Hello, Friend got a new truck. Price of truck OTD = $45k Down payment at time of finance = $2k ($43k financed) Interest = 6.9% Total for 75 months = $55.5k roughly which means it’s about $10k of ONLY interest. Payment = $710/month
Correct me if I’m wrong but in theory this truck can be paid off tomorrow and my friend pays none of the $10k interest, right? Anyway, my friend has a check that he wants to use of about $23k. My question is: is it better to put the $23k towards the auto loan right now (ensuring that the money goes towards the principal) or is there a better alternative like placing the money in a HYSA and earn about a 5% interest (I know it can fluctuate) and use that account to pay off the debt gradually? He’d be paying a lot more than the minimum monthly as well. I guess the only upside to this is though is having more cash liquid if ever needed.
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If the auto loan is at a higher interest rate than you can earn elsewhere it is better to pay it off. If your loan was like 2% I would say do not pay it off. But at 6.9% pay it off.
Wrong subreddit
You shouldn’t be paying on a 6.9% loan to a lender when you can only get 4.5-5.5% if you keep the money in a safe investment. Use the cash to pay the loan off. If the interest rate on the loan was less than you could earn in an investment, then you should pay it off. (note: this assumes there’s no pre-payment penalty)
Your wording is confusing. I think what you’re saying is put the money into whatever has the highest interest.
Gonna disagree with some of the other comments here: If his plan is to throw it into a HYSA (~5%), he’s better off using that lump sum toward the car (assuming no penalty). 6.9% APY on $43,000 = ~$3000 a year, 5% APY on $23,000 = $1,150 a year.
If he wants to invest it to get ahead, he’d have to beat the 6.9% APY. That’s the purely “numbers” answer though. If $23k sitting in a HYSA gives him a sense of security, I’m all for it.
The only thing here is that the $25k in the hysa won’t depreciate. Just an added to consider. But I guess if he keeps the truck for the longer term in should matter. Right?
This is the answer. Thanks for laying it out clearly and simply.
Wow, this is fucking STUPID. 6.9% on a 75 month loan with only $2k downpayment? He really likes to strap himself to the hamster wheel, isn’t he?
He should only buy what he can afford. The used car market has plenty of options, even for $2k. It may be old and rusty, but it does it‘s job.
Only putting $2k down was a very bad idea. Your friend is immediately upside in his loan and at that interest rate would likely be for most, if not all, of the time in the loan.
If he chooses to keep this truck. First is $23k a lot of money to your friend? Does he have a large savings already? If not then I’d put at least another $8k towards the truck. That should hopefully help keep his head above water in the loan. I’d put the rest in the HYSA. If yes, than I’d put it all towards the truck. 6.9% is a high rate, paying that down gives you an instant rate of return on your money.
Pay the $23k towards the Principal, Hold the loan for 6 months to boost your credit score, i was able to do this and added 30points total to my score, my mistake was keeping the loan balance too low that they closed the account after 4-5months. So if you can, calculate the monthly payments good for 6 months, that gives out the best result for your credit score and total interest paid. Keep as minimal principal balance as you can that’s good for 6 months loan life
I’d overpay my monthly payments. That way you’re still cutting deep into the interest and you have the money for whatever might come up.
Like pay 1400/month for 24 months.
That’s what we did with my wife’s Defender. Bought it in September 2020 on a 5 year loan, paid it off in November 2020 because I didn’t feel like paying interest
Only if they are principal payments.
Yeah
If he needs the 23k for a rainy day fund then a hysa makes sense. He could also use half for the loan and keep the rest in a hysa.
Correct me if I’m wrong but I’m theory this truck can be paid off tomorrow and my friend pays none of the 10k interest, right?
If it was paid off, no he would pay nothing in interest. If he’s throwing down half of what he owes on that loan, it will still accrue that 6.9% of interest, but on a low amount so the number won’t be going up as quickly as it would be on 43k.
And as absolutely awful as 6.9% is, I’ve been in the car business for 4 years, and I have not seen a rate below 7.49 in 6 months 🥲 (not including new car incentives, those are lower but your not going to find a 1.99% anymore)
A friend…👍🏻😁
if he has any CC debt, pay that off first, its almost certainly at a higher interest rate than the car loan. then if his car loan is the highest remaining interest rate of all his debts dump the remainder of his cash into that.
If it was me, I would pay off the car loan.
Pay it off as fast as you can.