Thursday, March 09, 2006

Should I Pay Off My Car Loan @ 4.25%?

Poll Closed. Thanks!
I just got an interesting comment from Think, and I've thought about it, but always felt content in knowing I'm not making or losing money with my loan, I just have extra cash in my pocket. This was enough reason for me to really keep the loan alive...but should I pay it off?

7 comments:

Think said...

You said:

"but always felt content in knowing I'm not making or losing money with my loan, I just have extra cash in my pocket."

But this is not true unless you achieve enough interest on your cash to make back the 4.25% plus taxes. One year of interest on that 16,600 is $705. In the 25% tax bracket you need to make $940 on an equivalent 16,600 to have $705 left after taxes to replace the 705 you are paying in interest.
That means you need to get 5.65% on your cash to not be losing money. You may not be losing tons but you are probably losing about $150 on that balance in a year by not paying it off with the cash. If you barely had enough cash to pay it off I would say its not worth it. But you have a huge cash buffer. What are you planning to do with that 88K? Do you have any reason to need that kind of cash.

Taken to the extreme if this is a good idea then if someone offered you the opportunity to loan another 100K at 4.25% and stick the money in an interest account, would you do it? If not then why do it with this money because that is what you are doing. You are carrying at 16K debt that I can't think of a reason to carry.

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