Should I pay off a 0% car loan?

Question

I'm ahead on 0% interest car loan. I don't have to make a payment until October. I currently owe $3,000 and I could pay it all off. Should I do that or leave that money in my savings account that earns 2% interest?

Answer 1

Between now and October, your $3,000 will earn $30 in your savings account.

If you are late on a payment for your 0% loan, your interest rate will skyrocket. In my opinion, the risk is just not worth the tiny gain you are trying to achieve in the savings account.

If it was me, I would pay off the loan today.

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A few more thoughts:

There is a reason that businesses offer 0% consumer loans. They are designed to trick you into thinking that you are getting a better deal than you are. Businesses don't lose money on these loans. The price of the loan is built into the cost of the purchase, whether you are buying expensive furniture, or a car. Typically with a car, you forfeit a rebate by taking the 0% loan, essentially paying all the interest up-front. Now that you have the loan, you might be ahead a few dollars by waiting to pay it off, but only because you've already paid the interest. Don't make the mistake of thinking that you can come out ahead by buying things at 0%. It's really not free money.

In the comments, @JoeTaxpayer mentioned that fear of mistakes can lead to missed rewards. I understand that; however, these 0% loans are full of small print designed to trip you up. A single mistake can negate years and years of these small gains. You don't want to be penny wise and pound foolish.

Answer 2

I struggle with 0% interest things in my personal life.

A responsible me that thinks logically says continue to pay it on time and take advantage of the benefit of the interest free loan you got. It will keep your funds liquid in the case of an emergency, build your credit and teach you self control.

Paying it off now has little to no benefit. It does however tie up $3,000 worth of capital you could be using for building interest or leveraging against other purchases.

Answer 3

Mathematically, the wisest choice is to invest your extra money somewhere else and not pay off your 0% loan early. An extreme example highlights this. Suppose some colossal company offered to loan you a billion dollars at 0 % interest. Would you take it? Or would you say "No thanks, I don't want that much debt."

You would be crazy not to accept. You could put that money in the safest investments available and still pocket millions while making the minimum payments back to them. Your choice here is essentially the same, but unfortunately, on much smaller scale.

That said, math doesn't always trump other factors. You need to factor in your peace of mind, future purchases, the need for future borrowing, your short term income and job security, and whether you think you can reliably make payments on this loan without messing up and triggering fees that wipe out the mathematical advantage of slow paying the loan.

You are fortunate because you really can't make a wrong choice here. Paying off debt is never a bad choice IMO. However, it may not always be the best choice.

Answer 4

Pay it off. If you do so, you have the liberty to drop or reduce a portion of your collision auto insurance coverage (keeping uninsured motorist). This could potentially save you a lot more than 20 bucks over the next six months.

Answer 5

Sometimes I think it helps to think of the scenario in reverse. If you had a completely paid off car, would you take out a title loan (even at 0%) for a few months to put the cash in a low-interest savings account? For me, I think the risk of losing the car due to non-payment outweighs the tens of dollars I might earn.

Answer 6

The question posted was, "Should I pay off a 0% car loan"?

The poster provided a few details:

I'm ahead on 0% interest car loan. I don't have to make a payment until October. I currently owe $3,000 and I could pay it all off. Should I do that or leave that money in my savings account that earns 2% interest?

The question seems to seek a general rule of thumb for how to behave with smaller debts. And a general rule of thumb could be taken from one of two principles (which seem to be religious camps).

• Take advantage of "free money" (0% loans) to maximize utility of your money.
• Reduce debts to be "free" to make other choices, with fewer distractions.

The "free money" camp believes that you can invest (even small amounts) of money risk-free and receive high returns, tax free, for zero effort.

The "reduce debt" camp believes that you should pay off debts so that you have the freedom to live your life unfettered.

Which religion do you prefer? I tend to prefer paying off debts.

The "free money" tent wants you to pay the car off over the next 6 months, earning interest. Suppose you can earn 2% interest (.02/12 per month), paying $500 per month for 6 months. So you earn interest on 3000 the first month, 2500, the second month, 2000 the third month,

(3000+2500+...)*0.02/12=5+4.17+3.33+2.50+1.67+0.83=17.50
17.50*0.75 = $13.13 after taxes (estimate 25% tax rate)

So, are you feeling rich, earning $13.13? How much time did you spending making the 5 additional payments? You could skip coffee once/month and make a bigger difference.

The "reduce debt" tent would have you pay off the car. Suppose you change your deductible on the car (or drop collision) to save money, and you will also same time by avoid 5 bill payments,

save$30/month * 6=$180 (after tax)
save 5*(6-1) = 25 minutes

But do you still have enough money in your emergency fund, how do you feel about having less insurance coverage, and did you notice the time savings?

