# Does Paying off Auto loan early make sense or invest in RRSP in my scenario



## mdcal (Dec 31, 2014)

I am new to this forum . Wondering if some financial gurus in this forum can help me make a decision about my car loan.
I have a $42,000.00 loan on a new vehicle @7.2% through the dealer for 96 months($13,470 in interest if I keep it till the end of term). There is no Prepayment penalty in the loan terms. The idea to get this loan was to pay it off and got a very good deal (about 11k off MSRP)on the vehicle by not taking the manufacturing financing. My dilemma is should I keep this loan and and invest in RRSP or pay off this loan ASAP(say maybe in a year or 2). I am in the 200K/Annum combined income bracket.
I cant wrap my head around the calculations if I invest in RRSP instead of paying off the loan ASAP. I am fairly savvy at investing in stocks and manage RRSP myself and have averaged over 10% returns over the past 5 yrs.


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## cainvest (May 1, 2013)

At 7.2% I'd pay off the loan, guaranteed money savings vs unknown returns.


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## Synergy (Mar 18, 2013)

7.2% is highway robbery. Pay that off ASAP! With your income I'm quite surprised you couldn't have negotiated a better rate. The past does not predict the future, who knows what 2015 will bring.


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## indexxx (Oct 31, 2011)

Why not go to your bank and get a low-interest line of credit? Then pay off the whole car with that, and pay off the LOC while also putting a bit away into your RRSP every month at the same time. Personally, I like to see results on all fronts- and the sooner you have something in your RRSP the sooner it can start compounding.


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## mdcal (Dec 31, 2014)

I do contribute 10% of my income to RRSP(with 6% company match). Would it make sense to take a tax credit by contributing more to RRSP(for ex 10k) then paying the loan with whatever I get from tax returns ?
I think I could get a Line of credit if I wanted to as I have a stellar credit history but would that make a huge difference if I get say for 5% vs 7.2% which I pay currently if I don't carry the loan over 2 yrs? Not sure if there are any calculators out there to compare Auto loan payoff vs RRSP.


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## Synergy (Mar 18, 2013)

This should help you out with the math:
http://www.getsmarteraboutmoney.ca/...ibution-vs-paying-down-debt.aspx#.VKNubsnx2_M


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## indexxx (Oct 31, 2011)

Moving to a 5% LOC saves you close to $1,000/year; always save interest when you can. Saving 2.2% is the same as getting an extra 2.2% return on an investment, right? 

42,000 x 0.072= $3,022
42,000 x 0.05 = $2,100

So you could move the loan to your LOC, and put the difference in your RRSP. But with your income, I would pay it off as fast as possible- otherwise, your perceived 'savings' of $11,000 disappears and that $42k car just cost you over 50. Can you double your payments?

It does make some sense to use your refund to pay debt, but I think it's better to invest your refund as you will eventually have to pay tax on the RRSP amount when you take it out on retirement. Paying debt with your refund is essentially the same as spending your refund on what you bought, which defeats the whole purpose of a tax-deferred investment.


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## mdcal (Dec 31, 2014)

indexxx said:


> Moving to a 5% LOC saves you close to $1,000/year; always save interest when you can. Saving 2.2% is the same as getting an extra 2.2% return on an investment, right?
> 
> 42,000 x 0.072= $3,022
> 42,000 x 0.05 = $2,100
> ...


My Idea of agreeing to the insane dealer loan was to pay it off in a year or 2 at the most and I can triple the current payment of about $600 to $1800 a month. Sound like what you mentioned makes sense about "defeating the whole purpose of a tax-deferred investment"


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## Just a Guy (Mar 27, 2012)

My question is, where is your savings and "great deal" if you don't pay it off quickly? You're paying more in interest than you saved off the price of the car...doesn't sound like a good deal to me. 

Another reason to pay it off is you pay it with after tax dollars...to earn enough in your rrsp to match 7% return you'd need to make over 10%.


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## mdcal (Dec 31, 2014)

Synergy said:


> This should help you out with the math:
> http://www.getsmarteraboutmoney.ca/...ibution-vs-paying-down-debt.aspx#.VKNubsnx2_M


Thanks for the calculator and the link to web site lots of useful information on that site.


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## mdcal (Dec 31, 2014)

Just a Guy said:


> My question is, where is your savings and "great deal" if you don't pay it off quickly? You're paying more in interest than you saved off the price of the car...doesn't sound like a good deal to me.
> 
> Another reason to pay it off is you pay it with after tax dollars...to earn enough in your rrsp to match 7% return you'd need to make over 10%.



The idea was to pay it off in a year or within 2 at the most. And I also got a cheque of about $900 from the dealer who mentioned that they receive a kickback from the bank for the loan and passing some of that money back to me for taking that loan.
Lets say I pay it off in a year than I would be paying $3,022 in interest but I already got about $900 back which amounts to $2122 in interest which might not be bad deal for getting a huge cash discount which is rare on a expensive German vehicle . This is the first time I have done a vehicle purchase like this dealers always come up with new and unique ways to confuse the customers not sure if I am winning or loosing here :stupid:


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## Michel (Mar 7, 2014)

mdcal said:


> I am new to this forum . Wondering if some financial gurus in this forum can help me make a decision about my car loan.
> I have a $42,000.00 loan on a new vehicle @7.2% through the dealer for 96 months($13,470 in interest if I keep it till the end of term). There is no Prepayment penalty in the loan terms. The idea to get this loan was to pay it off and got a very good deal (about 11k off MSRP)on the vehicle by not taking the manufacturing financing.


You got 11K off MSRP but the dealer hopes to get 13K back over the next 4 years. Don't let him.

