Paying off a 0% loan early?

[11ducks]

Hi all,
I'd love an opinion from some awesome MMMers.
I have a car loan (ducks to avoid punches) from the new car I bought in Jan 2013- 0% finance no fees, $287/month over 60 months. In my defence it's a 1.2L (tiny engine!) that only cost $17k total.

I currently have just under 3 years left (around $9k). There is an early payout fee of $13/month for the months remaining on the loan. What are your opinions on paying it off early if I have the cash? Is there a big difference between putting the $9k in an account earning 3% for the next 3 years and having that regular expense, versus paying off my loan early (with a $400ish early payout penalty) but avoiding indexation for the next 3 years and having an extra $300/month instead to save/invest? I'm really leaning towards paying off early -so the extra $300 freed up a
Month could go straight into savings-is that wrong?  Would love any advice, especially about how indexation plays into it as it still confuses me a bit (eg how $100 next year is worth more than $100 this year)

Thankyou!!!

Ps-typing on phone- pls excuse horrid grammar/typing

[deborah]

I deliberately got a loan under similar circumstances and put all the money in the special account I set up to pay for it, and the interest earnt is more than the interest in the loan. Where would the extra money come from to invest - it has either all been used up in paying off the car early or it is sitting in the account earning interest while you have the loan?

[dcheesi]

Not sure what 'indexation' refers to in this case. Are you just talking about the effects inflation? Or is there some sort of inflation adjustment fee being applied somewhere?

[11ducks]

Oops inflation, sorry, I was thinking of CPI

[kpd905]

I don't see a reason to pay that $400 penalty.  I'd just keep paying the loan each month.

[This_Is_My_Username]

The financially correct decision is to:

a) pay the 0% loan off as slowly as possible.

b) sell your 2-year old car and buy a 10 year old car.

Not sure if both are possible, because the car is collateral for the loan.

[Pigeon]

I'm in a nearly identical situation, but there is no penalty for paying the loan off early.

I'm in no great hurry to pay it off at 0%. 

[boarder42]

i'm gonna agree with username above... pay off as slow as possible... but really you should sell it and buy and older car.

[11ducks]

The financially correct decision is to:

a) pay the 0% loan off as slowly as possible.

b) sell your 2-year old car and buy a 10 year old car.

Not sure if both are possible, because the car is collateral for the loan.

Haha, nooooo- I went through 4 x secondhand cars in the preceding 7 years, at a total cost (incl repairs) of over $20k (unlucky) - there is no way I'm buying another secondhand car until I know enough about cars so that I can fix it myself. I have a 5 year warranty, that alone is worth the peace of mind it gives me (not being stranded on the side of the highway alone with kids in a thunderstorm, praying that a serial killer doesn't decide to mosey on by).


Thanks guys, will go the logical route (sigh)

[dcheesi]

Yeah, invest the $9k you have and keep making the payments. Between the extra investment earnings and avoiding the prepayment fee, it's a much better deal.

BTW, I'm still trying to figure out the point of setting a prepayment penalty on a loan that isn't earning the bank any interest?? All it does is encourage you to keep their money longer, with no upside for them...

[Retire-Canada]

BTW, I'm still trying to figure out the point of setting a prepayment penalty on a loan that isn't earning the bank any interest?? All it does is encourage you to keep their money longer, with no upside for them...

I expect that if you ever miss a payment date there are fees that kick in. If you pay the loan of fast there is less chance of the lender collecting on those fees.

It's also possible the auto company is paying a lender to hold the loan and if it is paid off early they lose out on interest.


-- Vik

[Retire-Canada]

Pay off the loan when each payment is due.

I'd keep the new car given that you've suffered the biggest part of the depreciation and you'd just be selling it at a loss to someone else for a deal at this point.

-- Vik

[deborah]

BTW, I'm still trying to figure out the point of setting a prepayment penalty on a loan that isn't earning the bank any interest?? All it does is encourage you to keep their money longer, with no upside for them...

Not quite. The loan is almost certainly derived from European money and the bank is actually getting more for it than they may get elsewhere. Besides which, it would be a nice little money spinner, since most people keep their cars for less than 5 years, so would have to pay it out.

[forummm]

I think it's fine to keep the car. I would pay exactly your loan payments whenever they are due. You would cost yourself quite a bit to pay it off early. Your payments in the future will be with deflated dollars, you can earn interest on them in the meantime, and you don't have to pay the prepayment penalty.

Honestly, I think your lender is stupid for having a prepayment penalty on a 0% loan in the first place.

[11ducks]

Thanks for the responses guys. I think I got such a good deal re 0% finance/no fees, because I bought a 2012 plated model 3days before the end of 2012-if they hadn't sold it then the price would have dropped as it was 'last years model'