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Pay off car loan due to low savings interest rate?
Old 08-11-2020, 12:29 PM   #1
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Pay off car loan due to low savings interest rate?

I currently have a 0.9% car loan with roughly $10K left on the loan (loan goes to 12/01/2022). I'm debating on whether to just pay it off since my emergency fund ($50K in a Capital One MM account) only earns 0.8% in interest.

I've looked at other high yield accounts to transfer my cash to but the change in interest rate would be a minuscule rise in interest accrual due to the amount. I also read somewhere that paying off a car loan early could be a "ding" on your credit report...but am not sure whether to believe that or not. My FICO score is 800+ and I wouldn't want to jeopardize that.

Thoughts?
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Old 08-11-2020, 12:37 PM   #2
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Keep the cash. You might need it.
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Old 08-11-2020, 12:48 PM   #3
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Originally Posted by jimbohoward69 View Post
I also read somewhere that paying off a car loan early could be a "ding" on your credit report...but am not sure whether to believe that or not. My FICO score is 800+ and I wouldn't want to jeopardize that.

Thoughts?
No, paying off early creates no ding (just double check there are no early repayment penalties in the loan, unusual but they do exist sometimes. The only thing you may have heard wrt paying it off is, when you use zero debt after a while you start to become less of a known-low-risk, because you're no longer demonstrating that you can manage credit.

Funnily enough, being financially solvent enough to not need debt doesn't always result in a perfect score. So, you probably can't get 850, but should have no issues staying over 800. I haven't had a car note since 2008, or a mortgage, just a couple of cards. I get a new one every few years for offers and bonuses, FICO seems to like that.
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Old 08-11-2020, 12:52 PM   #4
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Keep the cash. You might need it.
It's not really an "emergency fund" per se. The reason I opened the account in the first place was for a "house down payment fund"...but having access to a VA loan alleviates that requirement. Plus, I've got two guaranteed pensions (for life) that easily cover my annual expenses.

I only ask the question because it SEEMS that I'm losing money on the car loan since my cash is earning less.
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Old 08-11-2020, 01:07 PM   #5
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You are also losing money on a declining value asset, a car.
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Old 08-11-2020, 01:15 PM   #6
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You are also losing money on a declining value asset, a car.
Doesn't really come into play as all cars have that depreciation feature. Kind of like buying a cake and eating it a piece at a time. The loan is a stand alone item.
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Old 08-11-2020, 01:17 PM   #7
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You are also losing money on a declining value asset, a car.
So are you suggesting that I pay it off?
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Old 08-11-2020, 02:42 PM   #8
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Keep the cash. You might need it.
+1... besides any potential savings a miniscule... you'll have an average of a $5k balance between now and the end of 2022... that's 28 months... $5k*(0.9%-0.8%)*28/12 = $12.
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Old 08-11-2020, 02:43 PM   #9
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Doesn't really come into play as all cars have that depreciation feature. Kind of like buying a cake and eating it a piece at a time. The loan is a stand alone item.
+1... the fact that the loan collateral is depreciating is the same whether the OP pays it off over it remaining term or pays it off early so it clearly isn't particularly relevant to the decision of whether to pay it off early or not.
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Old 08-11-2020, 11:28 PM   #10
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+1... besides any potential savings a miniscule... you'll have an average of a $5k balance between now and the end of 2022... that's 28 months... $5k*(0.9%-0.8%)*28/12 = $12.
You forgot OP will pay tax on the 0.8% so it's a smaller amount, meaning the savings will be larger. Closer to $30
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Old 08-12-2020, 04:43 AM   #11
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I hate making payments on anything. It is such an inconvenience. I also managed our income and lifestyle to prevent the need to borrow money except for a mortgage and also a CC that is only used if we can pay it off each month (that to is limit the amount of cash we would need to carry). We made double payments on our modest home so it was paid off early to save interest and we pay cash for everything else including cars.

If someone is financially solvent then why do they need to be worried about their credit score? What difference does it make if it isn't a "perfect score"? Our credit scores are just fine based on paying off CC each month and paying utilities on time.
Consider buying a less expensive car in the future so you don't go into debt then put the payments into your savings/investments. If you are debating with yourself about the insignificant difference between the car loan and your emergency fund then maybe this is an opportunity to learn more about LBYM so you can become financially independent.



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