The past years have been very good for markets but no one knows what 2015 will bring, perhaps you'll get almost no growth or even negative growth this year. I'd take a guaranteed 7.2% over any predictions of market returns anytime.


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## My Own Advisor (Sep 24, 2012)

Synergy said:


> 7.2% is highway robbery. Pay that off ASAP! With your income I'm quite surprised you couldn't have negotiated a better rate. The past does not predict the future, who knows what 2015 will bring.


+1

That is a crazy loan rate. Why not do what indexxx said? Kill the 7%+ loan with a 4% LOC and save yourself 3%?


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## lonewolf (Jun 12, 2012)

I would sell the vehicle & buy a vehicle that I could afford. Limit your losses learn & move on


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## heyjude (May 16, 2009)

That is a huge amount of interest and a terrible deal for you. Eight years before you own the vehicle? Sheesh! By then you may need a new one. If your income is what you say it is, you should be able to pay down that loan as a priority. These days, you would be hard pressed to find any investment with a return of 7.2%. Eliminating that loan ASAP is the best return you will get.

I financed a new vehicle 2.5 years ago for about the same amount of money. However, my interest rate is 0.99% over 36 months. Interest rates went up for longer terms. I am not prepaying my loan, because my gains in the market greatly exceed the $500 or so interest over the three years. If I couldn't afford to pay for the vehicle over 3 years, I figure I couldn't afford it. Six months from now I will own the vehicle outright.


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## banjopete (Feb 4, 2014)

The answer also depends on how much contribution room you have remaining in your RRSP account as well. Play around with some tax return sites and see what you'd get back on your returns for different RRSP contributions levels. With your likely marginal tax rate you'll get a fair return for any contributions made.

I hope you enjoy the car.


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## m3s (Apr 3, 2010)

heyjude said:


> I financed a new vehicle 2.5 years ago for about the same amount of money. However, my interest rate is 0.99% over 36 months. Interest rates went up for longer terms. I am not prepaying my loan, because my gains in the market greatly exceed the $500 or so interest over the three years. If I couldn't afford to pay for the vehicle over 3 years, I figure I couldn't afford it. Six months from now I will own the vehicle outright.


The interest is baked in though right (bank and dealer are in cahoots) OP claimed to have saved $11k on the principle therefor has the opportunity to save up to $11k by paying off the loan ASAP (which is the obvious choice over RRSP imo) Let's say he paid $7k more but got 0% interest. He still paid $7k more but now has no chance to get that $7k back no matter how fast he pays. The dealers are winning this game either way or they wouldn't be in business.


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## coptzr (Jan 18, 2013)

Pay off car asap. First, call bank, refinance at lower rate, than start making largest payment possible. It easy to do, I have done it for people, they can't believe it when 1 year of payments are instantly removed.

My spreadsheet shows $42k loan @7.2% over 96 months, your first payment was $576.81 and you got hit with $252 in interest. How does that feel?


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## mdcal (Dec 31, 2014)

coptzr said:


> Pay off car asap. First, call bank, refinance at lower rate, than start making largest payment possible. It easy to do, I have done it for people, they can't believe it when 1 year of payments are instantly removed.
> 
> My spreadsheet shows $42k loan @7.2% over 96 months, your first payment was $576.81 and you got hit with $252 in interest. How does that feel?


Thanks for your suggestions and also a lot of very good suggestions from the other members in this forum. I opened a low cost borrowing account with PC financial for little over 5% interest and paid off the car loan in addition to that paid off about half the loan by selling some of my investments and hope to pay off the remaining within 6 months.


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## bkcmf (Apr 7, 2012)

someone correct me if i'm wrong, but isn't the interest rate for car loans (if you get it from the dealership's finance group) priced right in to the monthly payments and locked in? If you wanted to 'pay off the loan' earlier you basically still owe the whole amount no?

for example, according to this calculator: http://www.cars.com/go/advice/financing/calc/loanCalc.jsp?mode=full
If i buy a 10k car with 0 downpayment, 0 trade in, 0 tax, and 3% interest for 60 months, my monthly payment = 179.68.

179.68*60 = 10780.8.

lets say the next day after driving my car off the lot i got 10k in a half-court shot contest at the Raptors/Nets game.

now if i called up the financing group and said, i want to pay off my car loan, here is 10k, won't they say that I owe them the full 10780.8?

if so, what the heck is the point of paying down this debt asap when really you aren't saving on the interest payments, but rather just clearing up your budget?


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## Letran (Apr 7, 2014)

bkcmf said:


> someone correct me if i'm wrong, but isn't the interest rate for car loans (if you get it from the dealership's finance group) priced right in to the monthly payments and locked in? If you wanted to 'pay off the loan' earlier you basically still owe the whole amount no?
> 
> for example, according to this calculator: http://www.cars.com/go/advice/financing/calc/loanCalc.jsp?mode=full
> If i buy a 10k car with 0 downpayment, 0 trade in, 0 tax, and 3% interest for 60 months, my monthly payment = 179.68.
> ...


bkcmf, this would have been true if he has taken the manufacturer's financing but instead he did the smart thing and got the rebate instead. Which frees him up to pay off the loan quicker and REALLY save on the interest . 

But yes if someone did take the 0% from the manufacturer, it would have been completely tied in to the payments and there will be not much point of paying it early.

Edit: I just noticed that in your example it was 3%, if you happen to pay down or payoff that loan you will STILL save on the 3% for the remaining of the balance. I was agreeing if the rate in the car loan was 0% which has been a popular gimmick in recent years.

btw: how do you get $0 tax, you pay taxes no matter what, ...well unless your a native indian


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