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pay off car vs saving for house
I have about 17K left on my car to pay off. I have 5 years left to pay it off. If I make $1200 payments for a little over a year I can pay it off.
Thing is I would eventually like to buy a house but with the housing market being so volatile it makes me very unsure of actually wanting to buy a house now. I'm afraid of getting screwed like everyone else and it gets foreclosed on in the future.
In the same time frame I can still make a steady income to put money in savings aside from saving for house or paying off car.
Which would you think would be better now: pay off the car or start saving for a house?
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Re: pay off car vs saving for house
You can only be screwed on your house if you 1) Buy too much house 2) Plan to sell it in the near future (aka within three years.)
It's hard to time the bottom unless you average a) almost the bottom b) is this the bottom? and c) ah fuck that was the bottom. I think houses are going to get way cheaper this summer. Condo's for sure (though you may end up paying for the whole building's HOA cuz it will be vacant. :)
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Re: pay off car vs saving for house
Paying off the loan is a slam dunk, not even considering what the improvement in your FICO score will do for your Mortgage rate when you do get the money together for a down payment.
Look at your options it this way:
1) What's the return I can make on my house savings? Since you don't want to lose money, it's probably 3% at best. After taxes, take away 1/3, and you're left with a 2% gain.
2) How much does my Auto Loan cost? For the sake of argument, let's say 6%. Using the 1/3 tax rate from 1, that's like making 9%.
Crank the numbers with whatever rates you're paying/getting for CD's, and I bet you'll always come out ahead by dumping your debt.
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Re: pay off car vs saving for house
Another consideration is your credit rating / creditworthiness. Where you managed to get approved for a car loan in the past, this might not be possible tomorrow. Also, with banks taking huge losses on mortgage loans, future terms for new mortgages may be very tight.
I agree that paying off your auto loan does provide the greatest rate of return possibility. However, right now you do have use of $17k of 'other people's money' in the form of your existing car loan. Make sure that you can afford to 'do without' this money before paying the loan off early.
As far as the housing market, depending on how the election turns out there may be new gov't incentives available for future buyers of foreclosed homes in 2009. I agree with Deo that the 'bottom' in the real estate market is still a ways off.
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Re: pay off car vs saving for house
Pay off the car ASAP. Car loans attract a lot more interest than other types of loans and financially you are much better off to pay it off in the shortest period possible and thus save the largest possible amount of money.
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Re: pay off car vs saving for house
People who purchase foreclosed homes in 2008 will be getting an additional $7000 tax credit for that.
That being said...just because you pay off your car loan early doesn't mean that it will improve your credit. Sometimes by paying off the loan early it actually works against you.
But, can you do both? Not pay so much to pay your car off so early and still be able to put some money aside for your home? Instead of paying $1200 towards your car (which is a depreciative item), can you pay $600 towards your car and the other $600 towards saving for a house? (Or whatever split)
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Re: pay off car vs saving for house
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Originally Posted by
aussiebelle
Pay off the car ASAP. Car loans attract a lot more interest than other types of loans and financially you are much better off to pay it off in the shortest period possible and thus save the largest possible amount of money.
This is not always true. Credit Cards attract more interest than any other loan. Depending on her credit score and her interest rate, she could have gotten a 5-6 year car loan with an interest of 0% - 1.9%.
Though it does bring up the question...what other loans have you got, TM? CC? Student Loans, etc?
I would start paying off the higher interest loans first...especially the "volatile" one (ie. Credit cards). The loan on your car is fixed but it's not that way for some other loans.
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Re: pay off car vs saving for house
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Originally Posted by
VenusGoddess
I would start paying off the higher interest loans first...especially the "volatile" one (ie. Credit cards).
That is what I meant VG but you made it much clearer. I'm not sure if it is the same in the states as it is here but car loans usually attract much higher interest rates than home loans.
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Re: pay off car vs saving for house
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Originally Posted by
Melonie
However, right now you do have use of $17k of 'other people's money' in the form of your existing car loan.
One warning to others: OPM is only advantageous if and only if it will generate future cash flows. The money in play is ultimately for consumption, not investment- houses and cars are consumption unless you're a broker or a manufacturer, despite what those all those nice people in Real Estate or Used Car lots say. Hmm, no parallels with stripping there, no sir...
It's pronounced "Opium" by Chartered Financial Analysts for a reason.
