[USER]

Our car cost $60K at 2.49%.
We have $15K left to pay.

My husband does not want to pay it off all at once.

It does not make sense to him since the interest rate is low and he wants to use money instead, whether it is to invest, save and just to have in general.

He is not bothered and sleeps well at night.

Does it make sense?

[Scott]

I side with you for the following reasons..
1. Risk is not being factored in. Example.

You could lose your job and the market could tank.

Those two things happen often and they go together often.

The car loan company doesn’t care.

They still want their money.

2. It’s generally bad advice to borrow money for something that goes down in value…

personally I don’t borrow money for liabilities that lose value.

I pay cash for such things, and if I borrow money?I do it for things that go up in value. Example: your house.

Would you borrow money at a great interest rate for your groceries?

Of course not. Your car is no different.

[Colin]

What are your goals? How does the car purchase impact those goals?

Broadly speaking, $60k is an awful lot to pay for a depreciating asset.

You can get a car for a fourth of that price, if you need a car.

Also broadly speaking, 2.5% is a low interest rate, and given a long enough time horizon, $15k (or any amount) invested in the stock market will likely grow far more than 2.5%.

The market is up approximately 14% this year.

[Rob]

I’m with your husband. I sleep fine paying my 2.89% car loan. And he’s right, low interest is better to hold.

Don’t fall for that Dave Ramsey peace of mind nonsense.

He’ll have you believe that the sky could fall at any moment.

Only you know your finances and how secure they are.

I don’t carry an emergency fund, don’t need one.

That fits with our financial situation, not everyones.

Also, I invest 8x my car payment so even if I paid it off I wouldn’t add that.

I’d probably just spend it elsewhere.

[Eric]

I think this makes perfect sense to not prepay the loan based on your situation. I would sleep well.

[Nick]

Well, it makes way more sense to buy a two or three year old car so you don’t take the hit.

I’m heading tonight to go see a 23 Lexus that is about $25k less than the original sticker.

But now that you are in, just make the payments.

I suggest saving for your next car.

I only buy cars in cash.

This would be the most expensive car we would buy to date(if we make a purchase).

Just think if you would have bout a $35k car and put the other $25k in the market…

never having a payment.

Never too late to change those habits.

Good luck.

[Ellen]

In my financial situation, yes, it makes sense. My money earns more than the interest charged on that loan.

Your financial situation may be different than mine?

If you are worried, consider taking the $ amount difference between what you want to pay and what he wants to pay and putting it in a HYSA.

The money will be available to dump into the loan, giving you peace of mind, but will be earning more interest than the loan costs, earning him peace of mind.

[Mark]

Always factor in risk. Plus some ppl just don’t like debt. The best solution isn’t always the best “math’ solution

[Aaron]

Edit, math wrong originally. Right now that $15k it’s costing you ~$380/yr in interest and dropping with every payment.

It is cheap money so it’s not costing you that much at this point.

Certainly not an emergency to pay it off if you’d rather invest versus pay extra to principal .

[Darrell]

This kind of falls into that category of borrowing money to fund your investments.

There is the possibility that you would make more money. The possibility.

And there’s also a possibility that you’ll lose money.

This is never an issue for me to think about.

I don’t believe in debt so if I’m buying it, I’m paying cash.

[Matthew]

If the interest is less than the returns from investing in the market, which is almost guaranteed to be more than the one you stated, then he is correct in that it would be more beneficial to only make minimal payments on the loan and invest instead.

You could even put it in a CD and earn more than the interest.

The main risk with that is if there is loss of income while the market is down unless you have it in a safe investment.

If you have a secure job and an emergency fund though, then there’s no need to worry as much.

[Anna]

Yes, it makes sense. Service the debt. Investing in the market alone has better opportunity cost returning more than the interest on the car.

Makes sense.

[Lacy]

It makes sense. 2.49% is practically borrowing for free when HYSA are 5%.

Having a cushion for rainy day isn’t a bad idea either.

[Tino]

As always the husband is right!!
The dollar is losing value faster than 2.49% per year so why pay it off.

Inflation is at over 3% so there’s absolutely no financial incentive to pay it off.

I can see how emotionally speaking some people would want to pay it off though.

[David]

Yes it makes sense. Remember nearer to the end of the loan, most of your monthly payments are going towards the principle.

So paying an old loan off just a little bit early benefits the lender at the expense of the money you could have invested elsewhere

[Author]

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