Pay off auto loan?

[squiffy]

I have an auto loan with a balance of $7,109.43 remaining with my credit union.

I think originally it was about a 23K loan over 4-5 years. So it's close to being paid off. This may affect any analysis, as early on in an amortized loan you are paying a high percentage of interest, whereas toward the end, you are paying mostly principal and a much lower percentage of interest.

The credit union statement says the monthly payment is 371, with 346.49 going to principal and 24.51 to the finance charge.

There is no tax deduction for interest on auto loans, unlike interest on mortgage deductions. And this is not a leased vehicle and it's not used for business.

If I have 7,109.43 cash in the bank, which can earn 5% on a CD in a taxed account, is it better to put the money in the CD or to pay off the loan?

I actually saw an add for World Bank with a 10 month CD paying 5.45%, supposedly. Don't know if there is any catch?

Does the analysis change if the money is in a ROTH IRA or traditional IRA?

I have about 20K in my ROTH and 173K in my traditional IRA. So I can put either in a CD. Or mutual fund, or stock. But let's keep the analysis simple and say I would buy the highest CD rate I could get.

Since the traditional IRA would provide tax deferred earnings and the ROTH would provide tax free earnings of 5%, I imagine it's better NOT to pay off the 3.75% auto loan, but to just buy a CD at 5%.

But it's not so clear to me which is better, if you consider money in a taxable account, where the 5% interest from the CD will be taxed.

I make 82K a year, in case that helps anyone analyze the tax issue.

[tribefan9]

What is the APR on the auto loan? Assuming it is something reasonable and not a discounted rate of 2% or something, you should pay it off if you can afford to. Paying off debt is like making an investment that pays a return of the interest rate on the loan. Since you can not deduct interest on a personal auto loan, there are not other benefits to think about.

[squiffy]

Assuming the only extra money you have is the 7K making 5% tax free in your retirement account, then you are borrowing money from the bank at 3.75% (let's assume that is APY) to make 5% tax free.

[squiffy]

Good point about APY.

My original loan papers say 20,178.77 was borrowed. First payment made 10/1/03. 3.75% annual percentage rate. No APY is given. Not sure why.

It's a reputable credit union. They give APY for CD's and bank accounts and mortgages, but not for auto loans. Perhaps since the auto loan is calculated in a standard way no APY disclosure necessary?

APY is not disclosed on the original loan paper. Daily periodic rate is .0102%, whatever that means.

[tribefan9]

[ QUOTE ]
Assuming the only extra money you have is the 7K making 5% tax free in your retirement account, then you are borrowing money from the bank at 3.75% (let's assume that is APY) to make 5% tax free.

[/ QUOTE ]

If the only extra money you have is this 7k then you should not be paying off the loan just so you have a little liquidity and flexibility. Paying 3.75% is not going to kill you. Cars are not like houses where there are means of paying it off then taking the equity back out if you desire. To use your car as collateral on a loan after your purchase you will be dealing with shady cash advance places with insane fees and interest.

Also, back to the original question, with a rate this low I would not pay it off either, keep the cash in a savings account for the flexibility as well as to use for a better opportunity (like a house?).

[Pete]

apy= annual percentage yield....only for money that you are making interest on
apr= annual percentage rate....only for credit accounts