At the height of the car manufacturing shortage in 2022, I bought a car. This was the first time I purchased a car with no discounts, paying the full MSRP. It cost me about $1,000 in monthly payments—the most I’ve ever had in my life. The silver lining was the low APR of 2.69%, which felt like a good deal given the circumstances.
Currently, high-yield savings accounts and certificates of deposit (CDs) are averaging around the 4% mark. This is significantly higher than the 2.69% interest rate I’m paying on the car loan. At first glance, it seems logical to put extra money into a high-yield savings account and earn 4% interest rather than using it to pay off the car loan at 2.69%.
However, there are compelling reasons why paying off the car loan as soon as possible is a smarter move. Let’s explore why you should consider piling extra cash into your car loan payments to pay it off early.
1. Eliminate a Depreciating Asset
Cars are one of the fastest-depreciating assets you can own. By the time you drive off the lot, the car loses value, and it continues to decline every year. While you’re paying interest at 2.69%, you’re financing something that’s losing its worth over time. Paying off the loan early ensures you’re not stuck making payments on an asset worth far less than what you owe.
2. Peace of Mind
No matter how low the interest rate is, debt is still debt. Knowing that you owe $1,000 every month can feel like a burden. Paying off the car loan sooner gives you peace of mind, simplifies your finances, and removes a fixed expense from your budget, freeing you from the mental weight of that payment.
3. Improve Cash Flow
By paying off the car loan early, you free up $1,000 per month in your budget. That’s a significant amount that can be redirected toward more productive financial goals, such as investing, building an emergency fund, or even paying off other higher-interest debts.
4. Reduce Financial Risk
Life is unpredictable. What happens if your income suddenly drops or an emergency expense arises? With a $1,000 monthly car payment, your financial flexibility is limited. Paying off the loan early reduces your fixed obligations, giving you more breathing room in case of unforeseen circumstances.
5. Save on Interest Costs
While 2.69% may seem like a negligible rate, every dollar spent on interest is money that could be better used elsewhere. The sooner you pay off the loan, the less total interest you’ll pay over the life of the loan.
6. Gain Financial Discipline and Momentum
Committing to paying off your car loan early builds financial discipline. Once the loan is paid off, you can apply the same focus and momentum to other goals, such as paying off other debts or investing aggressively. The habit of eliminating debt often translates into long-term financial success.
7. Psychological Benefits of Being Debt-Free
There’s something deeply satisfying about fully owning your car without any strings attached. Even if the math favors leaving the loan in place, the psychological benefits of being debt-free often outweigh the marginal gains from investing elsewhere.
Why Not Invest Instead?
At 4% interest in a high-yield savings account, it might seem better to keep the car loan and grow your money. However, that 4% isn’t guaranteed to last forever—banks adjust rates based on market conditions. Additionally, the 4% yield is taxable, so your real return might be closer to the 2.69% you’re paying on the car loan. Paying off the car loan offers a guaranteed, risk-free return, and it reduces your overall financial risk.
Conclusion
While it may be tempting to take advantage of higher interest rates in savings accounts or CDs, paying off your car loan early provides guaranteed financial benefits and peace of mind. It eliminates a depreciating liability, frees up cash flow, and reduces financial risk. If you can comfortably pay off the loan without neglecting your other financial goals, it’s often a smarter move to own your car outright and gain the financial freedom that comes with it.
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