I got my car (2020 Ford Fusion Hybrid SE) new 3 years ago at $25k for a 6 year loan @ 0% interest for entirety of loan, $350 a month payment. I’m about halfway paid off and have about $12.5k left on it. What should I do? I just get sick of paying $350 a month.
Is it absolutely 0% or is it 0% with a $10/month administration fee? If the former, don’t pay it off early, just set up a standing order/direct debit and let it pay itself down. If the latter, you need to calculate the comparison rate (which will get higher the closer you get to zero balance), and work out what the break even is. Then carry on paying until you hit the point that the effective interest is greater than the interest on your savings account and at that point pay it off in full.
At 0% interest the cost of your money is nothing, so you save nothing by paying it off early. you will be better off taking your extra money and putting it towards other debts (1st) or investing them (2nd). In fact, even if you do nothing with you extra money now you will still come out ahead because of the future value of the dollar decreasing with inflation.
Setting aside the talk about interest, etc., I would double check the terms of your loan.
Almost no lending institution is going to give you $25k at 0% for the life of the loan. They wouldn’t be making any money. In fact, servicing the loan (taking payments, etc.) would cost them money.
Captive finance companies do this all the time because they make money on the margin of the product. The financing is just an incentive to get up to purchase the product.
The days of the 0% for X months financing are coming rapidly to an end as inflation and the federal reserve interest rate both go up. But even those loans, while they incentivize the buyer to pay the loan off early, will still apply interesting – sometimes, if you’re not careful, all the deferred interest for the past X months, which is extra shitty – after the 0% period is complete. I think the only major manufacturer this season that’s offering any sort of 0% deal is NIssan, and they’re sort of going all in, probably in an attempt to move excess inventory.
It’s just not a thing to see a lender not charge interest. It’s like, going to Taco Bell and ordering a burrito for $0.
There are, of course, some exceptions. The dealer may be subsidizing the interest payments. The lender/servicer may be pulling some (probably) illegal shit and calling “interest” a “service fee” or are perhaps charging a “payment processing convenience fee” to make their money. The dealer / automaker may be paying the servicer’s bills on the backend, but don’t think for a moment that cost isn’t baked into the sale price of the vehicle. I just can’t see a case where a lender would be okay working for free.
I think it gives them value as a sales tactic. Plenty of people get cars they can’t afford to pay for upfront, and may be a little outside a sensible budget for payments too. But if they see a 0% loan for 48 months… “what a great deal”… boom that’s another car sold
Paying off early and closing the account will drop that for a little while though. I just paid off a personal loan 4 months early and mine dropped by 21 points.
How are you checking your credit score? Frequent hard-pulls of your actual credit score would show up on your credit report and actually lower your credit score on it’s own.
I’ll bet you’re using a service like credit karma which pinky-promises it is properly calculating your credit score. But is it really?
Nah their scoring model weighs different things differently. And over the past decade, I get a sense that they put more value on your open lines of credit themselves over closed credit in order to encourage people to open more credit cards (which is good business for banks, but not the customer).
Don’t put too much faith in those services to give you an accurate credit score, and personally I wouldn’t allow them access to my personal information - that’s just another avenue of attack by a hacker if they compromise the CreditKarma mainframes and steal your info.
Your credit score isn’t about how good you are at repaying your debts, it’s about how reliable you are at generating and paying interest to your creditors. They don’t care if you pay it off, so long as you keep making monthly payments. That’s why you’ll get refinancing offers when you’re close to paying off a loan, they want to keep those interest payments coming. Even if you’re not paying interest now, they still want to see that repayment history.
Many people seem to forget credit scores didn’t exist before 1989. Decades ago a wife would have to get permission from the husband to open a line of credit with a department store.
Credit scores were built to help the banks, not the average person.
Not only that, but getting a mortgage before credit scores sucked. It’s never been easier to get money other than the ninja loans in the 2008 mortgage crash. Loans were only a thing for white people with bosses that liked them, or high status jobs like doctors and lawyers.
Most people are skipping the important point here, though I did see it at least once: the money you pay now is worth more than the money you’ll pay next year, or the year after that. That’s true not only because of inflation, but also because of your own earning power. Are you making the same amount of money today that you were making 3 years ago? Probably not–I’d guess that you’re making a little more. That means that each dollar you spend was a little easier to get, and is thus is worth a little less. The 12.5 K that you would pay now is probably worth more to you than it would be if it was spread out. So spread it out. The more dollars you pay later, the less those dollars are worth. This is a no brainer on a no interest loan, but it can still be true even if you’re paying interest, though the calculation gets a little complicated. If you have a relatively low interest loan, it might make more sense for you to keep making payments than to try to squeeze it in all at the beginning, especially if it’s a house mortgage (which are usually long-term). Those monthly payments, in 20 years, will be worth a lot less than they are now. It might seem crazy, but it doesn’t always make sense to maximize payments at the beginning of a loan just to reduce interest because 2023 dollars are not the same as 2043 dollars.
