Should I Pay Off My Car Loan or Invest My Money?

I graduated last May and have around $9K in equity investments, and $16K in cash. I'm also set to receive $10k after-tax in a couple months as a bonus payment... so, I'll be sitting on $26K in cash and around $10K in my brokerage account in the next couple months.

I have a $13K car loan and I'm thinking I want to pay off the car loan in its entirety with my cash.

The monthly is around $370 and the interest rate on it is 2.9%. I've been paying $500 per month just to pay it off faster, but I'm debating whether I want to invest my funds or just continue to pay off my car within the next 2.5 years.

Should I keep my cash as is to use as an emergency fund? Should I pay off my car right now?

I eventually want to start investing in real estate in the next couple years, so I do want to keep a nice cash sum available.. but I also would love to free myself from a monthly $500 car payment.

Other facts:
- Zero school loans
- Excellent credit history
- Zero credit card debt

Thoughts?

Paying Off Car Loan vs. Investing

Generally speaking, if your monthly interest rate is lower than the estimated monthly return on the market, it makes sense to invest your funds in a non-risky manner. The opportunity cost to paying off your loan is a potentially higher return in the stock market. However, if you are risk adverse you should spend your extra funds paying off your car loan or spending part of your funds to pay off part of your loan and then invest the remaining portion.

Our users shared their advice below.

BTbanker - Private Equity Vice President:

2.9% is pretty damn low. I would just pay it off faster like you are doing, but still use the money to invest in stocks. I honestly think you will return more than 2.9% in the market over the next year or two. Since you have no cc or student loans, I would leverage that debt. Just don't be too aggressive.

Rupert Pupkin:

Why would you use cash to pay off the loan at 2.9% rather than invest it with a decent chance of earning more than that? Ya, it's great to say you don't have a car payment, but there really is not much upside to it when the rate is that low. Also, you just graduated college. $16,000 is a lot for a rainy day fund. Keep about $5k of it and invest the other $11k, then when your $10k comes in put half in the rainy day fund and invest the other half. Just make higher payments towards the car at $700 if you want to cut some of the interest down.

Leonidas - Investment Banking Managing Director:

Since your interest rate is that low, it's your call. However, you should keep some cash stashed away at a separate checking account for however long you think it'll take you to find another job.

Personally, I'm very fiscally bearish, and I plan to keep 5 years living exp (5 yrs @$50,000 =$250,000) in the bank. Is it a bit excessive? Perhaps, but the knowledge that I can quit at any time, go to Law School, or just chill for a while is extremely liberating.

What is Opportunity Cost?

Check out a video below explaining the concept of opportunity cost as referenced in this post.

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Comments (18)

Feb 20, 2012

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    • 1
Jul 14, 2012

All I want to know is, how did you manage to stack up to $16K?

C'est la vie.

Feb 20, 2012

I cannot see a reason not to pay off the majority of your debt, if not all of it. Money owed always generates more money than money due. You need a functioning current account and something for a rainy day but after that, clear them debts (assuming no fee to pay off early).

Feb 20, 2012

I don't have a savings account; just a checkings, brokerage, 401k, and Roth IRA.

So I see you're saying I should pay it all off now, but I don't understand your statement of "money owed always generates more money than money due."

The only reason why I'm hesitant to pay it all off now is because the $16K is sorta my rainy day fund.. but it'll soon become around $26K in a couple months (this is guaranteed), so at the same time, I think it'd be okay to pay it all off now because I'll be in the same position 3 months later once I get the bonus.

Feb 20, 2012

i meant that interest rates on your savings will be much lower than on your debts, so you save money by paying off the debts.

If you're $10k is guaranteed, just pay it off.

Feb 20, 2012

2.9% is pretty damn low.

I would just pay it off faster like you are doing, but still use the money to invest in stocks.

I honestly think you will return more than 2.9% in the market over the next year or two.

Since you have no cc or student loans, I would leverage that debt. Just don't be too aggressive.

Feb 20, 2012

If the return on your investments and cash combined is greater than 2.9% you should hold on to the loan. Also, why are you sitting on so much cash?

Feb 20, 2012

2.9% is pretty cheap. Are you looking to buy a property in the near future? If so I would hold off on paying back the loan; otherwise I can't see a reason why you wouldn't

Jul 10, 2012

.

Feb 20, 2012

WHAT THE FUCK with kids coming here to ask if they SHOULD DO something?

SHOULD I get a dog?

SHOULD I buy an expensive watch?

SHOULD I buy an expensive car?

SHOULD move out of the friend zone?

WHAT are you? SLAVES?

Power and Money do not change men; they only unmask them

Feb 20, 2012
FlakieBear:

WHAT THE FUCK with kids coming here to ask if they SHOULD DO something?

SHOULD I get a dog?

SHOULD I buy an expensive watch?

SHOULD I buy an expensive car?

SHOULD move out of the friend zone?

WHAT are you? SLAVES?

Welcome to WSO...

Feb 20, 2012

What's up GreenFrog

Feb 20, 2012

I'm surprised the question wasn't "Is it more prestigious to pay off my car loan now or continue to pay the monthly payment?"

Feb 20, 2012

Why would you use cash to pay off the loan at 2.9% rather than invest it with a decent chance of earning more than that? Ya, it's great to say you don't have a car payment, but there really is not much upside to it when the rate is that low. Also, you just graduated college. $16,000 is a lot for a rainy day fund. Keep about $5k of it and invest the other $11k, then when your $10k comes in put half in the rainy day fund and invest the other half. Just make higher payments towards the car at $700 if you want to cut some of the interest down.

Feb 20, 2012

Since your interest rate is that low, it's your call. However, you should keep some cash stashed away at a separate checking account for however long you think it'll take you to find another job.

Personally, I'm very fiscally bearish, and I plan to keep 5 years living exp (5 yrs @$50,000 =$250,000) in the bank. Is it a bit excessive? Perhaps, but the knowledge that I can quit at any time, go to Law School, or just chill for a while is extremely liberating.

Feb 22, 2012

Thanks guys.

Just today I made enough profit through day trading to cover my interest for the car loan this entire year.

lol.

PowerPoint Jockey: Who are you? I'm assuming you know me from another forum. I'm guessing SF.

May 3, 2013
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