Payoff Car Loan?

[Perryinva]

Same same. I’ve only bought 5 brand new cars in my life. The first was a young (1980, 22, right out of college) and stupid financial move (since I had zero credit and just started my first real job, the dealer bent over to get me approved... for 17.9% for 4 years!). A VW Vanagon Camper that I camped in a LOT back then. Loved it. Had to have it. Did pay it off in a year, owned it for 3-4 years, traded it in on a new Porsche. Another young & stupid move. Lots of fun. No regrets. Most every car for the next 35 years, once I wised up to depreciation and became my own mechanic was bought used and were far better financial deals. Last 2 once retired, I bought new, dealt well, and no regrets. 3 years no maintenance and 4 year BTB warranty is worth it to me now that I can afford whatever I want. Best long term cost deal was a used 1999 Dodge Dakota with 89k miles on it for $4k in 2006 from original owner with full maintenance records. Still own it with 170k on it and no REAL major repairs. (But plenty of minor ones) Was a DD for many years, but now delegated since retirement to my emergency/yard work/hauling vehicle and maybe 2k miles a year tops. Costs $25/month to own and still has a $1k value.

 

[OldShooter]

That's just not possible for everyone, unfortunately.

Certainly there is someone, somewhere, who could qualify for a car loan but for whom there is no car cheap enough for them to pay cash. But I think this is so rare as to be almost nonexistent. Note that I am not saying that they couldn't pay for the car that they want to buy via a loan. By definition that is a car they can't afford. But there will be cheaper used cars that they could afford and which will meet their transportation needs.

The other, also rare, case is where the car is a necessary part of the person's business image. Then a loan and a otherwise-unaffordable car may be necessary. I am thinking of real estate agents here, where they really cannot transport clients in a $1000 beater. But again, rare.

But usually a car loan is about "want" not about need. LBYM is about needs.

As we get older and more prosperous, our ability to pay cash for cars allows us to buy newer and nicer cars, but the depreciation monster still hungers for our wealth. For the past 10 years or so, DW and I have been buying "new" cars that are one model year old. I saved around 20% on a new/old Soob WRX a couple of years ago. A year ago DW saved about 25% on a new/year-old Mini Countryman that was a brass hat driver and came as a certified used car. Wewill probably own these cars for 10 years or longer.

Once, only once, I have I bought a new/new car. Actually a 1994 K1500 Chev pickup. I spent a lot of time shopping and found that every used car manager in town had a year-old K1500 available, priced at close to what I could special-order a new one for. I concluded that the general pickup buyer must not understand delayed gratification and I ordered the new one at $500 over invoice. Paid cash, of course.

 

[OldShooter]

It should be but it isn't always the best choice... especially if the manufacturer offers you 0%-2% money.

The only reason someone is being offered 0-2% money is to entice them into buying a car at an inflated price and one that will instantly depreciate by thousands as you drive it off the lot and during the first year. IOW, that "free" money is not free at all.

Try buying a 2- or 4- year old car from that same dealer and see what the interest rate is. Strong odds are that your total cost of ownership for the first couple of years, including interest expense, will be less than the car with the bought-down interest rate.

 

[38Chevy454]

The only reason someone is being offered 0-2% money is to entice them into buying a car at an inflated price and one that will instantly depreciate by thousands as you drive it off the lot and during the first year. IOW, that "free" money is not free at all.

Try buying a 2- or 4- year old car from that same dealer and see what the interest rate is. Strong odds are that your total cost of ownership for the first couple of years, including interest expense, will be less than the car with the bought-down interest rate.

The point pb4uski was making was in reference to buying a new car using cheap loan rates vs cash purchase, which is a choice someone can make. Is the 2-4 year old car is a better *financial* decision? Sure I agree with that. But sometimes a person just wants a new car, and the 0-2% loan is an attractive option vs paying cash.

 

[OldShooter]

The point pb4uski was making was in reference to buying a new car using cheap loan rates vs cash purchase, which is a choice someone can make. Is the 2-4 year old car is a better *financial* decision? Sure I agree with that. But sometimes a person just wants a new car, and the 0-2% loan is an attractive option vs paying cash.

Yup. Interest rate arbitrage, but that is really a topic for another thread and it has its own issues and tradeoffs.

As many of us have lived our LBYM lives, our cars have evolved to become more "want" and less basic "need." My WRX is an example; it's more than just transportation. It's a bit if a toy as well. But particularly for younger people starting out, the car and the car loan/lease may be their biggest barrier to LBYM and to significant savings. Maybe I'm wrong but I think that is where the OP is. If he weren't trying to do better financially I don't think he'd be here with his question.

 

[Tiger8693]

Well, someones "opinion" of what is right for everyone, or what "should" be possible for everyone, is just that... opinion. Everyone has their own situation, and can make their own decisions.
I have over 1MM assets (including a large portion in cash), but chose to use the 0.9% option on a new truck. I guess I bought something I couldn't afford? Or paid too much because of the financing? By the way, I negotiated price as cash, THEN told them I wanted the financing. They didn't jack up the price.
In any event, there will always be a debate about the "Dave Ramsay" style of living, and using financing as a tool, and the right answer will always be up to the individual.

 

[cyber888]

I have $10,000 left on a 6 year car loan at 7%(2016 Elantra), and $50,000 in an Ally savings account. I have a job and $25000 a year in passive income coming in. Do you think I should payoff the car loan from my savings account? Thanks.

I had $4500 left in my BMW last month - 2.89%. When our $2400 stimulus came in, I paid it. Use to be earning 1.9% on Capital One, but now it's down to 1.3%. I'm paying off my mortgage debt faster this year.

