Pay off Auto Loan or Invest more?


#1

Okay guys, I’ve got a dilemma. I set some financial goals at the beginning of 2017, but I like to travel and don’t want to be a hermit, so I haven’t been saving enough. Now I’m halfway through the year and not on the mark to meet all of them.

I have an auto loan with $10k left that I was hoping to get paid off by the end of the year. I also started putting money (currently $4k) in Vanguard Index funds and was hoping to have at least $10k by the end of the year.

These goals are probably not compatible. I’m still going to max my 401k contribution, and it’s not the end of the world either way, just trying to decide the best use of the resources I have left. The car is my only debt, and I’d rather not sell it. While it would be nice to go into 2018 totally debt free, I need to start investing more outside my pension and 401k.

The interest on the loan is pretty low, but it will take longer to pay off $10k than save $6k. I guess I’m trying to weigh the benefits of getting out of debt sooner vs. investing sooner. Any thoughts?


#2

The best way for me to answer this would be to consider what I’d do in your situation: I’d pay off the debt first. Being debt free is a real plus for building wealth. Focus on eliminating the debt first, then move to investing.

Good luck,

John


#3

I think it may come down to what will motivate you. Strictly number-wise, the investing would likely yield a better return (6-8% or more) vs the low auto loan interest (assuming its 2-4%?). But if the prospect of being debt free is really important and you will benefit mentally from the clean slate, then paying off your loan is a good call. Personally, I would try to do a bit of both so that I can chip away at the loan while investing as I go. Hope this helps and good luck!


#4

What will help you sleep better at night? Eliminating the debt or growing your money?

You might try an analysis and see what the real dollar difference is between the 2, that may tip you one way or another.


#5

Do you think you could get a decent amount for the car if you sold it?

I know you said you rather not sell but, what if you got a couple grand for the car and then used half the money to finance a cheaper car (resulting in a lower loan amount than $10K) and invest the other half?

To birds with one stone!!!


#6

Fantastic job either way!
I recall Dave Ramsey saying no one should spend all of their money on a car and certainly spend more than all of their money ( a loan). Mindset wise my own preference would be to get to zero first and then go from there.


#7

Max out 401 K and IRAs then pay down debt. Thats how I would do it!


#8

I’ve sunk my annual bonus into my car loan to pay it off. Getting rid of the debt was more important to me. Seems to be either an emotional decision on your part (how much do you value being debt free) or a mathematical one (car loan interest rate vs potential investment gains).


#9

I have about $11,000 left on my auto loan at 2.79%. I’ll keep making regular payments until it’s done. Since I’m young, I would rather invest in my retirement accounts. I could pay the whole thing off now if I wanted to, but I’d rather keep my e-fund healthy and keep pumping money into my Roth IRA


#10

It also depends on the interest rate too. Like @David is at 2.79% which is fantastic (clap clap) so it shouldn’t be a priority.


#11

Have you seen my post about how 1 point on my credit score cost me $1,000 on my auto loan? TLDR is my credit score was 739 and my CU would have given me something like 1.59% if I had a 740. So instead I had to play some games and trick the dealer into giving me a good rate. It worked, but I still lost $1,000.

Also, don’t know if posting a link to my site is a bad thing so feel free to delete (sorry!)


#12

This is a hard one. The classic pay off debt or invest question. A lot of people have covered the mental aspect of being cash free. The one question I have is whether or not you will continue to invest the month cash flow that you are no longer paying to a bank or car company? I would weigh the pros and cons of the extra cash flow stream.

Take care!

Bert


#13

As a hater of debt demon :imp: I would work to eliminate the car loan. The best thing we ever did was to go debt free when we were first married, 25 years later, we are glad we did it sooner rather than later.


#14

Alright, lots of good responses here! @AmyB I WANT to be debt-free, and I think being debt-free would make me happier than having a lot of money in the stock market. But I try (emphasis on TRY) to base my decisions on math and not emotions, and mathematically it makes more sense to invest…

@TheFrugalGene My interest rate is only 2.44%, so the loan is costing me about $0.73 a day. Not a huge “priority,” just something I feel hanging over my head. Definitely want to pay it off before I make any major purchases like real estate or a wedding ring, lol

@SteveC I could sell it and get most of what I paid back, for sure, but the car makes me happy! It’s a Jeep Wrangler, and I actually use it for off-roading/camping/etc literally all the time. That being said, I admit that buying a car on borrowed money was a mistake and it’s something I’ll never do again.


#15

Ah, a Jeep Wrangler! I know that feeling.

Chris’s @ChrisYetter post may help you sleep more comfortable at night going with investing.
http://www.cyinnovations.net/compounding-interest/


#16

Dirt biking is fun too and much better exercise, not to mention cheaper too! :grin:

You could also rent a jeep or truck for camping trips.

If you really get that much joy out of it though, my response would be a resounding “YOLO”


#17

When it comes to vehicles I would pretend that the amount you spend on your monthly payment is gone forever. Once you’re done paying off the loan, start paying the same amount into a separate bank account to fund your next vehicle. That way you can pay cash and won’t have to take a new loan. Only thing you can’t get back is time in the market so I’d put your extra cash into all of your tax advantaged accounts.

But, I’ve also had debt for a long, long time so I’m more comfortable having it on my books.


#18

Hey,
Here’s loans are typically short-term, the lender minimum check credit and that the only consideration for the loan is the value and condition of the vehicle.