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I have about 13k in a savings account with 1% APY. Last year this account earned over $100 in interest. I have a car loan with a balance of about $4200 on it, with 1.9% APR. I pay $288/mo on the loan, and an additional $12 to the principal every month (for an even $300).

I should have the loan paid off in a little over a year, but I was wondering if I could actually save money by just paying the loan off outright, and put the payments into my savings account for the next year. I already put $500/mo into the savings account.

My usual thought process for a low/zero interest loan like this is that its better to have the emergency cash on hand. But I feel comfortable enough that I can take the one-year hit to my savings. But do I even save any money this way? Is there some formula I can plug into a spreadsheet to figure out when I could have or should have paid off my car loan?

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For your car loan:

4200 * .019 = 79.8/year or next month you will pay about $6.65 in interest.

For your savings account:

4200 *.01 = 42/year or next month you would earn $3.50

So you would save a little each month by using savings to pay off the loan early. Keep in mind, that once the loan is paid off, you would have $800/month to put into savings.

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    Easy as that, which rate is lower? Just make sure there are no extra costs for early payment in your car loan.
    – Hart CO
    Feb 7, 2019 at 19:19
  • Assuming an amortized loan, the interest paid decreases each month as principal is paid off. The savings account is an APY, so that earlier months have lower interest; the interest earned by the previous month's interest is what makes an APY of 1% for a slightly lower APR. None of which really affects the main conclusion that the total savings is very low, and that it would only take a few months to replenish the savings account.
    – chepner
    Feb 7, 2019 at 19:58
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    I was wondering how you came up with 800 then I reread the question seeing that op was already saving 500 a month. Even if its not that much interest just paying it off will make you sleep better. I say pay it all off.
    – JonH
    Feb 8, 2019 at 4:17
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The reason to pay off your loan now, rather than making the payments has more to do with risk and spending behavior than the dollars saved in the difference in interest rates. Additionally, paying interest on a depreciating asset means your losing money in two areas.

Financial Expert Dave Ramsey says to not use consumer debt of any kind. On average, you spend more when you use credit. Some more detail about typical car debt are shown in the link below. Another observation, is the really low APR on the Car Loan. This makes me think you have a really good credit score. If you do, then you've given a lot of your money to banks. The other link below shows a breakdown of how that's determined.

I would recommend using Dave Ramsey's Baby Steps in your situation:

BS1: Set aside $1000 in a starter emergency fund.

BS2: Pay off all debts (except the house) from smallest to largest. This includes the car.

BS3: Rebuild the emergency fund to 3 to 6 months worth of expenses

You can find the rest of the Baby Steps online, but these are the ones pertinent to your question.

Resources:

https://www.daveramsey.com/blog/the-truth-about-car-payments

https://www.daveramsey.com/blog/the-truth-about-your-credit-score

https://www.daveramsey.com/baby-steps

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  • Additional resources I recommend (but only partially related to your question) which you can find at the library, are Dave Ramsey's Total Money Makeover and Chris Hogan's Everyday Millionaire.
    – Adam Klump
    Feb 8, 2019 at 3:10
  • Actually this should be backward. BS2 and BS3 need switching. Emergency funds should be build BEFORE tacking debt - after all, an emergency can hit you any time.
    – TomTom
    Feb 8, 2019 at 7:59
  • @TomTom That's why BS1 is the first step. If $1000 seems too low, maybe it might be worth to increase it to $2000 to $3000. And, if wanted/needed, maybe do BS2 and BS3 in parallel. Nothing is put in stone.
    – glglgl
    Feb 8, 2019 at 11:09
  • Yeah, that is why I only commented. Also your state in life changes a lot, as do laws. I lease all cars at the moment, iirc, due to tax laws (leased = fully deductible) and low rates (car with 2.5%), while owning is a fight to deduct ;) So, it is VERY depending on where you live and what you are (independent vs employed).
    – TomTom
    Feb 8, 2019 at 11:40
  • For your future success in answering question, not everyone has drunk the DR kool aide. There are some smart and successful people, on this site, that have real problems with his teachings. While I am a no debt guy, you need to do better at explaining the why on making such radical departures from common wisdom.
    – Pete B.
    Feb 8, 2019 at 17:30
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You will save very, very little by paying back the loan. But you should have looked at this a lot earlier, when you bought the car.

The car dealer tries to make money from the sale of the car, and from the loan. If the give you a loan with good interest rate, as they did, you can bet that you paid more for the car.

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