Author Topic: Pay off car debt early? Mortgage overpay? Invest?  (Read 637 times)

Zola.

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Pay off car debt early? Mortgage overpay? Invest?
« on: February 12, 2018, 05:12:58 AM »
Pre MMM days, (fairly recently!) I bought a nice 2014 car on finance (Bad me, I know!). The last one was 12 years old and falling apart. I hope to keep this one as long...

I have a little under 3 years left to pay on it.  I paid half of the car cost up front, then agreed to pay the remainder off over 3 years. The interest rate is 3.44%. The remaining balance is £6900.

My mortgage rate is 3.09%, fixed for another couple of years. The remaining balance is £118,000. 23 years left in the standard deal.. I do overpay every few months and love seeing the number come down.

I can make overpayments on the car at any time, but I don't think the actual savings would be anything too dramatic? I pay £219 a month in the fixed deal..

I invest £300 a month into Vanguard Index funds, as well as put in 15% of my monthly pay into a pension  (mainly index funds, 9% from me, 6% from employer).

In my shoes, what would you do? Selling the car isn't an option I am afraid.



« Last Edit: February 12, 2018, 05:15:32 AM by Zola. »

boarder42

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Re: Pay off car debt early? Mortgage overpay? Invest?
« Reply #1 on: February 12, 2018, 05:36:30 AM »
not sure why selling the car is not an option but thats what i'd do

since you're saying its not an option though i would invest more - i wouldnt even be making extra mortgage payments even if your rate will be variable in the future. 
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Rufus.T.Firefly

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Re: Pay off car debt early? Mortgage overpay? Invest?
« Reply #2 on: February 12, 2018, 07:52:36 AM »
Find a way to get rid of the car loan - sell the car or pay down the debt. My philosophy is never carry consumer debt. I don't really care about the interest rate... even if it was a 0% interest loan from your family - pay it off ASAP.
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SlowMustachian

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Re: Pay off car debt early? Mortgage overpay? Invest?
« Reply #3 on: February 12, 2018, 07:59:11 AM »
I had the same issue, found mmm after I bought a car on finance with big down payment and a 3+ interest rate.  After asking people what to do on the blog I ended up trading it in for an older version of the same car so have no loan. I wanted to keep the same car because I needed all the seating. Now I wish I traded it in for a smaller electric car!

SlowMustachian

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Re: Pay off car debt early? Mortgage overpay? Invest?
« Reply #4 on: February 12, 2018, 08:00:02 AM »
*asking people on the forum, not blog

ReadySetMillionaire

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Re: Pay off car debt early? Mortgage overpay? Invest?
« Reply #5 on: February 12, 2018, 09:07:49 AM »
I have a car loan at about 5.3% interest with a $196/month payment.  I am going to pay it off this year, but only after we max all of our tax advantaged accounts. 
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TheAnonOne

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Re: Pay off car debt early? Mortgage overpay? Invest?
« Reply #6 on: February 12, 2018, 09:12:25 AM »
Paying off a mortgage early is an emotional choice, but mathematically wrong.


Ultimately, stop paying off the mortgage early, sell the car (or pay it off ASAP, but really, your income SOUNDS low given the values, so you probably REALLY NEED a cheaper car to get rich.)

Then max those tax advantaged accounts, again assuming your income is low, you probably have more than enough room in the 401k, IRA, and HSA before moving to just brokerage accts.

EDIT: I see you are from the UK, so the tax advantaged accts may differ. Also, investing advice here has a general "American" slant.
« Last Edit: February 12, 2018, 09:14:07 AM by TheAnonOne »

Zola.

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Re: Pay off car debt early? Mortgage overpay? Invest?
« Reply #7 on: February 12, 2018, 09:29:10 AM »
Income is quite a bit above the national average, for a very LCOL area in the UK, cheapest in the UK (works out about $50,000). My wife earns about $60,000. All relative to where you live, but for us its fine. Earning more is of course what we all want, I am training in some systems to command more money for the longer term.

On the face of it £219 a month between us isn't much at all... but its still a little monthly annoyance, which could be invested etc.

I have since done some sums and mathematically overpaying on the car loan would save me very little cash.

Zola.

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Re: Pay off car debt early? Mortgage overpay? Invest?
« Reply #8 on: February 12, 2018, 09:32:27 AM »
Find a way to get rid of the car loan - sell the car or pay down the debt. My philosophy is never carry consumer debt. I don't really care about the interest rate... even if it was a 0% interest loan from your family - pay it off ASAP.

That is my new philosophy now haha! :)

Laura33

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Re: Pay off car debt early? Mortgage overpay? Invest?
« Reply #9 on: February 12, 2018, 09:34:57 AM »
First, repeat advice to sell the car and get something cheaper.  But I don't know anything about the UK car market, so for all I know that cost may be reasonable.

