Personal Investments • Re: should i pay off a car at 1.9% or invest in a cd at 5.5%

Let's quantify this. Assume your effective fed+state marginal tax rate is 25% (substitute your actual numbers there). 5.5% yield on your CD post tax equates to 4.1%. So the differential yield over your car loan is (4.125-1.9) = 2.225%

2.225% on a 17K loan approximates to $380/year.

You can decide if that amount extra per year is worth the extra hassle of maintaining the CD, stress of not being debt free, the slight risk of having a car with an loan (insurance hassle if totalled, sales hassle if you need to sell quickly etc.). It's a close call, but for me, I would take the free money.

It would be about $380 for the first year. But decrease after that.

These are the only calculations that matter in this discussion. The hassle of continuing to pay it off would outweigh for me the few hundred bucks you make in this bit of arbitrage. But it may be different for you. Don't spend too much time thinking about this and do whatever feels better to you.

To each his/her own, but I hear this often enough and can't help question the real 'hassle' of making monthly payments on a debt. My last car (financed at 0.9% for 48 months) was through Chase finance. I was able to see this account right along with my credit card accounts and it was trivial to set up the loan on autopay. Literally took about 30 seconds of my time followed by monthly confirmation when tracking the budget/spending (something that would have been done regardless of the loan).

I also often question the psychological aspects mentioned regarding not being debt free. If you keep the funds to pay off the loan in full in something like a CD, HYSA, or money market, the funds will be available should you ever need them. If you have the money to pay the loan at any time, why should you be concerned that you have a debt? The numbers are incontrovertible - taking the loan is the best financial play here. Anything else is just behavioral, and I'll point out that many of the primary tenets of this forum are purposely simple in order to overcome behavioral pitfalls to investing. Why should this decision be any different?

Statistics: Posted by scophreak — Tue Feb 13, 2024 4:18 pm

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