If you need to take out another loan for something else then pay it off. So you have less debt on the books. Otherwise just keep the loan. It’s zero interest
If you dont want to take risks investing it chuck the savings in an account and have the loan payments taken from that account. If nothing else it keeps your funds liquid incase you need emergency cash.
Another consideration is that most auto loans require you to have full coverage for your vehicle. If you pay it off early you can reduce coverage if that’s right for you.
If it’s always $350 a month, just let the debt ride.
Over 6 years, $350 in year 1 is worth more than $350 in year 6 thanks to inflation (350$ in 2017 would be able to buy you $435 worth of goods or services today). If you have $12.5k sitting around - Invest that into something stable, collect the interest and just keep paying off the loan slowly because that’s the cheapest way to do it (unless we end up with negative inflation in the next 3 years - which seems unlikely, but who knows??)
Cars tend to be financial liabilities, depreciation on a new car is just tremendous - next time just get a beater with working AC for as little as possible, do your maintenance and run it into the ground.
The action you should take depends on your goal. If you’re aiming to make the best financial decision, you might calculate whether it would be more beneficial to invest $12.5k now, or to invest $350 each month instead. The latter would be possible if you decided to pay off the loan. However, if your decision is about feeling better, then paying off the loan seems to be the only option that would satisfy you. If you’re from the US, having a loan might be necessary to get future loans.
I mean think about how much money that 12.5k could generate for you, especially since you’re not paying to use the car manufacturers money. The interest rate is the cost to borrow the money… you’re getting it for free. Put the money…we’ll ask a fiduciary they have to give you good advice not based on a commission or profit.
If you’re paying 0% it won’t hurt to keep paying it monthly. If you have 12.5k laying around then invest it and make some money. Obviously if you had anything above 0% interest on the loan then paying it off would never be a bad thing.
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Is it absolutely 0% or is it 0% with a $10/month administration fee? If the former, don’t pay it off early, just set up a standing order/direct debit and let it pay itself down. If the latter, you need to calculate the comparison rate (which will get higher the closer you get to zero balance), and work out what the break even is. Then carry on paying until you hit the point that the effective interest is greater than the interest on your savings account and at that point pay it off in full.
Absolutely 0
At 0% interest the cost of your money is nothing, so you save nothing by paying it off early. you will be better off taking your extra money and putting it towards other debts (1st) or investing them (2nd). In fact, even if you do nothing with you extra money now you will still come out ahead because of the future value of the dollar decreasing with inflation.
So the dollar decreasing due to inflation is bad right?
Setting aside the talk about interest, etc., I would double check the terms of your loan.
Almost no lending institution is going to give you $25k at 0% for the life of the loan. They wouldn’t be making any money. In fact, servicing the loan (taking payments, etc.) would cost them money.
Are you sure it’s for the life of the loan?
It is the entirety of the 6 year loan, directly through Ford Credit themselves. 0%
Captive finance companies do this all the time because they make money on the margin of the product. The financing is just an incentive to get up to purchase the product.
Car loans are very frequently extremely low interest rates when financed through the dealership. I personally have a 0.99% car loan.
The days of the 0% for X months financing are coming rapidly to an end as inflation and the federal reserve interest rate both go up. But even those loans, while they incentivize the buyer to pay the loan off early, will still apply interesting – sometimes, if you’re not careful, all the deferred interest for the past X months, which is extra shitty – after the 0% period is complete. I think the only major manufacturer this season that’s offering any sort of 0% deal is NIssan, and they’re sort of going all in, probably in an attempt to move excess inventory.
It’s just not a thing to see a lender not charge interest. It’s like, going to Taco Bell and ordering a burrito for $0.
There are, of course, some exceptions. The dealer may be subsidizing the interest payments. The lender/servicer may be pulling some (probably) illegal shit and calling “interest” a “service fee” or are perhaps charging a “payment processing convenience fee” to make their money. The dealer / automaker may be paying the servicer’s bills on the backend, but don’t think for a moment that cost isn’t baked into the sale price of the vehicle. I just can’t see a case where a lender would be okay working for free.
I think it gives them value as a sales tactic. Plenty of people get cars they can’t afford to pay for upfront, and may be a little outside a sensible budget for payments too. But if they see a 0% loan for 48 months… “what a great deal”… boom that’s another car sold
I’d bite the bullet and keep paying it, it looks good on your credit report to have secured credit with a long repayment history.
Perhaps, my credit score currently is 791
Paying off early and closing the account will drop that for a little while though. I just paid off a personal loan 4 months early and mine dropped by 21 points.
How are you checking your credit score? Frequent hard-pulls of your actual credit score would show up on your credit report and actually lower your credit score on it’s own.
I’ll bet you’re using a service like credit karma which pinky-promises it is properly calculating your credit score. But is it really?