So second:  the math says to invest more.  Period.  Your interest rates are very low, especially when viewed historically.  It is therefore very likely that you will do better putting that money in the market.

In addition, when you invest, the first few years make a huge difference in your end results.  The rule of 72 says that, if you get a 7% return, your money will double every decade.  So if you have $50K invested now, in 30 years that will be $400K (three doublings).*  OTOH, if you start a decade later, in the same 30 years your money will be worth only $200K -- half as much.  Think about that:  same actual amount of money, put in exactly the same investments, but you end up with only half as much, just because you started later.  So you want to get as much invested as early as you can, so your money has as much time to grow as possible. 

The complicating factor here is the UK mortgage system, which I understand offers only adjustable-rate mortgages, not fixed ones.  But my advice remains the same, because if rates skyrocket like they did in the late '70s, you can always sell your investments and pay down the mortgage.** 

*Ignoring tax implications here for simplicity's sake.

**Yes, it's a little bit of a risk (because skyrocketing inflation tends to depress market performance, so you might be selling at a low).  But it is fairly unlikely that that would happen quickly enough that you'd get totally hammered.  So I'd go after the option that is much likely to happen, i.e., market continues to outpace mortgage rates over the longer term.
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Tuskalusa

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Re: Pay off car debt early? Mortgage overpay? Invest?
« Reply #10 on: February 12, 2018, 09:46:56 AM »
I second the idea of paying off the car. From there, make it a policy to not take on consumer debt. From there, invest more.

aceyou

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Re: Pay off car debt early? Mortgage overpay? Invest?
« Reply #11 on: February 12, 2018, 05:28:08 PM »
Top option: Sell the car.  Disclaimer...my wife and I have never owned anything that's less than ten years old, so I don't know what I'm missing.  I'm a relatively happy guy, so probably not missing much. 

Second option: Invest as much as possible.  I can't say it better than Laura did. 

Lmoot

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Re: Pay off car debt early? Mortgage overpay? Invest?
« Reply #12 on: February 13, 2018, 05:52:47 AM »
Why is everyone saying to sell the car? OP already stated they want to keep it long term. If they keep it 10 years, what’s a few thousand dollars in savings amortized over a decade? Not much, and certainly not worth the hassle of 1) Selling a car 2) Paying fees to buy again 3) the gamble of getting a different used  car.

An older car likely means more repairs in the same amount of time of ownership. Personally I see nothing wrong (if you can afford it), with buying a later model you intend to drive into the ground. Having spent thousands per year on my 2003 Accord (standard milestone repairs), I would not start out with a car that was that close to needing major components replaced. I am hanging in there with my car bc I got many cheap years out of it before the expensive ones, and with most of the expensive years behind me now, I can eek out a few more good cheap years. But my next car will be significantly newer.

Zola.

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Re: Pay off car debt early? Mortgage overpay? Invest?
« Reply #13 on: February 13, 2018, 07:51:02 AM »
Cheers Lmoot! :)

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Re: Pay off car debt early? Mortgage overpay? Invest?
« Reply #14 on: February 13, 2018, 08:19:49 AM »
Hi Zola, hope you’re ok. Fellow UKer here. You know what your car is worth and as a result how much you could sell it for. The difference between this and the cost of buying a new one is obviously the amount you could suddenly invest. With any purchasing/selling decision it comes down to whether the item means more to you than FI. I recently sold a very much loved bike. I valued having the monetary amount invested more than the bike, as great as it was. If you want to keep the car then keep it but as you say, keep it for a very long time.

Interest rates are starting to creep up. We’ve been on threads before talking about the mortgage versus investing conundrum from a UK perspective. With the benefit of hindsight and if I was in your position now I think I would be tempted to:

1. Get rid of the car loan ASAP.
2. See what the chances are of getting a 5 year fix on the mortgage.
3. With a mortgage fixed for a longer time I would stop overpaying on it.
4. Invest every penny I could.


freya

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Re: Pay off car debt early? Mortgage overpay? Invest?
« Reply #15 on: February 13, 2018, 08:57:25 AM »
I heartily agree with getting rid of the car loan - not just to save money but to get rid of that "minor annoyance" and enforce the discipline of limiting debt to mortgages.  Minor annoyances have a way of adding up, and reducing them is what Mustachianism is all about.  Also, I would not pay a cent toward the mortgage until the car loan is wiped out, given the difference in interest rates.

Beyond that, we really can't offer useful advice without knowing more about your situation:

- marginal income tax rate
- whether mortgage interest is fixed or variable - if variable, how interest rate increases are determined
- specifics on the tax advantaged contributions (how much, matching funds, etc)
- is mortgage interest tax deductible
- how much emergency savings you have

In the UK, one would expect a lower gain on investments and a higher marginal tax rate compared to a similar situation in the U.S.   In the U.S. it's generally better to carry the mortgage and put everything toward investments, but that may not be so clear for you.