Pay car off pretty early or don't bother?
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- Feb 2nd, 2019 11:12 am
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- Xtrema
- Deal Guru
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- Yodums
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- Ottawa
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.BeverlyHills90210 wrote: ↑ 36k for a Civic...wow.
- BeverlyHills90210
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- Bb0231
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Why would you include 5k interest? Wow.BeverlyHills90210 wrote: ↑ 36k for a Civic...wow.
- psyfer
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- Feb 24, 2004
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- Bb0231
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How much interest is there? At what rate???BeverlyHills90210 wrote: ↑ You can get a slightly used Lexus ES for 36k.
36k for a Civic... No thanks...
- ar2020
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- Jan 27, 2014
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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...
- Grac213
- Jr. Member
- Aug 24, 2018
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pay it off if you can early... Cars are depreciating assets. That's why I lease but that's another topic for discussion
- QN5252
- Deal Addict
- Nov 12, 2014
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- Kingston, ON
Don't let the tax tail wag the dog.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.
- rilles
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- Aug 29, 2001
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- 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.
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- ar2020
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- rilles
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- Xtrema
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He ain't wrong but it really depends what kind of saver you are.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...
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.
- TuxedoBlack
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- Somewhere in AB
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.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.
"You don’t need to sacrifice stability, common sense, and comfort if a 1% bond still lets you achieve your financial goals." M. Housel
- Xtrema
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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.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.
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.
- vkizzle
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- Aug 22, 2011
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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!
You don't know if you'll drop dead tomorrow!
- Xtrema
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- Elusivellama
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- Oct 15, 2008
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- canada
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%.michiebaby wrote: ↑ Always pay off/down your debt as fast as you can... unless you are able to make more from the borrowed money.
- Bb0231
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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.
- ar2020
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Which market?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%.