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Re: pay off car vs saving for house
Two most important questions
i) Do you have a prepayment penalty on your loan payoff?
ii) What is your loan rate?
If your loan is < 5%, it doesn't make any sense to pay it off.
S&P 500 on an average returns > 8%.
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Re: pay off car vs saving for house
^^^ let me put this another way in regard to the 'other people's money' point. Right now TigersMilk has X normal income, Y ability to 'save' money per month , z dollars in a savings account, and $17k in outstanding car loan. If TigersMilk is like 99.9% of other dancers, she has no health insurance coverage and no unemployment insurance. So here is the 'other people's money' issue.
Basically TigersMilk has said that she has $1200 per month available above and beyond normal living expenses. She therefore has the option to devote the entire $1200 towards early repayment of her car loan, or she has the option to make her regular (guess) $400 car payment and deposit the $800 balance in a savings account.
Now consider the following possibility ... TigersMilk gets sick or injured 6 months from now and is unable to dance for a month. If she has been devoting $1200 towards paying off her car loan early, and saving nothing, covering her normal living expenses for that month versus zero income and zero savings is going to mean that many bills won't get paid on time ... including that month's car payment. On the other hand, if she had been making regular $400 car payments and depositing the $800 balance in a savings account, 6 months down the road she would have almost $5000 to draw on to cover living expenses during the month she was unable to work thus her income is zero.
The point about 'other people's money' was to amplify the fact that overpaying versus contractual obligations on a car loan (or any other loan) does not mean that the extra payment amount can be 'retrieved' if an emergency crops up. Nor does it mean that one month's payment can be 'skipped' without consequences. However, once a ~$5000 balance has been built up in a savings account / money market account / other instantly liquid investment, the full $1200 could then be devoted towards car payments without risk.
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Re: pay off car vs saving for house
Thanks for all your responses! Gives me some ideas for a better plan. My car loan interest rate is 8% and my monthly payment is $370. The total amount of interest paid on the car is ~ 5486.84 by the end of the loan term if I pay the normal monthly payment. There is no prepayment penalty. I have no other loans except for some cc debt which is about 5K.
I think I'm just scared to even think about buying a house. The things to know about buying a house change so much its hard to keep up.
I plan to keep up the savings no matter what. Hmmm some more to think about.
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Re: pay off car vs saving for house
Are you planning to buy in SD?
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Re: pay off car vs saving for house
Probably. I love California...there would have to be a giant quake that would swallow the state to make me leave *knock on wood*.
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Re: pay off car vs saving for house
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Originally Posted by
TigersMilk
The total amount of interest paid on the car is ~ 5486.84 by the end of the loan term if I pay the normal monthly payment.
Actually, you'll pay that much in interest whether you pay the loan off early or on-time. You don't pay less in interest just for paying the loan off early. That's why the bank has on their statements, "This is how much you owe to date $17,000. This is not your payoff amount."
I found this out many years ago when I went to pay my car loan off early. I found out that I had $10,000 left on my loan, but the pay off amount was several thousand dollars higher than that. Why? Because they calculated the "lost interest" into the pay off. They're not going to loan you any kind of money without knowing they'll be getting their full "agreed upon" interest back. ;)
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Re: pay off car vs saving for house
^^^ not all auto loans work this way, but the 'subprime' auto loans usually do. You are correct that if the original loan was for $20,000 principal plus $5000 interest over a period of 5 years, and you choose to accelerate payments to pay off the loan quicker, you will STILL wind up paying back $25,000 no matter if it takes one year or three years or 5 years.
'Subprime' auto loans without pre-calculated interest (meaning that the actual interest payment due each month is a function of the actual outstanding principal balance) also usually carry a pre-payment penalty charge. Similar end result i.e. the lender gets the full amount of money regardless of whether the loan payments were made on time or paid off early, just a different means of getting there.
'Prime' auto loans don't utilize either pre-calculated interest or a pre-payment penalty. Thus if a 'prime' auto loan is paid off early, the borrower will save money on overall interest costs.
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Re: pay off car vs saving for house
^ Well, it depends on the bank, then. I had a prime auto loan and I still got charged the remaining balance AND the "uncollected" interest to pay my car off early (there was no pre-pay penalty). However, that was quite a few years ago, so things may have changed.
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Re: pay off car vs saving for house
sounds like you had a prepayment penalty on your car. All car loans don't work that way.
