Paying off car question

**breathemusic** · 08-06-2012, 02:21 PM

I would maybe split it and go halvsies. On one hand, an e-fund is usually in an online savings account or some other form of really liquid savings, which translates to crappy interest. So the interest you're paying on the car loan is higher than the interest you'd be saving by putting the money in savings.

On the other hand, your e-fund isn't very high. Sure, it covers 2 months of your regular living expenses, but it sounds like your living expenses are relatively low. An e-fund should really be enough to cover real emergencies. Rent or utilities may not be high, but a medical bill can easily take a huge chunk, or all of that fund. They say your e-fund should be 3-6 months of living expenses, but if you are living low cost right now, and know that in the future you're likely to upgrade to higher cost living expenses, then I think it's better to save 6 months aside. Then, when you do maybe get a bigger place, or do whatever that raises expenses, you'll still have a solid few months of livings expenses as your e-fund and it won't leave you hanging as much while you rebuild back to 6 months again or whatever. If how I explained that made any sense.

**snafu** · 08-06-2012, 02:47 PM

The rule of thumb is to pay off a car loan in 3 yrs. which suggests payments of approximately $ 500. I'd boost EF to at least 3 months of expenses and increase 4O1K to take advantage of compounding which are so important in the early years. Adding extra payments directly to principal keeps disbursements flexible should your circumstances change. It's awesome to drive a fully paid off car with warranty and value left.

**bjl584** · 08-07-2012, 07:01 AM

Originally posted by hokies2688 View Post

Hey everyone. Just have a question about paying off my new car. Please don't get into why I should have bought a cheaper car or financed for less years because that's not what I'm asking! FYI, it's a 2013 Hyundai Elantra Limited fully loaded that I got for $20k after all taxes and fees. I got such a good deal through my dad that I can already sell it for more than I paid or break even. That's why I bought new. Anyway, it's a 5 year loan and the interest is 3.9% and after my trade in, I owe $16,500 with monthly payments of about $304.

Now here's my question: I was planning on paying $400/month. Then I thought well why not $500/month? Then if $500, why not $1000? Where do you all draw the line? I'm 24 with no debt, make $65k/year and expenses with rent are $1500/month before the car payment. I have $3k of my desired $10k in my e-fund, and $10k each in a brokerage and my 401k. So, how would you all balance out how much of my ~$1800/month savings goes to my car and how much goes to my e-fund? I hope this wasn't too confusing. If so, I can answer any questions. Thanks so much everyone!

Strive to pay it off in 3 years. Use the extra money to build up your EF to 10K and to use for retirement savings. If you are planning to buy a house sometime in the future, then save up to 10K in the EF, use extra money for your downpayment on a house, and keep your retirement contributions to the company match. Feel free to invest anything above that if you still have extra money.

**disneysteve** · 08-07-2012, 07:25 AM

Originally posted by snafu View Post

The rule of thumb is to pay off a car loan in 3 yrs.

Originally posted by bjl584 View Post

Strive to pay it off in 3 years.

I agree. Nobody should ever take a car loan for more than 3 years. Use an online calculator like at bankrate.com to figure out how much you need to pay to get it repaid in no more than 3 years. Keep funding your EF with the rest.

**hokies2688** · 08-07-2012, 01:23 PM

Why is three years such a big deal? The difference in interest between 3-4 years and 4-5 years was like $7/month

**disneysteve** · 08-07-2012, 01:45 PM

Originally posted by hokies2688 View Post

Why is three years such a big deal? The difference in interest between 3-4 years and 4-5 years was like $7/month

It isn't really about the interest. It is more a measure of affordability.

If taking a car loan, it should be for no more than 3 years with a payment of no more than 10% of your monthly take home pay. Any higher payment or longer term to get to that payment is an indication that you are overspending on the car.

It is just like the rule that your home payment shouldn't exceed 28% of your income and total debt shouldn't exceed 36%.

**riverwed070707** · 08-07-2012, 02:36 PM

Originally posted by hokies2688 View Post

Why is three years such a big deal? The difference in interest between 3-4 years and 4-5 years was like $7/month

The problem is when you start thinking in terms of monthly payments instead of total cost. A quick calc based on what you provided says you'll pay $1688 in interest over the life of the loan for 60 months. Excluding the fact that you typically get a better rate with a shorter term, with a 36 month loan you'd pay $1010. That's an additional $678 in interest or about $28/month. Not substantial but why would you choose to pay $700 more for your car than you had to if you could easily afford the higher payments?

**JoeP** · 08-16-2012, 05:11 AM

Originally posted by riverwed070707 View Post

The problem is when you start thinking in terms of monthly payments instead of total cost. A quick calc based on what you provided says you'll pay $1688 in interest over the life of the loan for 60 months. Excluding the fact that you typically get a better rate with a shorter term, with a 36 month loan you'd pay $1010. That's an additional $678 in interest or about $28/month. Not substantial but why would you choose to pay $700 more for your car than you had to if you could easily afford the higher payments?

It also helps to look at the TOTAL COST of buying a car. A $20k car paid for with cash will cost you $20k. A $20k car paid for with a 5 year loan at 3.9% will cost you $22,045.80. In the latter case, the seller got your $20k, and the bank got your $2045.80.

Plus with a shorter term, the car is yours earlier, so you won't be on the hook for payments if you were to find yourself in a financial pinch later on.

Paying off car question