Use savings account for auto loan early payoff?

[Jared Cruz]

Hi there! I have an auto loan of 3% and a remaining balance of $10k. I have around $11k in my savings account and I was thinking of using that to pay off my loan soon.

Other than my car and mortgage, I am completely debt free. 

I really want to pay off my auto loan as it is costing me $80 a month, or at the end of the loan period, 27 more months, around $2k.

I'm expecting to get three bonuses between July and April, totaling around $8k, which I could then replenish my savings account with.

Is this a bad idea?

[Greg Scott]

Quote from @Jared Cruz:

 So I looked at those High Yield Savings Accounts and some are offering 5%, which would net me around $400-$500 a year in interest. Meanwhile my auto loan will cost me nearly $1000 for that same year.

What I want to do is pay the loan off and start aggressively putting money away as I'll be completely debt free at that point.

If your loan payment is $1000 per year and $300 of that is interest, that means that $700 is loan pay-down.  Your actual COST to use that money is $300. (Note: that costs goes down every year as the loan is paid off.)

If you can earn $500 per year in interest and pay $300 per year in interest that means you are making $200 per year profit off that cash.  So in five year you will have at least $1000 more cash in your pocket than if you paid off the car loan today to "save" money.   It's counter-intuitive, yet absolutely true. 

This is a very simple example, and it is the kind of math that keeps a lot of people in the middle class while a few become millionaires.  It is critical to understand how to have money make you money.  Being debt-free doesn't put food on the table.