I just purchased a new car last month. Between my trade-in and down payment I only financed around 10k over 4 years for 3.9%. I have enough to pay the rest of the car off still leaving me a couple of thousand or so in my savings account, not including stocks. With interest rates the way they are, I am only earning 4.0% with Countrywide, which I won't qualify for if I choose to pay off my car immediately. There is no pre-payment penalty so I am just trying to decide if there is any reason I am overlooking not to pay the car off now.

I figure with 3.9% for the car versus 4.0% interest I come out better paying the loan off due to less tax at the end of the year on the interest earned in addition to the money I save by paying the car off early even after you take away the interest I won't earn.

Am I missing anything or any reason it wouldn't be smart to just pay the car off now?

If you're comfortable with the size of the emergency fund after you pay off the car, I think paying it off is a good idea.

Squeezer99 said:i guess you forgot that income taxes are taken out of your 4.0% by the federal and state governments, so countrywide's 4.0% is really only netting you around 2.5-3% after taxes. so you're actually losing money by putting money in countrywide versus paying off your car, not to mention that having your car paid off means you can drop the insurance coverage down to liability only.

When it was a good idea to have a liability only coverage on a BRAND NEW car??

OP, a agree with a previous poster - if you feel that you have enough cash to cover emergencies - go ahead and pay it off

innocentbastard said:Squeezer99 said:i guess you forgot that income taxes are taken out of your 4.0% by the federal and state governments, so countrywide's 4.0% is really only netting you around 2.5-3% after taxes. so you're actually losing money by putting money in countrywide versus paying off your car, not to mention that having your car paid off means you can drop the insurance coverage down to liability only.

No I mentioned that as one of the main reasons to pay the car off early. I just want to make sure I am not overlooking some reason paying off the car early wouldn't make sense. Everything I think up such as what you mentioned points to pay off the car now.

Liquidity. You're paying the difference between your financing rate and the CFC rate as a cost of keeping that money available if you need it. If you were paying 20% on the car, I'd say obviously pay it off, but you're only losing a small amount of money to keep that $10k (or whatever) available to you if you need it.

Plus, I personally find it slightly more difficult to save money than to pay down debt, so for me (probably not for most FWF posters), I'd rather hold a slight fiscal disadvantage on the debt and have the money in my bank account than totally deplete my savings to buy a car.

This is just a point of personal preference, I think that if you can't obviously see the answer then it's more about your personal preferences than about the relatively small amount of money the differential is. Just because you're losing a small amount of money, it doesn't necessarily make it the wrong decision.

Rule of 78's is OFTEN used to calculate the interest earned by the lender in auto loans, for ealry pay offs. This could be another reason to continue with the monthly payments rather than pay off early.

rigor said:does your financing include gap insurance? if so keep it.

Are you kidding?

Have you maxed out your Roth Ira?

same here. have a kind of an AOR on my car payments.

fwvisitor said:OP simple

dont pay

you would be paying approx 800 in interest over 4 years on car

assuming you earn 3% on your 10K after tax you will earn more than that!

Not to mention the advantage of having the saved money with you

Edit : I should have mentioned this. Compound interest rocks when interest rate is just a bit more than your savings rate and you have a long term loan

10k only for the first month, then it would be 10k minus your monthly car payments. Trying to squeeze money from compound interest is good. But I don't think in your case doesn't make you effective. Just pay it off if you have the money.

Often car loans are simple interest. That means they calculate the interest and put it into the payment. If you pay it off early you prepay THEIR interest and it results in ZERO savings other than a few stamps if you mail in your payments.

Find out if your loan is compounded interest or simple interest.