 

[Aerides]

Certainly there is someone, somewhere, who could qualify for a car loan but for whom there is no car cheap enough for them to pay cash. But I think this is so rare as to be almost nonexistent.

We've all heard that stat about how most americans don't have $400 for an emergency? Many of them still qualify for a car note. I was one of them for most of my 20's. Not hard to be broke but still have a FICO over 650. And as a woman with a 20-mile commute, working a 2nd shift, I couldn't buy a cheap used beater and be comfortable that it would be reliable and safe. So I financed. Buying any reasonable car with cash was out of the question.

Later, I still financed cars, paying them better than required, but certainly leaving my slowly-growing cash balance in the bank. I wasn't frivolously overspending, I just didn't make much more than my expenses.

I wasn't rare, or close to "nonexistent" by any means. I was in the same boat with most of my peer group at the time.

 

[OldShooter]

... Or paid too much because of the financing? By the way, I negotiated price as cash, THEN told them I wanted the financing. They didn't jack up the price. ...

If you're happy, fine. But assuming this was manufacturer financing, the no-free-lunch principle applies. To offer a below-market rate, the car manufacturer has to eat the cost of that offer, reducing his profit on the truck. If he instead just reduced the price of the truck, he would make the same amount of money. But buyers are lured by the financing offers and don't understand that TANSTAAFL. They are paying.

 

[Sunset]

From age 16 to 30 something, I only had used cars. Finally in my 30's I could afford a new car, which was an econo box type, I'm currently on my 3rd new vehicle.
Which I splurged on and paid $30K.
At my age, I don't feel the strong desire to fix my own cars anymore.

My many used vehicles were an education in auto-repair.
My most exotic car was a Russian Lada (with writing in Russian as was brought over in Military relocation).
My most strangest purchase was to buy a dead lady's car.

I always paid cash for my cars. Never financed them, but now maybe if I buy another one, I'll be on the look out for the best cash deal, then finance for a bonus technique.

 

[Perryinva]

Dealers typically make much more on used cars than new cars. Better financing is offered from the manufacturer, as well as dealer incentives to move new iron. The depreciation on a brand new car is absolutely higher than a used car, all else equal, but deals can still be had. My last new vehicle was bought a full year ago, a 2019 BMW X3 loaded exactly as I would have ordered it, minus one option. It was a dealer demo, which had 4000 miles on it, but carried the same new car Maintenance & Manufacturers warranty. The sticker was $54k, which means about $57k out the door. I bought it for $43k out the door after a full day of haggling and walking out..twice. According to KBB, my depreciation is the same as a used car. DWs DD, she puts less than 5k miles a year on it, so those few miles mean nothing to us. It has a whopping 8500 miles on it now. All vehicles are paid off now.

 

[OldShooter]

Dealers typically make much more on used cars than new cars. Better financing is offered from the manufacturer, as well as dealer incentives to move new iron. The depreciation on a brand new car is absolutely higher than a used car, all else equal, but deals can still be had. My last new vehicle was bought a full year ago, a 2019 BMW X3 loaded exactly as I would have ordered it, minus one option. It was a dealer demo, which had 4000 miles on it, but carried the same new car Maintenance & Manufacturers warranty. The sticker was $54k, which means about $57k out the door. I bought it for $43k out the door after a full day of haggling and walking out..twice. According to KBB, my depreciation is the same as a used car. DWs DD, she puts less than 5k miles a year on it, so those few miles mean nothing to us. It has a whopping 8500 miles on it now. All vehicles are paid off now.

Yes. When we get to the point where we can afford newer and nicer cars, we have to work to keep the depreciation monster from biting big chunks our of our butts. I actually think that negotiating is kind of fun, but many do not.

My best deal was on a Mazda RX-8 a little over ten years ago. List was like $29k, but the (new) car was one model year old. I first haggled them down by about 25%. Then I agreed to a Mazda loan (paid off 2 months later) that gave me another $2500 credit. Then when I was with the saleskid signing papers, we found a work order for a repair due to a test drive where the prospective customer had stuffed the RF corner into a snow bank. I tore up the papers and told the saleskid to have his manager call me in the morning. I checked out the repairs carefully, including looking at the car on a lift, then talked to the body shop manager and looked at his pictures of the damage. Finally ended up with that $29K new car for about $18K.

Now later in life and more prosperous, we always start looking for cars by checking the online inventories of model-year-old/never sold cars and, at the dealers, check out the Certified Used. DW's current Mini was both, previously driven by a Mini zone rep and never titled. We got a very good discount, the only problem being it has every ridiculous option they sell; even a heads-up display.

 

[Perryinva]

That’s funny. I enjoy haggling too; DW can’t stand it. I never NEED a car. They NEED to sell one. That’s the main point they want you to forget. When I retired, we planned on some east coast travels and the X3 pressed all the buttons for me. I know the vehicle pretty well. I love the BMW HUD, not so much the Mini one. We also have a 2016 MINI Clubman sans HUD.

 

[Earlygirl]

I would either pay it off or refinance to a lower rate at your local credit union. No fees to refinance. If you need an option in case you need emergency cash get a HELOC on your home, if you are a home owner. If not a home owner maybe you can sign up for a credit card that has a zero percent option for a year to 18 months. I would not want to be paying 7% at this point.

 

[seraphim]

Refinance then put the $10k in a Vanguard stock fund where it will earn a higher interest rate until you retire - assuming the loan payments are doable for you. We just got a 2.8% loan. Vanguard fund averages about 8%. You do the math

 

[artsy-B]

It should be for anybody over the age of 30, if they have a handle on their finances.

Totally disagree. Life and kids and domestic violence and stuff like that. Do not be so dang pompous!