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Re: pay off car vs saving for house
^ No...no pre-pay, nothing. A straight up prime loan. But, all banks are different, so it could be that.
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Re: pay off car vs saving for house
I just put my car loan on my credit card because the loan was that shit... so that's my advice at least, hahaha.
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Re: pay off car vs saving for house
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Originally Posted by
VenusGoddess
^ No...no pre-pay, nothing. A straight up prime loan. But, all banks are different, so it could be that.
I don't see how they could charge you more interest than what had already accrued if you didn't have a pre-pay penalty. They must have snuck that in with some kind of loophole because that really is odd. What bank was it? I just got a car loan with Cap One and I clicked on the payoff quote and it gave me just what my balance is plus the interest that's accrued so far this month.
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Re: pay off car vs saving for house
What I was told (10 years ago??) was that they collect the money they are owed according to the docs that were signed. So, if I agreed to $4000 in interest and paid 1/2 of that before I paid off the car early, they would add $2000 to my pay off to collect the unpaid interest that they would have gotten had I not paid off early.
But again, this was 10 years ago. It was Ford Motor Credit and 10 years ago I had a 700 credit score. So, I know I didn't get a subprime loan being that I had great credit, a stable job history, etc, etc, etc (and my interest rate was low at that time).
Other than that...I have no idea.
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Re: pay off car vs saving for house
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I don't see how they could charge you more interest than what had already accrued if you didn't have a pre-pay penalty. They must have snuck that in with some kind of loophole because that really is odd.
it's not 'odd' anymore in the subprime car loan industry. Instead of the familiar amortization table where interest and principal payments are calculated on a 'running' basis every month, the pre-calculated interest car loan is based on a pre-calculated interest based payment table where the interest payments are front-loaded all to hell.
(snip)"Make sure you know whether your loan interest is precalculated. In far too many cases, people with bad credit end up with a loan where the interest is pre-calculated. When loans have pre-calculated interest, your payments may go solely to interest for as much as one-half of the life of the entire loan.
Try to retire the loan early, even to refinance, and you may end up owing much more than you thought. Don't get a rude shock -- while you may be forced to take out such a loan, be very clear up front what you're facing."(snip) from
To spell this out in more detail, a 'prime' 5 year car loan with say an 8% straight interest rate would involve an amortization curve where the first month's $405 payment consists of $272 towards principal and $133 towards interest. This gradually shifts such that the last month's $405 payment consists of $402 in principal and $3 in interest. In comparison, a 100% front-loaded 10% pre-calculated interest auto loan for the same $20,000 and the same 5 year term starts out with a $445 payment which is entirely interest based. Monthly payments continue to be applied only to interest for the next 14 months until the $5,500 or so in precalculated interest has been paid. At that point, you still owe the full $20,000 in principal, and the remaining 45 $445 monthly payments gradually reducing the principal balance.
Under the normal $20,000 8% straight interest 'prime' car loan, at the 2 year point, if you try to refinance the outstanding balance of the loan will be just under $13,000. In comparison, under the $20,000 10% pre-calculated interest 'subprime' car loan, at the 2 year point, if you try to refinance the outstanding balance of the loan will still be close to $17,000.
Of course, if you try to refinance the pre-calculated interest 'subprime' car loan before the 'break even' point of the payment table (in this case sooner than 15 months), not only will you owe the entire $20,000 loan balance but you will ALSO owe as yet unpaid pre-calculated interest. In other words, to 'pay off' the example pre-calculated interest loan at the 12 month point, you would have to come up with $20,000 principal PLUS another $1335 in as yet unpaid pre-calculated interest for a total of $21,335 ... even though you had previously paid close to $5,000 towards the loan during the first year.
~
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Re: pay off car vs saving for house
Jesus. That sounds like a huge rip-off to me! It sucks that they can even do that, but I guess loan companies never pass on a chance go make as much as they possibly can.
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Re: pay off car vs saving for house
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Originally Posted by
Bunny
Jesus. That sounds like a huge rip-off to me! It sucks that they can even do that, but I guess loan companies never pass on a chance go make as much as they possibly can.
It comes from all this credit risk scare I guess... the loan company goes "please give me all the interest you would end up giving me anyway right now before we do anything else, because I don't know if you're going to go broke. If you don't, it's the same in the end anyway". They can still lose if you go bankrupt right afterwards, though, which is the remainder of their worries and adds to premiums...