Automotive

Pay car off pretty early or don't bother?

  • Last Updated:
  • Feb 2nd, 2019 11:12 am
Deal Guru
Sep 1, 2004
12893 posts
13091 upvotes
AMD wrote: You didn't tell us the most important information : what's the interest rate on your loan?
My bet is 3.9%. Base on payment and term and MSRP of Civic Sport HB.
Member
Mar 6, 2008
456 posts
197 upvotes
Ottawa
BeverlyHills90210 wrote: 36k for a Civic...wow.
What's so surprising about that? The car is a 27K vehicle + fees, taxes, and interest. A car in the low 20s will start to creep up around $30K OTD.
Member
Jul 18, 2017
210 posts
165 upvotes
Yodums wrote: What's so surprising about that? The car is a 27K vehicle + fees, taxes, and interest. A car in the low 20s will start to creep up around $30K OTD.
You can get a slightly used Lexus ES for 36k.

36k for a Civic... No thanks...
Member
User avatar
Feb 24, 2004
392 posts
139 upvotes
Bb0231 wrote: Why would you include 5k interest? Wow.
Interest should ALWAYS be considered unless you can pay in full for the purchase.
Deal Addict
Nov 8, 2017
3135 posts
1308 upvotes
BeverlyHills90210 wrote: You can get a slightly used Lexus ES for 36k.

36k for a Civic... No thanks...
How much interest is there? At what rate???
Banned
User avatar
Jan 27, 2014
5574 posts
2580 upvotes
Here is a question. What to do when shopping for new car and sales rep says there is no point financing at 3 years @ 0.9% when 5 years is at 2.9% and it's open loan? They say you can pay lump sum anytime so why not keep monthly payment low and choose the longer duration? And if you can pay off in future then you do that. I feel like they benefit from this that's why they always mention it...
Jr. Member
Aug 24, 2018
139 posts
80 upvotes
pay it off if you can early... Cars are depreciating assets. That's why I lease but that's another topic for discussion
Deal Addict
Nov 12, 2014
1172 posts
1004 upvotes
Kingston, ON
angryaudifanatic wrote: Depends, do you have a T2200 and can write off the interest as employment expenses? If so, that may change things.

Still though, I'd pay it off.
Don't let the tax tail wag the dog.
Deal Fanatic
User avatar
Aug 29, 2001
6584 posts
1749 upvotes
rural ontario
Depends on the loan type. Some are traditional loans where you pay interest on the outstanding amount. Other are upfront interest loans. Those types don't matter when you pay it off as all interest is already prepaid.
72 69 6c 6c 65 73
Banned
User avatar
Jan 27, 2014
5574 posts
2580 upvotes
rilles wrote: Depends on the loan type. Some are traditional loans where you pay interest on the outstanding amount. Other are upfront interest loans. Those types don't matter when you pay it off as all interest is already prepaid.
How do you know which one your contract is?
Deal Fanatic
User avatar
Aug 29, 2001
6584 posts
1749 upvotes
rural ontario
ar2020 wrote: How do you know which one your contract is?
Its in the details of your purchase finance terms.
72 69 6c 6c 65 73
Deal Guru
Sep 1, 2004
12893 posts
13091 upvotes
ar2020 wrote: Here is a question. What to do when shopping for new car and sales rep says there is no point financing at 3 years @ 0.9% when 5 years is at 2.9% and it's open loan? They say you can pay lump sum anytime so why not keep monthly payment low and choose the longer duration? And if you can pay off in future then you do that. I feel like they benefit from this that's why they always mention it...
He ain't wrong but it really depends what kind of saver you are.

You suck at saving, do the short term, low interest rate.

You are good at saving and definitely pay it off early, lower payments will buy you some flexibility. (ie a $200/month difference will net you $2400/year to contribute to RRSP and get at least $700 back).

Of course, I am willing to bet the sales guys may get bigger commission getting you on a higher rate but everyone's take is different.