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We really need more information about the poster's situation. The answer should consider the relevant details of the situation to provide an informed response. Here are questions that would enable a response to address the whole situation.

• Do you have a family?
• Do you have a fully funded emergency fund?
• What is your income, and expenses, and do you have a positive cash flow?
• What are your (other) assets, and debts?
• Would the money you used to pay it off be better used for another purpose?
• Are there any reasons why you might need this $3000?
• What is your current credit history?
• What other credit tradelines to you have (or plan to have)?
• Would the loss of this tradeline affect your credit mix at some point?
• Are there any co-signers?
• What is your health? (where you might fall ill and miss a payment)
• Do you work in a dangerous occupation? (where you might be injured)
• Do you plan to keep the car or want/need to buy another car?
• How much is the car worth, and would you consider reducing the insurance coverage?

Why are these important? Here are a few reasons why the above might be important.

• You are married, have two cars and would like to have one car payment, or have kids and need to buy a third car
• An emergency fund can help you avoid financial shocks, et al
• You might need the $3000 for an unexpected expense, or an opportunity
• You might have other debts charging higher rates (mortgage?)
• You might encounter an opportunity to invest, or buy a rare or collectible item.
• Do you have delinquent or collection accounts that need to be paid
• You might have limited credit mix and need an installment account (now or in the future
• Do you have a co-signer who would be relieved of potential risk?
• Could you develop an illness, miss a payment, and damage your payment history?
• Could you get hurt or injured, miss a payment, and damage your payment history?
• Perhaps you want to keep this car (for your daughter), buy another car, and need to qualify for a loan?

Answer 7

The precise answer depends on the terms and conditions of the loan, and whether you can reasonably expect to meet them.

For example, if you keep the loan, make no payments, there is a good chance that - eventually - you will trigger a clause in the contract, and suddenly be charged fees or a significant interest rate. If you don't need to pay anything for a time, odds are you will forget to monitor the loan (after all it is not costing you anything) and suddenly get hit with an unexpected expense.

Most loan contracts are structured - by professionals - to benefit the loan provider. The purpose of a loan provider is to make a profit. They do that by encouraging you to pay more - up front, over the longer term, or both.

Personally, I would never take out a zero-interest loan. It is specifically designed to appear like a gift from the loan provider, while actually (and almost covertly) costing more at some point.

If I was in your position (i.e. if I had taken out such a loan) I'd pay off the loan as fast as possible. If you have more than one loan, however, prioritise by working out which actually costs you more over time. And pay the worst ones first. You'll have to look closely at the terms and conditions - possibly with the help of a professional - to work out which is actually work.

Answer 8

Ultimately the question is more about your personality and level of discipline than about money.

The rational thing to do is hang on to your cash, invest it somewhere else, and pay off the 0% loan as late as possible without incurring penalties or interest. Logically it's a no-brainer. Problem is, we're humans, so there's a risk you'll slip up somewhere along the way and not pay off the loan in time. How much do you trust yourself?

Answer 9

Don't pay off the 0% loan. First, set up an automatic monthly payment to ensure you never miss the payment (which could lower your credit score).

If you are in Canada, depending on your situation:

• If you are not employed, open a TFSA account.
• Use the money to buy stocks of good companies that pay a dividend (around 5% yield).
• If you are afraid of stocks, use the money to buy 1- or 2-year term GICs that pay around 2.5%.

If you are employed and make more than $50k/year:

• Open a SDRRSP account and contribute the money to it. Depending on your income, you may get up 45% of the money back due to saving on income tax.
• Use the money in SDRRDP to buy stocks that pay a dividend or GICs.
• With the money you get from your tax savings, do similar things.

Answer 10

Mostly to play devil's advocate, I will recommend something different than everybody else.

If you can pay off the entire $3,000 balance and are torn between saving that money somewhere that will earn a return and paying it off now to be debt-free, why not a little of both?

What if you pay half now and then save the other half and make a big payment at the end.

Essentially that becomes two $1,500 payments: one now, one right before the 0% due date.

To me, the half up-front significantly reduces the risk, but leaves some cash available to grow.

Answer 11

Here's my take:

1) Having a car loan and paying it on time helps build credit. Not as much as having credit cards (and keeping them paid or carrying balance just enough to be reported and then paying it), but it counts.

2) Can't you set in your bank, not the lender, something to pay the car automagically for you? Then you will be paying it on time without having to think on it.

3) As others said, do read the fine print.

Answer 12

My theory, if you must be in debit, own it at the least expense possible. The interest you will pay by the end, combined with the future value of money. Example: The Future value of $3000 at an effective interest rate of 5% after 3 years =$3472.88 Present value of $3000 at 5% over 3 years =$2591.51

you will need more money in the future to pay for the same item