Okay, I know I said last week that I would go ahead and pay off the car loan by pulling the needed funds from my ING savings. I don't think I'm going to do that. I'm sure I'm rationalizing, rather than being rational. But here are my thoughts.
Discipline is Key
I'm really against buying new cars. This is one of the most basic tenets of living budget consciously. Last December, I bought a brand new Acura. Like I said before, I love the car, but can't believe I bought new. I could have made a withdrawal for the full amount and not even bothered stopping by the financing office. However, I was not ready to deplete the savings by that amount just yet. After taxes, licensing, etc. the amount due was over $30k. I decided to put a down payment of $10,000. I took $7,000 out of savings and put the remaining $3,000 on a credit card. I planned to take the remaining $3,000 out of savings when my credit card bill came due, but due to a good income month, I was able to pay the bill out of cash flow.
So, here's what I realized. I didn't miss the $7,000 out of my savings. I knew, logicallly, that the balance was lower, but it didn't feel that bad. In February, I received a substantial tax refund, most of which I sent off to the Honda financing people. Again, little pain. I had a pretty good income month again in February, and this time when I made a substantial payment to Honda out of my income, it hurt. Seeing current income go to the void that is debt repayment is not so fun. A little fun, but not nearly as fun as watching my savings account balance increase.
My income, while good, is instable. Some months I make $5,000, others $12,000. While my goal is to pay the car off in 18 months, I think I could probably do it faster. If I do it faster, the $500 in excess interest that it will cost me over 18 months would be less.
I have a solution. At first, I liked the Financial Freedumb's idea of paying off half of the car loan. After all, I can decide next week or next month to pay the rest off. If I pay it all off, and decide tomorrow that I need all of this liquidity, too late. I can't ask Honda for my money back.
Then I had another idea. Jonathan, of My Money Blog, is well known for borrowing from 0% balance transfer credit card offers, and investing the funds in interest bearing accounts. I'll admit, I have thought about doing this myself. Well, I'm going to steal from this idea, but use the 0% balance transfer money to pay off my car loan. I will pay off the cards at the same rate that I planned to pay off the car. This give me an absolute deadline. Most of the 0% balance transfer offers are only good for 12 months. If I have not paid them all off as the 12 months nears, I will go ahead and make a savings withdrawal for the difference.
It's a pretty good compromise, right? It gives me a deadline of 12 months to pay off my car. It finances the car at 0% until that time. It allows me to have my safety net savings account. Also, in the event that I decide to buy a house a year from now, I know today that I will have the needed liquidity.
And, I guess I didn't mean "Final Post" because I will certainly be updating this situation. More like Final Decision.
I think most would recommend against that strategy of using a credit card to pay off your car EXCEPT that your situation is much different because you already have the money. It makes no difference if you paid the car loan off and then started a 0% BT arbitrage or if you didn't pay off the loan and used the 0% towards the car, it's merely a psychological difference. Did that make sense?
Posted by: jim | March 13, 2006 at 04:14 PM
Nice! Wow, we are doing pretty similar things...I'm actually using 0% BT funds to pay off the car too...good luck!
Posted by: Financial Freedumb | March 13, 2006 at 05:06 PM
Thanks for the post! I'll definitely ask for your opinion when I'm serious about getting a new car.
I have a question about your situation, and apologies if it has already been asked. Do you have a pre-payment penalty on your car loan? If so, you probably want to factor that into your decision.
Posted by: City Girl | March 14, 2006 at 05:52 PM
Hey City Girl,
There are no prepayment penalties. In fact, I think that's standard in auto lending. Simple interest, no pre-payment penalties. Makes them pretty flexible for accelerating payments, refinancing the loan, or paying the whole thing off anytime you want.
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