Nah their scoring model weighs different things differently. And over the past decade, I get a sense that they put more value on your open lines of credit themselves over closed credit in order to encourage people to open more credit cards (which is good business for banks, but not the customer).
https://www.cnbc.com/select/credit-karma-vs-fico-credit-scores/
Don’t put too much faith in those services to give you an accurate credit score, and personally I wouldn’t allow them access to my personal information - that’s just another avenue of attack by a hacker if they compromise the CreditKarma mainframes and steal your info.
Damn
Your credit score isn’t about how good you are at repaying your debts, it’s about how reliable you are at generating and paying interest to your creditors. They don’t care if you pay it off, so long as you keep making monthly payments. That’s why you’ll get refinancing offers when you’re close to paying off a loan, they want to keep those interest payments coming. Even if you’re not paying interest now, they still want to see that repayment history.
Many people seem to forget credit scores didn’t exist before 1989. Decades ago a wife would have to get permission from the husband to open a line of credit with a department store.
Credit scores were built to help the banks, not the average person.
Not only that, but getting a mortgage before credit scores sucked. It’s never been easier to get money other than the ninja loans in the 2008 mortgage crash. Loans were only a thing for white people with bosses that liked them, or high status jobs like doctors and lawyers.
Pay it off and start paying yourself $350 a month.
No, don’t do this. Invest the lump sum of money now because at zero interest, you’re not gaining anything by paying it off.
The lump sum of 12k will be worth much more invested now than 350 a month trying to get back to that amount
Most people are skipping the important point here, though I did see it at least once: the money you pay now is worth more than the money you’ll pay next year, or the year after that. That’s true not only because of inflation, but also because of your own earning power. Are you making the same amount of money today that you were making 3 years ago? Probably not–I’d guess that you’re making a little more. That means that each dollar you spend was a little easier to get, and is thus is worth a little less. The 12.5 K that you would pay now is probably worth more to you than it would be if it was spread out. So spread it out. The more dollars you pay later, the less those dollars are worth. This is a no brainer on a no interest loan, but it can still be true even if you’re paying interest, though the calculation gets a little complicated. If you have a relatively low interest loan, it might make more sense for you to keep making payments than to try to squeeze it in all at the beginning, especially if it’s a house mortgage (which are usually long-term). Those monthly payments, in 20 years, will be worth a lot less than they are now. It might seem crazy, but it doesn’t always make sense to maximize payments at the beginning of a loan just to reduce interest because 2023 dollars are not the same as 2043 dollars.
So im confused are you saying to pay it off now or wait because my loan is 0%
They’re saying wait.
You should definitely wait
If you need to take out another loan for something else then pay it off. So you have less debt on the books. Otherwise just keep the loan. It’s zero interest
If you dont want to take risks investing it chuck the savings in an account and have the loan payments taken from that account. If nothing else it keeps your funds liquid incase you need emergency cash.
Another consideration is that most auto loans require you to have full coverage for your vehicle. If you pay it off early you can reduce coverage if that’s right for you.
But they should know that AS SOON as you drop coverage, THAT’S when it gets totaled.
If it’s always $350 a month, just let the debt ride.
Over 6 years, $350 in year 1 is worth more than $350 in year 6 thanks to inflation (350$ in 2017 would be able to buy you $435 worth of goods or services today). If you have $12.5k sitting around - Invest that into something stable, collect the interest and just keep paying off the loan slowly because that’s the cheapest way to do it (unless we end up with negative inflation in the next 3 years - which seems unlikely, but who knows??)
Cars tend to be financial liabilities, depreciation on a new car is just tremendous - next time just get a beater with working AC for as little as possible, do your maintenance and run it into the ground.
I have no interest in ever buying privately owned again
Doing this right now, getting/learning manual makes it fun. Plus, at least for me, the used standards come cheaper.
I personally love standards. It’s more fun, and it comes with passive theft deterrent
Technically, if you just pay off 0% interest loan just because you can, you’re losing money(interest).
It is not only needless but is also an actually worse financial decision.
The action you should take depends on your goal. If you’re aiming to make the best financial decision, you might calculate whether it would be more beneficial to invest $12.5k now, or to invest $350 each month instead. The latter would be possible if you decided to pay off the loan. However, if your decision is about feeling better, then paying off the loan seems to be the only option that would satisfy you. If you’re from the US, having a loan might be necessary to get future loans.
I mean think about how much money that 12.5k could generate for you, especially since you’re not paying to use the car manufacturers money. The interest rate is the cost to borrow the money… you’re getting it for free. Put the money…we’ll ask a fiduciary they have to give you good advice not based on a commission or profit.
If you’re paying 0% it won’t hurt to keep paying it monthly. If you have 12.5k laying around then invest it and make some money. Obviously if you had anything above 0% interest on the loan then paying it off would never be a bad thing.
True
Buying on credit and then using the cash on a savings account is like having cashback on a purchase with an extra step
Keep the loan. It’s the best deal you’ll see in your lifetime.