[Caitlyn]

Is there any good reason to NOT immediately pay off an auto loan? I financed a new vehicle – interest rate is 7.9% when I’m used to 2.5. I get it. It’s the times.

I recently have a conversation with a financial planner (CFP) who said the vehicle is a depreciating asset.

And to pay 1k/mo on the loan but not pay it off immediately.

To invest the rest and after a few years trade the car in.

Does this make any sense?

I see no reason why I would not want to keep this car for a long time. It fits my family’s needs.

And is brand new.

Everything I’m reading everywhere suggests no loan is the best route.

But I’m curious if there are other schools of thought on this.

[S Dennis]

Ppl are fixated on the 7.9% rate instead of the subject at hand – the advice that was given.

Since Covid, unless you’re financing with a credit union the rate is generally above 6%.

In any case, there’s no low risk investment I can imagine that would make it worthwhile to not knock down the loan as quickly as possible.

And, a paid off item 100% cannot be repossessed. Circumstances change that can throw life into a tailspin, then you can find yourself no longer able to make the payments and have to watch your car on the back of a tow truck.

[Guy]

Want to save even more, fire this financial planner and read a few books on the subject.

[Doug]

Pay it off and keep the car forever. Don’t fall into the trap of getting a new car every four or five years.

I have a very healthy portfolio but drive a 2007 Corolla.

Runs great!

[Jennifer]

Pay it off and keep it for as long as you are able.

[Kirby]

What’s his logic? I’d say pay it off right away and keep it until it no longer makes sense (major repairs worth more than the vehicle)

[Ro]

Fire the financial planner and pay off the car as fast as possible. Anyone that is telling you to keep high interest debt around and to do it again in a few years is a clown.

[April]

The more money you invest with him, the more he makes. I read in one of your answers your husband passed.

Sorry for your loss.

You’re an easy target for him/her be careful.

[Milas]

Ouch. That’s a high interest rate. That said, I’ve financed vehicles, paid interest because I didn’t want to tie up tens of thousands of cash that could be invested in other avenues that reaped multiples of that car payment interest.

[Steve]

How fast you pay it off could depend how much cash you have and your other expected or unexpected expenses.

For example, I wouldn’t pay it off by using all the cash I had on hand if I need that cash for other things like home repair or fully funded emergency fund.

Pay it off as quickly as you can but not put yourself in financially jeopardy elsewhere.

[Joseph]

I believe part of that thinking stems from the old rule of needing to keep a loan open for at least 6 months for it to stay on the credit report.

Not sure how much you paid for the vehicle but it might be hard to pay off a brand new vehicle in 6 months in any case.

But if you already have a vast credit history then this doesn’t matter how soon you pay it off.

[Raymond]

Your financial planner is trying to keep you in loans… They already told you it’s a depreciating asset, why would they tell you to recycle and continue to lose money?

I have all my vehicles paid off, it’s amazing what you can do when you have no vehicle payments…

I paid off my primary home when I had no car payments…

Then bought a rental property…

and paid that off…

I then bought a new primary home (2.375%) and my old primary is now a rental.

If you always have a car loan, you may struggle to get ahead.

We all understand the need for a vehicle so get an affordable reliable vehicle and pay it off.

Then maintain it for as long as you can.

We had a Toyota Paseo that lasted us 24 years.

We current drive a vehicle purchased in 2007 and one purchased in 2014…

both are paid in full.

[Juliett]

No. Sounds like terrible advice. You need a new CFP.
Your CFP wants to make commission off the investment.

If you had paid cash for the car would you do the same thing?

Sure a car depreciates, but the best thing you can do is buy a car and drive it until the wheels fall off.

Someone who drives a car for 15+ years and 300k miles comes out ahead of someone who gets a new car every 3-5 years.

Dump the CFP they don’t have your best interests in mind.

[Sylvia]

Definitely pay it off. Pay cash for cars and keep them well maintained so you can drive them as long as possible.

[Anindita]

In general, an investment account gives around 10% return with no upside limit of how much more return it can give.

You may find out year over year, you are earning ~15-20%.

Of course, there can be capital gains taxes if they are not in a tax sheltered account but the likelihood of getting a higher than 7.9% return is pretty good.

This is the primary reason for not advising to pay off the loan.

Now, the second reason is, having more liquidity in hand.

When you have cash in hand, you can use this cash for a lot of things but a car will only take you from point A to point B and the car is already doing it (whether it is paid off or not).

All these above mentioned points become invalid if the interest rate is something as high as ~20%. But yours is not that high.

Personally my threshold is 7%. If I have a loan that’s higher than 7%, I do my best to pay it off.

Otherwise I just keep it lingering and invest my money instead.

[Amy]

This makes no sense. Especially as it is a depreciating assett. And assets that loses value.

I could see if it was growing in value over time maybe there might be the case that you could pay it off at your convenience.

But makes really no sense to be in debt for any reason if you can help it.

Possibly I can see selling it as it is not worth what you paid in just a few years.

But it’s a car.

You use it to get around.

It’s not a painting that is losing value and therefore you should just get rid of to replace with a more valuable one.

Lose this financial planner.

He is a wack job

[Aud]

That advice makes no sense. Pay it off ASAP. Some dealerships offer good rebates if you use their financing, so it makes sense to take the higher interest rate if you can pay it off quickly.

Make sure you keep the loan long enough to not forfeit that rebate though, if you got one.

For us, we have to keep the loan 3 months before paying it off.

[Leslie]

Pay it off. You’re not going to find an investment that will give you 8% plus the depreciation of the car over a few years.

[Joe]

Pay off all high interest loans first the. Work your way down
If you’re carrying any kind of credit card balance pay that off first

[Jess]

Trading in a car that you financed is one of the dumbest things you can do financially.

There is no way to take a bigger loss on your purchase other than if it is outright repossessed.

Pay that sucker off fast and drive it till the wheels fall off!

[Tara]

Back in 2019, before interest rates flew up, even with 850 credit the Toyota rate was 3.9%, which to me was obscene since my last four cars were 0%.

I financed it to get the extra thousand dollars off, then paid it off immediately.

When your credit is great as yours is, you can afford to do that.

I did it for peace of mind, I could have invested to outperform that 3.9%, I think yours is a no-brainer to pay off immediately.

[Brian]

Look at the car and the loan separately. If the car was paid off, but you had this 7.9% loan hanging around, what would you do?

7.9% is a pretty good guaranteed rate, so if it were me, I’d be paying it off as quickly as possible unless I had worse rates on other debts.

[Ira]

If you had a low interest rate then I would say not to rush but 7.9% is high.

Of course keep the car for as long as possible.

What car is that with a $1K payment a month?…

That’s crazy.

[Author]

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