Should I pay off my car loan from savings to save money?
I have about 13k in a savings account with 1% APY. Last year this account earned over 0 in interest. I have a car loan with a balance of about 00 on it, with 1.9% APR. I pay 8/mo on the loan, and an additional to the principal every month (for an even 0).
I should have the loan paid off in a little over a year, but I was wondering if I could actually save money by just paying the loan off outright, and put the payments into my savings account for the next year. I already put 0/mo into the savings account.
My usual thought process for a low/zero interest loan like this is that its better to have the emergency cash on hand. But I feel comfortable enough that I can take the one-year hit to my savings. But do I even save any money this way? Is there some formula I can plug into a spreadsheet to figure out when I could have or should have paid off my car loan?
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You will save very, very little by paying back the loan. But you should have looked at this a lot earlier, when you bought the car.
The car dealer tries to make money from the sale of the car, and from the loan. If the give you a loan with good interest rate, as they did, you can bet that you paid more for the car.
The reason to pay off your loan now, rather than making the payments has more to do with risk and spending behavior than the dollars saved in the difference in interest rates. Additionally, paying interest on a depreciating asset means your losing money in two areas.
Financial Expert Dave Ramsey says to not use consumer debt of any kind. On average, you spend more when you use credit. Some more detail about typical car debt are shown in the link below. Another observation, is the really low APR on the Car Loan. This makes me think you have a really good credit score. If you do, then you've given a lot of your money to banks. The other link below shows a breakdown of how that's determined.
I would recommend using Dave Ramsey's Baby Steps in your situation:
BS1: Set aside 00 in a starter emergency fund.
BS2: Pay off all debts (except the house) from smallest to largest. This includes the car.
BS3: Rebuild the emergency fund to 3 to 6 months worth of expenses
You can find the rest of the Baby Steps online, but these are the ones pertinent to your question.
Resources:
www.daveramsey.com/blog/the-truth-about-car-payments www.daveramsey.com/blog/the-truth-about-your-credit-score www.daveramsey.com/baby-steps
For your car loan:
4200 * .019 = 79.8/year or next month you will pay about .65 in interest.
For your savings account:
4200 *.01 = 42/year or next month you would earn .50
So you would save a little each month by using savings to pay off the loan early. Keep in mind, that once the loan is paid off, you would have 0/month to put into savings.
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