Car loan strategy...

The BF just got a car, finally, which is a huge relief to the worry of whether or not he's going to make it back and forth to work. My old 2000 Explorer doesn't owe us a dime since it's sitting at 250k miles.

SO, now that he's got the loan, the payment is $209.80 every month. Not a horrible amount, and now that his overtime is coming back, it is looking like it's not a hateful stretch to keep it paid.

That being said, this is NOT the car he really wanted. He wanted something more expensive, and nicer. This car is intended to be temporary, a bridge to get him between the need of now, and a place when we will be more comfortable, and can afford something more in line with what he likes and wants.

The loan is for 75 months, and is only at 2.59%, which is pretty good on a used car right now.

I plugged some numbers into just to see what kind of impact things could have.

If we pay $225, it knocks 6 months off the loan.

If we pay $250, it knocks 11 months off the loan.

So knowing that we don't have intentions of keeping the car, and the budget is fairly tight, what would you do in this scenario? Pay extra on the loan in the hope that the money will come back when we go to sell? Or just leave it alone, and put that money towards saving for the next car so that we have cash in hand?

(As a side note, not that it entirely matters, it is a Subaru Impreza, with only 41k miles on it, so low mileage now, and a car that holds pretty good value long term)

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  • He's paying an average of $16/month in interest. He is also effectively paying the depreciation, since I assume he will sell this car before getting the one he wants. The combination is the price of peace of mind.

    If you think the next purchase will happen before this loan is up, I would maximize the savings toward the next purchase. This will minimize the amount financed next time, which may not be as favorable a rate.

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    • dakinemaui good point about the loan rate in the future!

  • I normally treat money into a car as what it is, an oxymoronic dead "investment", if you can call it that. Any cash you put into it is cash that is not working for you.

    IMHO, 75 months is a long loan term, but considering your budgetary restrictions, it is what is is. I would apply more to the loan to knock off the months I would take to pay down debt, but that is especially true with CC debt, since it has higher APRs.

    How tight is your budget? Since you say you are not keeping the car, my instinct would be to pay as less interest as I would on the car loan. If you are putting the extra 15-40 USD towards your next car, I don't think it is going to make a lot of difference in that area. You might as well use it to reduce the interest you pay on the loan, especially since you are not keeping this car, like you say. But if you have more space in your budget sending money to your next car, more like a few hundred, I would say add this amount to that, since the returns on that are much higher (in terms of paying lower interest on your next loan).

    And   dakinemaui beat me to saying the same thing in fewer words. :P

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    • LoaferDude Thanks!! I appreciate your thoughts (most of my thoughts come out rambling like this, and less like dakinemaui, too.

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      • dakinemaui
      • dakinemaui
      • 7 mths ago
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      farfromtheusual Ha! I've been making a conscious effort to be less verbose. 😉 Caught me on a good day!

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    • dakinemaui  😂

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    • dakinemaui #Goals 😅

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  • Another consideration is that some expensive maintenance happens around 100k miles. The sooner he starts saving for that the less impact it will be per month.

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    • dakinemaui true... THANKFULLY he can do the vast majority of work himself, which saves us BOATLOADS. That's the only reason the previous explorer make it to 250k. It just got to the point where the parts alone cost more than the car itself (seriously KBB is $75.00).

  • One more factor to consider: when selling the car, there's always the risk that you won't get what you still owe on it, regardless of whether you pay the minimum or slightly more.  You might profit on it as well, but again, that's a gamble and that depends on how risk-averse the two of you are, the residual value of the vehicle itself when it comes time to sell, and the buyer market.

    If you don't sell it for what you still owe, then that's additional money to account for.  I think we all have friends who've driven (ha!) themselves into a hole by constantly rolling over loan balances into new loans and end up paying $60K for a $20K car.

    Finally, when valuing a vehicle, it's not just about resale $$$.  If the car runs and if maintenance/repairs can be done for less than the cost of a replacement vehicle, it still holds value. 

    But I totally understand wanting the car you want.  It's why I have mine now (Dodge Charger).

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    • Ivory Wildebeest thanks for the thoughts, I appreciate it. I guess the goal is to get ourselves into a better financial position as quickly as possible in order to be able to afford the car he wants so that this car still holds value. Thankfully, Subaru cars do hold value pretty well, compared to others, so that's a good thing. He was considering a Chevy Cruze, but looking back, it's a good thing he got the Subaru because they hold value way better than the Cruze would have.

      Thanks for the thoughts! I guess we'll also just have to watch the market and make sure that we keep an eye on what we can sell it for vs what's left on the loan.

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