Saving money while owing on a car

thestaggy

thestaggy

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I am in the process of paying off a car and I have just shy of 4 years left to go. The thing is I have a fair amount of cash saved up that should be able to cover the full settlement on the car. So my question is, is it smart to kill the car or is it a bit of a risk seeing as the cash is my "rainy day" safety net?

Part of me thinks it is pretty stupid to save while having a pesky debt you could kill off, but then the other part is a bit nervous using up my safety net should something (unemployment, expensive car/home repairs, etc).
 
Keep half as your rainy day fund, dump the other half into the car (but keep your monthly payments the same). Thus you pay off the car over a shorter period, less interest etc. It's always a good idea to minimise or eliminate your short and medium term debt if you can afford to.
 
I suppose that is a nice compromise. And if and when my savings build up I can always take a bit out here and there and slam it into the car.
 
AFAIK if you're financed through a company like Wesbank they charge you the full 5 years interest even if you pay the car off after 18 months. in effect you don't save a cent. but i'd phone whoever financed you and check.
 
maumau said:
AFAIK if you're financed through a company like Wesbank they charge you the full 5 years interest even if you pay the car off after 18 months. in effect you don't save a cent. but i'd phone whoever financed you and check.
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Ah, that's not right. And I am financed through Wesbank.
 
illegal

maumau said:
AFAIK if you're financed through a company like Wesbank they charge you the full 5 years interest even if you pay the car off after 18 months. in effect you don't save a cent. but i'd phone whoever financed you and check.
Click to expand...

As far as I am aware what you just stated is illegal. You are not allowed to be penalized anymore for paying off debt early. They do add the closing finance charge though. I could be wrong but my last two cars I was not penalized.
 
I have never been penalized for paying off early and I have never paid a car off over the full term.
The settlement value should always be less then the full financed value.
 
Ask for a settlement on the car, and then decide. I would oay off the car. Best car on the road is one where no money is owed to.
 
If you simply add money to a debit order you'll effectively just pay the same interest regardless as you just pay more instalments faster.

If you pay a lump sum though it would be wise to go to them and request a re-calculation of the interest based on the outstanding amount after paying said lump sum...that's what will save you money.

*****

You are already quite use to paying the instalment, so pay off the car but then simply take that same money and put it into an investment.

Basically "hide" the money from yourself and you'll have built-up your savings again in no time.
 
thestaggy said:
Part of me thinks it is pretty stupid to save while having a pesky debt you could kill off, but then the other part is a bit nervous using up my safety net should something (unemployment, expensive car/home repairs, etc).
Click to expand...

You need to compare the different options. This fair amount of cash your have saved up... where is it stashed at this stage? An interest bearing account? Phone and find out how much the settlement value would be for settling your car completely. Then compare this amount, adjusted for eg. expected return of your current interest bearing account, to the amount you will still be left paying off on your car for the next ~4 years.

In the end I feel it is not a good idea to have large amounts of liquid cash lying around. These days I always suggest that after settling the medium term debt you rather put these amounts into some kind of a semi-liquid investment and rather get yourself a line of credit or a virgin money credit card for those "in case of emergency" type of situations. This allows you a better use of your liquid cash but still covers you in case of an unexpected expense. Combine this with proper car, unemployment and debt insurance and you are set.

Eg. Take 60% and stash it away in a 12-24 month investment (eg. 'rolling' retail bond), another 25% in a 6-12 month investment vehicle and then stash the remaining in a capitec account or whatnot. Just make sure that the amount in any given capitec account does not exceed R9999 in order to obtain the maximum amount of interest.
 
SauRoNZA said:
You are already quite use to paying the instalment, so pay off the car but then simply take that same money and put it into an investment.

Basically "hide" the money from yourself and you'll have built-up your savings again in no time.
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This.
 
maumau said:
AFAIK if you're financed through a company like Wesbank they charge you the full 5 years interest even if you pay the car off after 18 months. in effect you don't save a cent. but i'd phone whoever financed you and check.
Click to expand...

