Pay Off Auto Loan ASAP?

[Richie]

Greetings, Mustachians!

I feel as though I made a financial mistake a couple of years back.  I received a major promotion at work (we're talking a 75% raise).  As is often the case in life, my car (which was a junker) promptly decided to reward my pay raise by ceasing to work.  This car was a bit of a money pit in the four years I owned it, but that didn't upset me terribly as I didn't have monthly loan payments to worry about.  Insurance was also cheaper.  Anyway, I was pressured by well meaning people to take out a loan and purchase a used car.  I should add that I do love my car.  I'm getting fantastic gas mileage, and it is a reliable brand.  It's also not overly flashy - it's simply a 2013 Toyota Corolla.  I expect to keep it for a very long time.

Going from part-time minimum wage to 30k per year felt like I was winning the lottery at the time, but now (two years later) I have a more realistic understanding of how far money goes.  I've recently received another major promotion, which has bumped me up to 36k per year.  This caused me to take a long, hard look at my spending habits.  It also caused me to discover this blog, which I'm still working my way through.  I'm beginning to wonder whether I should have taken that auto loan.  My insurance premiums skyrocketed, and I'm now stuck with several more years of payments.  I think the important lesson this has taught me is, just because you can pay for something, doesn't mean you can afford something.  I was wondering what the MMM way of handling this would be?  Should I hold tight and just keep on paying for several more years, and just keep the car a very long time (which I would be happy to do - I really like the car)?  Or, should I throw as much money as I can at this loan until I pay it off (which would allow me to invest more, sooner)?

Some more details:

Gross Salary: $36,434
Minus Taxes, Mandatory 7% Retirement Pay-In, and Health/Dental/Vision Insurance Deductions: $24,016.24 (net)
Remaining Balance On Loan: $11,518.14
Finance Rate: 1.99%

[Exflyboy]

Well your right you really should not have taken out an auto loan. You should have saved the money and bought a car you could afford and repaired the one you had (within reason).

Yes it would probably be a good idea to pay off the loan.. But, you need to get a quote for what is outstanding first, some loans are structured such that you save precisely $zero in interest by paying it off early. Usually these loan shark type "deals" are what are sold by used car dealerships.

If you save interest (and I assume the APR is above 5%) by paying off early then of course you should.

Naturally if you have other debt such as credit cards with a higher APR then you should pay these off before the car loan in any case.

[Richie]

Well your right you really should not have taken out an auto loan. You should have saved the money and bought a car you could afford and repaired the one you had (within reason).

Yes it would probably be a good idea to pay off the loan.. But, you need to get a quote for what is outstanding first, some loans are structured such that you save precisely $zero in interest by paying it off early. Usually these loan shark type "deals" are what are sold by used car dealerships.

If you save interest (and I assume the APR is above 5%) by paying off early then of course you should.

Naturally if you have other debt such as credit cards with a higher APR then you should pay these off before the car loan in any case.

Thanks for the response.

The one good decision I made two years ago is financing through a credit union.  My APR is only 1.99, and it is a biweekly payment to save on interest.  I can save on future interest payments by contributing extra, if I feel inclined to do so.  My dilemma is figuring out how aggressive I should attack this loan.  I suppose I could trade in the car for something older and cheaper, but I do really like the car and feel like I could get 15-20 years out of it.  Also, I currently have no other debt.  Really, the loan is reasonable - it's just what I'm spending between the loan and the insurance that is the thorn in my side.

[Syonyk]

That's a new enough car, and you make little enough, that it may be a better idea to sell that car, buy a cheap car that's 8-12 years old, and pocket the difference.  You can then drop your insurance back as well (though be sure you can cover the deductible).

In your position, I'd also recommend learning to do your own car work.  It pays out very well on an hourly basis as compared to taking your car to a shop.

How far is your commute to work?  Would biking to work be feasible?

[lbmustache]

That's a new enough car, and you make little enough, that it may be a better idea to sell that car, buy a cheap car that's 8-12 years old, and pocket the difference.  You can then drop your insurance back as well (though be sure you can cover the deductible).

In your position, I'd also recommend learning to do your own car work.  It pays out very well on an hourly basis as compared to taking your car to a shop.

How far is your commute to work?  Would biking to work be feasible?

Nah, not worth selling his car in this case. A quick check online reveals that PP value for a 2013 Corolla, (guesstimating this part for the OP) 20k miles, very good condition, is about $12k. OP wouldn't be making much off this car sale. So then OP gets rid of the loan, and has to dip into savings to buy a "new" old vehicle for $5k or whatever.

OP, I vote for keeping the car and paying it off asap. Your APR is low enough where it's not going to kill you. You're driving a Corolla, not a Mercedes, and like you said it will last forever. You have a reliable car that you know the history of.

What is your insurance rate? Is there anything extra on your insurance that you don't need?

[use2betrix]

That's a new enough car, and you make little enough, that it may be a better idea to sell that car, buy a cheap car that's 8-12 years old, and pocket the difference.  You can then drop your insurance back as well (though be sure you can cover the deductible).

In your position, I'd also recommend learning to do your own car work.  It pays out very well on an hourly basis as compared to taking your car to a shop.

How far is your commute to work?  Would biking to work be feasible?

Nah, not worth selling his car in this case. A quick check online reveals that PP value for a 2013 Corolla, (guesstimating this part for the OP) 20k miles, very good condition, is about $12k. OP wouldn't be making much off this car sale. So then OP gets rid of the loan, and has to dip into savings to buy a "new" old vehicle for $5k or whatever.

OP, I vote for keeping the car and paying it off asap. Your APR is low enough where it's not going to kill you. You're driving a Corolla, not a Mercedes, and like you said it will last forever. You have a reliable car that you know the history of.

What is your insurance rate? Is there anything extra on your insurance that you don't need?

I agree with this 100%. It's already an affordable vehicle. That was a good decisions at least.


That being said, I might actually vote to just keep making your monthly payments. You have a 2% interest rate. If you can invest the money you'd be better off. If you aren't going to invest it, then pay it off. You won't get 2% in a savings account even.

[Paul der Krake]

Keep car.
Make payments as per your current finance terms.
Invest whatever else you have left at the end of the month.
Enjoy your fine econobox for the next 20 years.

[snogirl]

Keep car.
Make payments as per your current finance terms.
Invest whatever else you have left at the end of the month.
Enjoy your fine econobox for the next 20 years.

x2