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I am in a position to pay off my car and my wife's car, for a total of $42k. That would still leave us with some savings, and a 6 month "emergency fund". We plan on buying a house in 3-5 years. Should I pay them off and be debt free, or stick the money in a CD for now? If I pay them off, I will free up almost $900/month in cash flow that won't go towards car payments and can be put in an money market or investment account.... thoughts?

2007-09-05 06:45:52 · 14 answers · asked by docjulius 2 in Business & Finance Personal Finance

14 answers

You should definitely pay off the cars, odds are that the interest rate you're being charged for the cars is higher than what you could get with a cd or savings account or anything like that.

2007-09-05 06:52:23 · answer #1 · answered by jsprague78 2 · 0 0

Look at it from a interest rate and time-frame perspective. View all debts as negative interest (what you're paying out), and all deposits as positive interest (what financial institutions are paying you for your money). If you can find a place to put your money that yields a higher interest rate than what you're paying for those cars, invest it there.

Based on the total vehicle debt, I wouldn't be surprised if you have a specialty auto loan (1.9% or 2.9% APR?) from the manufacturer. If this is the case, then put the money in a CD or Money Market, which would pay in the neighborhood of 5%. You'd make back the ~2.9% your leinholder is charging you, plus an additional 2.1% APR for your future home payment. Even if you just want to pay off the debt for psychological reasons, resist the urge. $42k invested in one lump sum now will make more in interest than $900/month over the next 3-5 years.

2007-09-05 07:00:36 · answer #2 · answered by hallmanjj 4 · 0 0

You can probably get around 5% or a little better on a CD. If your interest rate on your car loans is higher than that, and it probably is, I'd pay off the car loans. If you put the $900 a month into savings or secure investments, you should be in good shape with a down payment when you are ready to buy a house.

2007-09-05 07:35:20 · answer #3 · answered by Judy 7 · 0 0

Getting out of debt is never a bad idea. The emergency fund is already in place so good for you. I suggest paying them off and instead of making that $900 payment to the car company, make a bill for yourself and pay yourself. Perhaps 450 in a money market and 450 in the stock market. You sound like you are on the right track, just don't fall into the trap of using that $900 as extra spending money, keep tabs on it like you did with your payments.

The key is to get your money working for you, there are many closed end bond funds that will let you reinvest your monthly dividend and over a year of investing that money you will be surprised at the growth. I wish you luck

2007-09-05 07:12:09 · answer #4 · answered by Domino 4 · 0 0

Oh pay off the car loans -- it will feel so good to own those cars free and clear. Put the $900 into a money market -- if you can set up some kind of automatic deposit, so much the better.

When you get ready to buy that house you should have a substantial downpayment saved which will give you better interest rates and a much small house payment.

Congratulations. You are definitely thinking the right way.

2007-09-05 07:01:39 · answer #5 · answered by bdancer222 7 · 0 0

There's no such thing as good debt. Pay off the cars and be debt free. Go with a money-market account for the balance. It will give you a little more interest than a CD without a long term commitment. Buying a house? Your credit score is a measure of how much interest you are willing to pay so you can buy something else and pay interest on it, too. Sounds stupid, doesn't it? There are alternatives. Go to daveramsey.com.

2007-09-05 10:25:30 · answer #6 · answered by starfishltd 5 · 0 0

I would pay off the cars IF you can be disciplined and save the $900 per month that it frees up. You will avoid a ton of interest payments and make money on the deposits.

2007-09-05 07:14:20 · answer #7 · answered by Jay P 7 · 0 0

If your interest rate you are paying on the autos is below 4 pct it is a toss up: But if it is a dime more than 4 pct. pay them off immediately and you will have options to use your money in better investments. First your cars are not appreciating in value, quite the contrary. Find a secure investment for the 900.00 a month with a good interest rate that will bear you some profit.

2007-09-05 06:55:24 · answer #8 · answered by glenn t 4 · 0 0

here's how you figure it out.

Take your interest rate on the cars and compare it to the rate you're making on the money if you don't pay off the cars. Whichever is the higher rate go that route.

There's certainly ways to invest money that will beat out your interest rate but if you just have the money in a savings account of some kind pay off the cars.

2007-09-05 06:53:57 · answer #9 · answered by icpooreman 6 · 0 0

Wow, while it's a good thing to be debt free, you may also want to keep making payments to mantain good credit, so when you buy a home you are in very good standing and your score is good. If you still have other accounts like credit cards you are making payments on, then I'd say pay up your cars but make sure you're paying for something every month that is reported on your credit report. My 2 cents!

2007-09-05 06:53:38 · answer #10 · answered by fine00 3 · 0 1

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