Not true.
 
maumau said:
AFAIK if you're financed through a company like Wesbank they charge you the full 5 years interest even if you pay the car off after 18 months. in effect you don't save a cent. but i'd phone whoever financed you and check.
Click to expand...

MongooseMan said:
Not true.
Click to expand...

They cannot do that if you bought your car after the new credit act came in. Only applies to older credit agreements.

Not so sure when the act was passed.
 
thestaggy said:
I am in the process of paying off a car and I have just shy of 4 years left to go. The thing is I have a fair amount of cash saved up that should be able to cover the full settlement on the car. So my question is, is it smart to kill the car or is it a bit of a risk seeing as the cash is my "rainy day" safety net?

Part of me thinks it is pretty stupid to save while having a pesky debt you could kill off, but then the other part is a bit nervous using up my safety net should something (unemployment, expensive car/home repairs, etc).
Click to expand...

Not so sure what your rate is but mine is 10% so unless your getting 7-8% interest on your investment, pay it off.

But please do a time value of money calculation first. What will your current savings be worth in 4 years time and how much will your car payments be in 4 years, then do the math.

Remember that a R100K investment today will be R150K in 4 yrs but paying your car off over 4 yrs might come to R125K (just an example).
 
ld13 said:
You need to compare the different options. This fair amount of cash your have saved up... where is it stashed at this stage? An interest bearing account? Phone and find out how much the settlement value would be for settling your car completely. Then compare this amount, adjusted for eg. expected return of your current interest bearing account, to the amount you will still be left paying off on your car for the next ~4 years.

In the end I feel it is not a good idea to have large amounts of liquid cash lying around. These days I always suggest that after settling the medium term debt you rather put these amounts into some kind of a semi-liquid investment and rather get yourself a line of credit or a virgin money credit card for those "in case of emergency" type of situations. This allows you a better use of your liquid cash but still covers you in case of an unexpected expense. Combine this with proper car, unemployment and debt insurance and you are set.

Eg. Take 60% and stash it away in a 12-24 month investment (eg. 'rolling' retail bond), another 25% in a 6-12 month investment vehicle and then stash the remaining in a capitec account or whatnot. Just make sure that the amount in any given capitec account does not exceed R9999 in order to obtain the maximum amount of interest.
Click to expand...

It is in an interest bearing savings account. I know that is not the best option, but this is all part of me reevaluating my financial position, so I will/am looking to reinvest in a more fruitful way.

Thanks for your advice. I will definitely look into all you had to say.
 
Pay it off. Unless the rate is below inflation it's practically always in your favor to pay it off.
 
maumau said:
AFAIK if you're financed through a company like Wesbank they charge you the full 5 years interest even if you pay the car off after 18 months. in effect you don't save a cent. but i'd phone whoever financed you and check.
Click to expand...

Just checked with Wesbank and no, they do not charge the full interest. You have a capital balance and capital plus interest. If you settle you just pay off the capital balance.
 
I have a slightly different outlook for car repayments, and to adopt my view you would have to decide on whether you are keeping your car after it's paid up or not.
I don't really plan on keeping my car until the end of the payment plan. A year or so before, I will evaluate my financial position, decide on what I can afford for the upcoming period in terms of car payments and get a new car. I view car repayments as almost rental - it's an amount that I am comfortable to pay for the car that I drive. So I will change cars every 3-4 years, never actually owning a vehicle. I thus keep my savings separate and don't try work out the interest ramifications on the car loan.

If you plan to keep the car forever (or until it's unrepairable, whichever comes first) then you should pay it down as soon as possible. It loses value each day and your interest keeps accruing - be free of interest on the depreciating asset.
 
You will not earn more interest than what you have to pay a bank. Paying off debt is the best investment you can make, because over the same time period, you will have paid more than earned, so why not pay off the debt and then earn on the monthly investment alone. Simultaneous debt vs investment is a no win.
 
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