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Pay off low interest Car Loan?

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Jack10525
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Pay off low interest Car Loan?  Reply with quote  

I've got about 6500 left on an auto loan and 1500 on a credit card. I have 15k in an emergency fund (cash) and am wondering if I should just pay off this debt now. The car loan is 2% and the CC is no interest until Aug 2018. I just hate having payments. Financially I live well below my means but am looking at buying a new car at the end of this year. What would you do?
Post Thu May 24, 2018 10:42 pm
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oldguy
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Here's what I do.

I have an Index Fund that has an average long term return of 11%/yr. When I buy a new car, I leave my own $35k in that fund and I finance 100% of the new car for 5 years. At 2%, the 60 payments cost $36,800, ie about $1800 for the interest.

Meanwhile, the $35,000 that I left in the 11% fund nearly doubles in 5 years (it usually takes about 6 1/2 yrs by the Rule of 72).

So no, I never prepay a car loan - I haven't paid cash for a car in 35 years.
But the key is - I use that borrowed money to earn more money (11%). But if you leave it in cash, you won't earn a return, you'll lose 2%.
Post Thu May 24, 2018 11:18 pm
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Jack10525
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Can you explain that in a little more detail? Say I don't have 35k cash to stick in an index fund. How would I go about setting this up?
Post Sat May 26, 2018 12:12 am
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tomteathers
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Man. Making loans is really hard sometimes. i remember when i had commercial equipment financing loan. it was really helpful but i had to be responsible for it. i'll look for my calculations and get back here.[/url]
Post Sat May 26, 2018 6:43 am
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oldguy
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quote:
Can you explain that in a little more detail?


The concept is to avoid using your available money to prepay loans - and instead use it to earn new money.
In your case you would invest the $6500 at 11% rather than spend it to prepay a 2% loan.

It sounds like a small savings - but if you follow that rule for 30 years or more, and allow it to compound, it grows into millions. Much of my wealth came from following that rule.
Post Sat May 26, 2018 4:08 pm
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