How Long to Keep Auto Loan Before Paying Off?

[luvs2barre]

I bought a car in November 2006. Started making payments in January 2007 with a interest rate of somewhere around 21%, refinanced in January 2008 for 14% and I have just now refinanced this car for the 3rd at 6.99%. I had plans to try to pay it off as soon as I can but I'm not sure with this new account if it would be wise to do so. I could easily throw an extra $1500 a month towards my new car note of $450 a month. I think that would pay it off in like eight months or so. Is this wise? Would 8 months be enough history for my FICO score? I don't want to lose points for paying it off too early and I financed the car for 36 months.

TIA!

[Anonymous]

If you have adequate cash reserves (and won't deplete them) and have paid CC debt off, then I would recommend always paying off debt.

DO NOT pay interest for the sole purpose of some possible, marginal, FICO gain.  You have 2 previous loans paid off (due to the refi).  If you pay this one off in 6 to 12 months, you will be fine.  For anything you lack in account aging you more than make up in lower debt to income and installement loan balances.

Obviously your credit has improved over time, going from 18% to 14% to under 7%.  Having 3 paid auto loans will be plenty and you will be in a very good position the next time you need an auto loan.

Plus, you might as well be putting that $400 and $1500 in savings once you are paid off....and start paying yourself.

Message Edited by txjohn on 04-21-2009 12:49 PM

[luvs2barre]

Thanks for replying. Actually our emergency is basically non-existent so since I got the interest rate low on the auto I think we will instead use that extra $1500 a month to build up our savings and then work on paying off the car especially in this economy. All credit card debt is paid off and we just have 1 car loan and my student loans but I'm still in school and I pay cash for school now and the loans are from the past.

[Anonymous]

If you do not have savings/emergency funds, then DO NOT pay one penny extra on the auto loan.

Here is the program I recommend:

1.  Have a written budget in place

2.  Know what income you have and where it is going

3.  CUT ALL non-essential spending (no eating out, no movies, no impulse or just because purchases, etc.)

4.  Put EVERY penny you can find (search between the sofa cushions) into savings until you have at least 3 months emergency funds.  See "Raising Extra Cash" below for more ways to get savings boost.

5.  Once you have 3 months, I recommend you continue till you have 6 before you loosen your budget or pay extra on your auto loan

6.  Once you have established at least 3 (recommend 6) months emergency fund/savings, then begin putting all extra cash into the auto loan......MURDER IT....KILL IT.....PUT IT DOWN

7.  You can be debt free (not including Student Loans) and have 6 months emergency funds in probably 2 years 

Don't run up any new debts. 

Raising Extra Cash:  Here are some ways to decrease the time to accomplish:

Have a garage sale, ebay and craigslist sale and start spring cleaning out the "stuff" we all accumulate that we don't need, don't use, don't want, is a luxury we can live withou or don't remember we have stored in attic, garage, closet, under bed or worst of all in paid storage.  You can raise from hundreds to even thousands of dollars, depending on the stuff you have accumulated.  If you do this right away, use it to establish emergency fund head start.

Good luck!

Message Edited by txjohn on 04-21-2009 02:30 PM

[luvs2barre]

You are right. Great suggestions. We will definitely work on the six month emergency fund before paying anything extra on the car. Thanks so much!

[MattH]

---

@Anonymous wrote:
You are right. Great suggestions. We will definitely work on the six month emergency fund before paying anything extra on the car. Thanks so much!

---

Sounds like you have the right plan: build up emergency fund, then pay off car.  I agree with other poster on this.  By refinancing into a fairly low rate you have already gone a long way to cutting your interest expenses, and good for you getting a 36-month loan instead of something with a longer term.  At this point, having cut your payments, you are in an excellent position to use the cash flow in other ways.

I would suggest down the road, once you've built up cash and paid off that car, open a new savings account just for the car's future replacement.  Every month put into that account what you would pay on the loan if you got a new car.  Postpone buying another car until that account contains at least half the price...

My personal view of debt is that car loans fall in the middle between "good debt" like a mortgage and "bad debt" like a credit card: unlike houses a car is always a depreciating asset but at least it's likely to have some value when the loan has been paid off.