The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: Lski'stash on July 20, 2015, 05:32:03 PM
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I have a little over 6,000 left on a loan for a Ford Fiesta with an interest rate of 3.25%. My husband and I now have one more credit card left to pay (4,000 left, should be done by September), and then can either pay aggressively on the car loan, or pay the 10,000 left on his student loans (7%). We then just have a mortgage left (200,000 left at 3.95%). From the research I've done on the forum, if the mortgage rate is between 3-4%, then it's actually better to invest the money as long as it can beat a 7% increase. My question then, is whether or not I should treat my car loan the same way, or pay it down aggressively within the next few months?
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One difference is that car loans aren't tax deductible like mortgage interest. 3.25% Isn't a bad rate but it isn't awesome either my car loan is at 1.49%. Penfed.org (http://Penfed.org)is also offering to refi car loans at the same rate. I'm not sure I'd bother to refi your car loan. But I'd definitely pay down the student loan at 7% before doing anything else. It was me I'd be inclined to just pay down the car loan and invest instead. However, it is at an interest rate, size, and duration, that paying it off is also a fine option.
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I would pay the student loan down ASAP. I would leave the car and mortgage on minimum payments. I would invest all savings once you've killed the student loans.
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Depends on your risk tolerance. Statistically you should come out ahead by investing instead of accelerating the car loan payoff, but it's not guaranteed. Whichever option you choose make sure you leave an emergency fund buffer.
Definitely pay down the student loan though.
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I would definitely pay the student loan first. Then decide if you want to throw money at debt or increase your investments.
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Ummmm . . . no.
Obviously pay off the higher interest rate debt first, but comparing a car note to a mortgage is ridiculous for a number of reasons. Besides the mortgage interest deduction pointed about above, new cars depreciate so rapidly that someone who takes out a new car loan is almost always immediately under water. While people can end up underwater on home mortgages, it is not a situation that almost always happens to people.
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Ummmm . . . no.
Obviously pay off the higher interest rate debt first, but comparing a car note to a mortgage is ridiculous for a number of reasons. Besides the mortgage interest deduction pointed about above, new cars depreciate so rapidly that someone who takes out a new car loan is almost always immediately under water. While people can end up underwater on home mortgages, it is not a situation that almost always happens to people.
I believe the OP was talking about the loan, not the depreciation costs of a new vehicle. My 2007 vehicle is financed (at a rate lower than my mortgage - and I have never been underwater on a car, FWIW). I could pay it off more quickly than I am already, or I could continue to contribute very aggressively to tax-advantaged retirement accounts.
Generally the best situation is to not have a car loan at all, but if it does down to "pay a car loan at 3% or max your 401k", I would lean towards the latter.
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Ummmm . . . no.
Obviously pay off the higher interest rate debt first, but comparing a car note to a mortgage is ridiculous for a number of reasons. Besides the mortgage interest deduction pointed about above, new cars depreciate so rapidly that someone who takes out a new car loan is almost always immediately under water. While people can end up underwater on home mortgages, it is not a situation that almost always happens to people.
Being underwater on a car is not a big deal. I'm underwater on both of mine (probably like $5-$10k on each). So? If they got totaled, I'd just pay of the extra that insurance wouldn't cover. If you can handle it, it's fine.
If you're curious, in my case I got 0% loans and huge tax credits (they are Leafs) so I just invested the tax refunds instead of paying off the loan.
http://forum.mrmoneymustache.com/share-your-badassity/nissan-leaf-almost-paying-me-to-drive-it/
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You should conduct a total cost of credit analysis on this one. Of course, at first glance, it would make sense to pay off the highest interest loan first.
However, ask yourself the question: are there more strings attached to the loan? If you finance your car, the lender forces you to carry more insurance than you might want or need, including low deductibles. This is my main problem with financing cars. The insurance premiums for collision are not worth it for me if I could buy a 'new' used car outright with cash.
