Would it be better to pay save at 2% to pay a 10% car payment for a series of months or invest @4.8% cd's comp

Question

Would it be better to pay save at 2% in a bank account to pay a 10% car payment off for a series of months or invest in a CD that you can add to lets say 4000 each month or more that's compounded @ 4.8% and monthly. I'm going with the CD for no but I really am unsure. If a huge amount of money poured in to pay off the car I definitely would but for now should I just let the CD continue to grow until I have enough to pay off the car

Answer 1

I'm not really sure what you're saying here, but I'll give it a shot.

It sounds like you have a car payment that you financed at 10% per annum. You have come into a little $ and you want to know whether it would make more sense to double or triple pay your car payment each month to lower the payments quicker or to pay the normal monthly payments and throw the rest into a CD that'll earn about 5%.

In lieu of doing something like that, this is what I would do. Forget the CD's. Someone else mentioned that you can get a similar rate on a high-yield money market account (100% true) and it still be liquid (100% true again). For arguments sake, let's say you have 5 years left on the car payment. Figure out how much it would cost to take out a 10% rate on a 3 year payment. The difference in the 3 and 5 year rate, say it's $1500 a month, should be put into a balanced mutual fund each month. Traditionally, mutual funds have returned about 10%. You'll have your car paid off much quicker with this method than with investing in CD's.

Good luck . . . if I am not 100% dead-on with what you asked, I apologize for the long winded answer!

Answer 2

What is "pay save"? I am doubtful that you are putting $4000.00 into savings a month as you wrote? If you are, I guess thats some car you have. If you really have that kind of money to throw around then you should either make a large effort to educate yourself or find a financial advisor who can help you understand what is best for you. Go with one who charges a straight rate and make sure they are not attached to any stock or investment fund or company and are accredited by a recognized national organization. You didn't mention if the $4000 is tax-free (IRA) or not, which affects your actual cost and which is the best choice.
Aside from the fact that a CD is a lousy investment (but is super safe) and a diversified approach would be better as ANY (well almost any) investment guide will tell you (unless you'll need the money in the next couple of years). Aside from that, lets say you have $48,000 owed for that car and you're paying 10% or $4800
annually (I'm keeping this simple, with decreasing principle (the amount you owe) the numbers will change but the logic won't). In this example 12 months of payments would pay it off (at $4000 per month). The opportunity cost, you say, is the return on the CD or annualized at 4.8%. That 4.8% would be added to the money you're putting in to reduce a MINUS 10% that they are charging you. So, the logical question is which would you rather do, make 4.8% or not lose 10% of your money? Now, as I wrote, if the money is going into an IRA and reducing your taxes then its more complicated, but generally the answer will be the same (for us not bringing in the big bucks, depending on your marginal tax rate - you can either ignore this or figure your "2007" taxes with and without that money in a IRA (use the 2006 tax forms as a guide)). The other complication is the car loan. Are you charged a straight 10% on the principle balance, is there a penalty for early pay off? That is; what is the real benefit to you of paying it off early? Hopefully, that 10% IS of the balance and so you should pay off the loan, then start socking money away. Logically. But people aren't logical, and some of us have trouble saving so the real question is: based on your own self-knowledge, will you have more money saved a year from now if you put it into a cd or if you pay off the loan first?
If you don't have the discipline to actually save the money, then talking about putting it "all" into a cd is silly. Or if you'll put it in and 6 months from now will be taking out that check book for the down-payment on that Custom Sunset Orange Rolls Royce then all logical bets are off. Bottom line you must do what you will actually be able to continue to do and enjoy your life. The best (logical) course is (probably - almost certainly) to pay off that loan [ + 4.8 - 10 = -5.2% thats a minus 5.2%, you're losing $$!! ]
But if the $$ put aside actually gets spent on fast times, faster playmates and high living where the alternative is to have it automatically put into a CD then you'll actually be better off a year from now with the CD.
(note that for simplicity I said the car costed $48000, that was including the interest - this doesn't change the logic, just the exact numbers amounts you'll be saving by paying it off as soon as possible.)

Answer 3

Pay off the principal of your loan. Having money sit in any account that pays less than what you are paying on your loan is just crazy. MAKE A SENSIBLE PLAN to pay extra on your loan and it will pay off in the end. The interest you save will far surpass anything that you gain by putting it in savings or CDs. Just think about it a sec. If you are saving paying 10% interest, is this more than whatever rate you might get? Of course. The benefit for you also would be an improved credit rating, and lower interest rates in the future. Also, don't be conned by the compounded monthy thing. Your loan principal is also compounded monthly according to the amount you owe. Paying off at the earliest time possible saves you that much, compounded by every month that it is paid early.

Answer 4

if the interest payment is locked and ur payments dont go down over time as you pay then I say invest your money and pay your bills to you have enough pay off the loan. That way your money is working smarter for ya versus tieing it all up in the car place that's not giving u credit for jack. And now your money is gone, but the bright side is that ur closer to payin off the car, but you have no money til next pay day to invest is the downside. And that's negronomics 101.

Answer 5

Maybe I don't fully understand the question, but why would you borrow at 10% to invest at 4.8%? You get a 10% return on your money by paying off the car loan.

Answer 6

Actually you can open up a high-yield online savings account with either Emigrant Direct or HSBC Direct (both FDIC) insured. They are both at 5.05%. They are similar to a checking account as in they're liquid. CD's you can't touch the money w/o getting fined for early withdrawl. This way you get the best of both worlds.

Answer 7

go with the CDs, and if you can start your CD with $10K or more, you can get a higher interest rate. Either that, or put half into CDs and half toward your car, but put at least half away.

Answer 8

ohhhh, my head hurts with this one!