Here's some numbers:

$30K Civic
24 months at 1% would yield a monthly payment of $1200 but total interest cost is $300 for the whole term.
60 months at 2% would yield a monthly payment of $500 but total interest cost is $1500 for the whole term.

I once walked into a Dodge dealer and ready to pay cash but took a loan to get another $1000 discount. Pay 1 payment then pay the rest off, so that $20-$30 interest net me extra $1000. Loans if you know how they work can definitely work for you instead of against you.
Deal Addict
Jul 8, 2013
4498 posts
6934 upvotes
Somewhere in AB
Xtrema wrote: If your RRSP isn't maxed out, putting that $11k in there will get you min 20% back as tax savings.

Putting that $11k into the loan will probably net you less return than that.

The next debt to service is mortgage because it's amortized and way more expensive than you car loan.

If you have no mortgage, no sure way to make 6+% on your $11k, pay off the car.

Insurance doesn't change just because your car is paid off. Its a finance and not a lease, you decide what risk you want to cover. If you think you can afford to lose the value of the car due to theft or your fault, don't buy comprehensive.
But it's pointless if you're getting RRSP and having GICs at 1% return. Keep in mind that you eventually will have to pay the tax back when you take the RRSP out. So it's not like it's a free 20% tax savings.
"You don’t need to sacrifice stability, common sense, and comfort if a 1% bond still lets you achieve your financial goals." M. Housel
Deal Guru
Sep 1, 2004
12893 posts
13091 upvotes
TuxedoBlack wrote: But it's pointless if you're getting RRSP and having GICs at 1% return. Keep in mind that you eventually will have to pay the tax back when you take the RRSP out. So it's not like it's a free 20% tax savings.
First of all, GIC right now is 2.2% if you know how to shop. Over 3% if you are willing to lock in 5 years.

Second, I said min 20%. It really depends on what tax brackets you are in when/how you are going to withdraw it.

It's not hard someone to use RRSP to stash their income at 43% (top bracket in AB, Fed+Prov) and withdraw it at bottom at 25%. So for this person, not only they would save 43% up front (tax return), enjoyed tax shelter growth inside RRSP, and able to save 19% on taxes on withdrawal.

Yes, tax deferred but if played right, you can make it out like a bandit.

Also, there is also such thing as TOO MUCH RRSP. When you are over 40 or 50 and you think you have too much RRSP, then you should favor TFSA as the other shelter.
Last edited by Xtrema on Feb 1st, 2019 1:45 pm, edited 2 times in total.
Deal Expert
Aug 22, 2011
41798 posts
30054 upvotes
Center of Universe
There's absolutely no need to be carrying debt if one can afford to pay things off.
You don't know if you'll drop dead tomorrow!
Deal Guru
Sep 1, 2004
12893 posts
13091 upvotes
vkizzle wrote: You don't know if you'll drop dead tomorrow!
I think to me, that's a even more valid reason to get more loans! :D
Member
Oct 15, 2008
378 posts
372 upvotes
canada
michiebaby wrote: Always pay off/down your debt as fast as you can... unless you are able to make more from the borrowed money.
Absolutely 100% this. If the interest rate is 2.99% (for example), then keep paying the loan and invest the spare cash into the market which will return far more than 3%.
Deal Addict
Nov 8, 2017
3135 posts
1308 upvotes
Xtrema wrote: If your RRSP isn't maxed out, putting that $11k in there will get you min 20% back as tax savings.

Putting that $11k into the loan will probably net you less return than that.
I'd at least consider how much I can pay into RRSP before it's maxed out and use the refund to repay the loan.
Banned
User avatar
Jan 27, 2014
5574 posts
2580 upvotes
Elusivellama wrote: Absolutely 100% this. If the interest rate is 2.99% (for example), then keep paying the loan and invest the spare cash into the market which will return far more than 3%.
Which market?

Top