Insurance should only cover financially devastating events, e.g. severe illnesses, a fire burns down the entire house, you cause a traffic accident and a third person is badly injured....
Smaller damages should be paid out of pocket to incentivize mindfulness (High Deductible concept)
Factor this into your analysis and a 2.5% car loan can in fact turn into a 7.5% loan if you include costs for over-insurance that are associated with it.
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They can work like mortgages but the interest rates shouldn't be as high as mortgage interest rates. I financed my car because the rate being offered was 1.79 and that was pretty low. Had it been 3-4%, no way.
cars depreciate and the interest is not deductible.
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You should conduct a total cost of credit analysis on this one. Of course, at first glance, it would make sense to pay off the highest interest loan first.
However, ask yourself the question: are there more strings attached to the loan? If you finance your car, the lender forces you to carry more insurance than you might want or need, including low deductibles. This is my main problem with financing cars. The insurance premiums for collision are not worth it for me if I could buy a 'new' used car outright with cash.
Insurance should only cover financially devastating events, e.g. severe illnesses, a fire burns down the entire house, you cause a traffic accident and a third person is badly injured....
Smaller damages should be paid out of pocket to incentivize mindfulness (High Deductible concept)
Factor this into your analysis and a 2.5% car loan can in fact turn into a 7.5% loan if you include costs for over-insurance that are associated with it.
I have $2,000 deductibles on mine right now. You have me wondering if my credit union would be pissed if they found out. :P
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Thanks everyone! My credit union does make me keep full coverage on the car until the loan is paid off. I called my insurance agency to find out the difference if my car were to just be on PLPD (limited liability only), and the difference came out to $350 per six months. If I am planning on switching to PLPD, should I pay that one before the student loans then?
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@forumm- I definitely might look into a leaf down the road. It doesn't make much sense for me at this point, but if I could ever get a deal like that I just might!
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forummm's situation with the cars is awesome . . . and unusual. Not all locations have the tremendous incentives through tax credits.
More often than not, car loans are not a good deal.
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Why not sell the fiesta? If you can make even $ 500 bucks profit from the sale then you are good. IMHO it's not worth it to have a car loan and like others have said pay the high insurance premiums for full coverage and high registration cost(here in Colorado at least) associated with a newer vehicle. Buy a good cheap reliable Honda fit, Toyota matrix, corolla etc. If you really worried about maintenance and not at all mechanically inclined buy a great extended warranty (just make sure to read all the fine print on the policy). My ex wife's last Subaru was right at 80k when the head gaskets went out - common issue - all covered by her ext warranty as well. She paid her $ 500 deduct for the ext warranty and was good to go!
I personally plan to never take out a loan for anything ever again - besides a mortgage.
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@Kevin S. I have thought about selling the car, and that still might be what happens I think. We do have two cars, but my SO was pretty quick to remind me that he has to have a car for when he's on-call for work so he can respond in the time frame he's given. it looks like I might be able to get $500-1000 profit for it, but I would have to save up a couple grand to add to it to get a reliable car.
So... Here's where my numbers are with what everyone has pointed out.
Car savings for payoff= 6,000*3.25%= $195, plus the $700 saved from insurance= $895 for the year
Student loan payoff savings= 10,000 *7%= $700 in savings from payoff
Potential gain on 403B if no payoff on car- 6,000- (180*12)= $3,840*7%= $268.8
Am I missing anything? I know these are not exact numbers and I'm new to economics-type math, but according to this I should payoff the car and then the loans.
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The correct answer is to max out 401ks, IRAs and HSAs first. Do not pay extra on the car or house. Consider refinancing car for full value at 3%. Invest the difference. Do not consider paying off student loan. Consider refinancing through SOFI. SL are forgiven in the event of death or disability. One of which is guarantee, the other a fairly high probability. There is also a chance Hillary will offer reduced rates to garner the youth vote. Put your energy into investing.