Should We Pay off Our Car Loan?

car_loan.pngThe Federal Reserve just cut interest rate again and banks will soon, if not already, follow suit to lower their savings accounts’ rates. And according to some experts, such as PIMCO’s Bill Gross, the current rate reduction cycle is far from over, which means interest rates from banks are heading no where but south in the near future. With less returns from banks, I am thinking whether to pay off the balance we still owe on our car.

When we bought our Odyssey in 2005, we took a $31,000 5-year car loan at 4.90%. I have never worried about the loan and paying it off early didn’t occur to me since we can get more from our money when the banks were paying us some 5.0+% interests. After more than two and a half years with monthly payment of $650, the debt has been reduced to a more manageable level of a little more than $17,000. As bank deposit returns get less appealing and the cost of carrying the loan exceeds the reward from putting the money in a savings account, maybe it’s time to consider paying it off.

No, I am not going to send them a $17,000 check if I choose to go that route. What I plan to do is getting a credit card that gives me 0% APR for 12 months with no or a cap on balance transfer fee then use the balance transfer money to pay the loan. In this way, I can get another 12 months of interest free period. After doing some homework, I identified a couple of cards for this purpose (FatWallet.com’s Finance forum is a good place to find 0% APR cards):

  • Citi Driver’s Edge Platinum Card
  • Discover More Card
  • Bank of America National Education Association WorldPoints Platinum Plus Card

The one that I am interested in getting is the Driver’s Edge which doesn’t have a balance transfer fee and it could be a card that I may actually use.

I just closed an account early this week. Now it looks like I am about to get another one :)


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6 Responses to “Should We Pay off Our Car Loan?”

  1. fivecentnickel.com |  Dec 13, 2007 at 10:19 pm

    Even before the rate cuts, 5+% interest after taxes is less than the loan rate, so you were likely losing money by holding the cash in the bank.

  2. Jonathan C |  Dec 14, 2007 at 12:45 pm

    how does adding yet another credit card to the mix help you reach your goal of simplifying your finances?

  3. Sun |  Dec 15, 2007 at 2:05 pm

    Yes, even at 5.0+% APY, I am paying more for the loan then what I get from the banks. I want to pay if off early, but have to wait it reach a level that won’t put too much pressure on us. Now it’s about at that level :)

    Jonathan: Adding another card won’t help simplify my life as I wanted. But this new card is probably for the balance transfer purpose only and I will probably just close it after the promotional period. $17,000 is not an
    amount that I want to pay right away if I don’t have to. Getting another card and using the borrowed money to pay for the loan just give me a little more time to hold on the money.

  4. Grant |  Dec 15, 2007 at 2:38 pm

    Make sure your auto lender will allow you to pay off the loan using a credit card before you open another account!

    Also, is opening a 0% Balance transfer card worth the hassle? Why not just increase the monthly payment and be done with the whole deal?

    -Grant

  5. Curt |  Feb 27, 2008 at 4:01 am

    Just to let you know you will be negatively affecting your credit rating/score by opening and closing out these accounts. Creditors look for repayment over a period of time. The longer an account is open and in good standing the better your credit rating will be. Why don’t you just pay the loan off outright and not even bother opening another credit card account and waiting a year. What if something happens and you are not able to pay off that credit card like you wish. Once interest kicks in you will be stuck with a high interest rate large balance. If you just pay it off then you will have that extra $650.00 a month that you can easily save. Its just my opinion but it does not make much sense to me taking out a credit card to pay off a car loan when you already have the money in hand. Good Luck

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