Should we pay off our car loan?

Question

Our car loan is 30k. Mo. pymnt $550 w/$77 going to interest.

We have 30k saved up to invest after our cash reserves. We are looking for our first rental property/cash flowing asset...

Should we pay off the car and start our 30k savings again? Pay down the loan so the interest is lower? Or invest the 30k somewhere else that can cash flow?

(Also we are in San Diego, Ca. and it looks like any cash flowing asset would have to be out of state or @ least a far drive)

Thanks,

Luke

Jaron Walling · Answer

@Luke Eisele Real estate investing requires budgeting and planning. Are you good at these things? Piling on more debt to get started is not a good idea. If you like depreciating items keep the car and pay it off following what ever term you signed on. $30K should not be >1/3 of your income otherwise you bought too much car to begin with and my advice would be sell it. People like to brag about the interest rate but don't see the bigger picture. Some people (not saying you) cannot afford the vehicle they drive. This is why 7 year auto loans are a thing and it scares me.

Regardless of all that $30K is nice chunk of money. Think of it as a launch pad. Now it's time to build the rocket.

Luke Henry · Answer

Thanks for putting in the time and input! Had I found Biggerpockets 6 months ago before we got the car this post probably wouldn't have been needed lol (Would have got a cheaper car).

Anyhow, the cash reserves are 6 months of income, and 1 year is the goal. And yes the 30k is just a launching pad.

After reading these I think we will pay 1-5k increments @ a time in order to keep our "launch pad" (like that term) around 30k and growing.

Matt McGuire · Answer

I am in a similar situation and came looking for a thread like this to see what others thought.

Ultimately, a vehicle isn't an asset. It doesn't put money in your pocket, and it will eventually depreciate and outlive its useful life. I think buying assets with available cash is a better use than paying off a vehicle. That being said, I think it is important to eliminate debt in the long term . To me it makes sense to buy a low priced vehicle and hold it for a long time. You do reap the reward of not having a payment once it is paid off. Recently, I've been playing that board game Cashflow and in that game, you have the option to pay off debt or buy assets to increase cash flow. When I play that, I eventually pay off the debts, but it isn't until I have at least a couple of investments. The goal in that game is to increase passive income enough that it covers your expenses. If you use all your cash to pay off the debt, you cant afford a good deal if it comes along. The key word is passive and I know that can be debated about real estate, but my point is you want that money coming in from another source rather than just your paycheck.

If you haven't played that game, you can play it for free on the Rich Dad website and its pretty cool. It is definitely outdated but the ideas are still relevant and gets you thinking differently.

William Decker · Answer

@Luke Eisele try to refinance the car for a much lower interest rate, then take your cash on hand and invest in a cash flowing property.

At that point you can start paying down the car loan or use some of the cash flow to pay down the car loan. This is just what I would do, I ￼ Believe you will have a much more self gradation doing it this way, if having a appreciating asset is a goal.

Ramon Flores · Answer

@Luke Eisele Look at it like this. Let's say you get a property that cash flows for $200 with your 30k. Sounds great right?

However when if you pay off the car, you will cashflow $600 plus a month. It depends on your situation, how much money you make, etc. Perhaps you have equity in your car and instead of paying the balance in full you can sell it for a car that is less than 10k.

If you pay cash, you will not have a car payment plus have 20k available for your first property. Just thought I'd offer a different viewpoint. Best of luck!

Twana Rasoul · Answer

@Luke Eisele I think your options are either pay it all off, continue making your payments or sell the car but probably making a partial payment is not the greatest idea.   Everyone is different and not all decisions should be solely based on numbers all the time.  That said, if you know how to manage your money properly, getting into a home as your primary residence with low money down especially in Southern CA will have much higher overall returns over the next 10+ years than just about anything else you can put that money in.

Best of luck on whatever you decide.

Kaiser J. · Answer

There is no one right answer here, it's specific to the person.  I hate debt and would not consider buying a car that I can't pay for in cash.  Many on this site want to be as levered as possible, which may work just fine for them.  If it makes you sleep better at night to have the car paid for, do that.

Cody L. · Answer

No.  Unless it's a very high interest rate.  Use the $ you would use to pay down the car to help buy a property that'll generate far more money then the car costs you.

Hunter Vigneault · Answer

Let me start off by saying I am not a financial advisor, and I can't speak to your financial situation specifically, but there are two main factors I would use when considering what to do: how much cash do you have and what does your cash flow look like.

First, it sounds like this would be all the cash you have after reserves. I'd encourage you to make sure your reserves number is a real number. I think 6 months should be a minimum and 12 months a goal, but the number will depend on who you talk to, and I think should depend on your line of work - if you work in a highly specialized industry or role, maybe you are indispensable or maybe it is just harder to find a new role should your current one go away. In that case, I don't mind hanging onto a payment if it lets me hold the cash. Bank rates are down somewhat recently, but you can put that extra cash into a high yield checking account to pick up some interest and help net out the effective rate, if that makes sense.

Second, I think paying the loan off is a very easy way to put an extra $6,600 a year net of expenses back in your operating budget (granted...the cash came out of your pocket and is paying down debt on a depreciating asset). It would likely be difficult to get the same kind of cash flow from a rental asset with a 30k investment even if it went smoothly. If $6,600 is a relatively small number for you, then maybe it's worth looking at investments that may have a higher overall return because of the difference in terms (5 years or whatever for the car note and potentially 15-30+ years for an investment property). If you choose the investment property, remember that you need to reevaluate your cash reserves balance because you will likely want to budget for the same number of months of debt service/repairs.

The one thing I would say is the "wrong" thing to do is pay the loan down but not off. It allows you to shorten the effective term of the loan and move more of the payment to principal, but uses your cash buffer and doesn't change the ongoing monthly expense number. You're out $15k (for example) but still on the hook for $550 per month if you lost your job etc.

Depending on your current rate, maybe you could split the difference and pay down a portion while extending the term and dropping the rate. I'm not sure the number here will be big enough to be worth the headache, but doesn't hurt to evaluate the option.

Ultimately, you'll need to make a call about your own lifestyle and risk tolerance (sorry I can't make the decision for you!). Hope that helps to frame the potential thought process somewhat.

Should we pay off our car loan?

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