/22/21 at 6:19 pm to Dawgfanman
quote:
For me, I’ve experienced truly hard times (only food was deer I shot, fish I caught, veggies I grew and stuff family gave me). I’ve had times where I didn’t have reliable transportation. I’ve had times I didn’t know how I’d pay my house payment.
So for me it’s about never experiencing that again. If I own my car, own my home, I’ve got less of a “nut” to scrounge up each month.
I get that, but by that same token, good debt at reasonable rates can actually help you make it through those times. Cash flow rules, for the most part. I’d rather owe $200k on my house and have $200k invested than have no money invested and a paid off house. The former would allow me to get through more lean times than the latter.
Posted on 6/22/21 at 6:39 pm to slackster
quote:
Cash flow rules, for the most part
So if someone doesn't make a ton of money (no clue if OP does or not, just playing devils advocate here), wouldn't it be better to keep as much of their paycheck as possible instead of devoting a good percentage of it to a car payment ?
quote:
I’d rather owe $200k on my house and have $200k invested than have no money invested and a paid off house.
well sure, but that's a pretty extreme example. Any money you have "invested" is not liquid so essentially doesn't exist for you for another few decades. Me personally I'd rather take a little bit out of savings (or in this case, free inheritance money) and buy a car rather than take a chunk out of my monthly paycheck to pay for it.
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