If it were me, I would put the bonus money in a dedicated car account, and try to add to it monthly. But if you can deploy your resources in a way that shifts your behavior, that could make a big difference. The rates and the balance are too low to be worth worrying about. For example, will there be a "processing fee?" What will they charge him to cancel the lien and change the title? Will he have to pay sales tax? Hopefully, tj will tell us what he finds out.Īptenodytes wrote:The way I would look at this is that what matters most is the effect on your behavior, not the interest payments or interest income. But terminating a loan early brings a whole slew of possible fees. Loan origination for cars is often subsidized (so that you can get a better deal for a car by taking out a loan), but once you have the loan, interest must accrue at the loan's quoted interest rate. It is almost certainly 1.9% (unless there is a pre-payment penalty), as that is how loans work. Umfundi wrote:At this point, the history of your loan, or the fact you have a car, does not matter. So, if you pay off your car loan, will you save what used to be your payment? Or, will you go looking for a new car, since yours is paid off? If you have a monthly payment, you will likely pay that out of your cash flow, without tapping into savings. To pay cash for a car, or pay off your mortgage, you will tap into your capital, or savings. Ric Edelman, in his book "Ordinary People, Extraordinary Wealth", notes that his successful clients have mortgages that are about half the market value of their homes (that was 2000) and have no inclination to pay their mortgages early.Ĥ. 2.25% is incredibly cheap compared to any other debt I have access to.ģ. I use it to smooth out bills like tuition, and it is part of my emergency funds strategy. My mortgage is paid off, but I do have a Home Equity Line of Credit. You don't want to sink capital into underpinning an expense.Ģ. Paying a mortgage is cheaper than renting. That's a question with very complex answers. Why does anyone who has a sizable taxable investing account, and a mortgage, still have a mortgage? I would be incredibly surprised if it is actually 1.9%. With only those two pieces of information, you can calculate the effective interest rate of the loan if you choose to keep it. Make monthly payments to Honda for the next four (?) years. They should tell you what that lump sum is.Ģ. tj,Īt this point, the history of your loan, or the fact you have a car, does not matter. Ever since I moved that cash out of Rewards Checking, it has not necessarily been as easy of a decision. I took a 1.9% loan because I figured the odds were good that I'd do better investing, and at the time, I had it all in a 4% rewards checking acct, so it was kind of a no brainer with a SAFE alternative. Why does anyone who has a sizeable taxable investing account, and a mortgage, still have a mortgage? So, I look at total cost of ownership (TCO): After I get rid of the car, what will it have cost me? In my view, the stated interest rate on a loan or lease is more or less irrelevant. I want it for the lowest total cost and, if possible, a minimum capital outlay. Therefore, as long as you don't have a liquidity need, it makes sense to pay off the loan. So, would you invest in a risk-free bond portfolio with a two-year duration and a 1.99% return? You probably would it's unlikely that your bank offers a two-year CD earning 1.99% after tax for two years, and in the bond market, Admiral shares of Limited-Term Tax-Exempt earn 0.94% after tax with a 2.4-year duration and some risk. The whole portfolio has a two-year duration because the payments are of almost equal value and have durations ranging from 1 to 48 months. For example, if your payments are $250 a month, then the first $230.69 you pay will be worth $250 in 48 months, and the next $231.07 will be worth $250 in 47 months, and so on. That is, the payoff is equivalent to 48 payments, each one growing at 1.99% for a final value equal to the monthly payment. Paying it off is equivalent to buying a tax-free bond portfolio with a two-year duration and a 1.99% risk-free return. Because of a year-end bonus, I have ample cash available to pay it off - but I'm not sure if that is the best financial move. Tj wrote:Hey Bogleheads, so I have about 4 years remaining on 1.99% Auto loan.
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