Pay off Car Loan Early?

• 

  Brick Tamland on 12/12/2023 - 08:13

  +3

  Pay it off early if you intend to sell it, otherwise I dont see the point if you are paying the interesting regardless

  • 

    dynamic007 on 12/12/2023 - 09:19

    Hello - I do plan to keep the car as we still need a second car in the house.

  • 

    HeWhoKnows on 13/12/2023 - 07:37

    Its not just paying out the interest. There is also an early termination fee. This may not be tax deductible.
    Regardless So definitely better leaving things the way they are.

• 

  bemybubble on 12/12/2023 - 08:14

  +3

  It’s worth noting that usually car loans use the rule of 78 to calculate interest. Which means if you’re 2/3 of the way their chances are you’ve already paid the bulk of your interest so keeping the loan afoot is prob better for cashflow.

  On a side note. If you’re feeling the pinch then consider unloading an investment. When my wife went on mat leave I did exactly that. This way no pressure for her to go back to work either

  • 

    dynamic007 on 12/12/2023 - 09:04

    +1

    Thank you, and yes selling one of the IP is in the plan. We can't action until June/July due to them being occupied. But we have started the process with the evaluations and scoping out agencies. While we still could sell with tenants in, the advice from agents is with the properties it would be better to sell vacant as they right now it wouldn't attract an investor.

• 

  geekcohen on 12/12/2023 - 08:15

  1500 early termination fee

  Jesus!

  • 

    Mechz on 12/12/2023 - 08:22

    Common if you want to get out early, usually waived after the first 2 years depending on who you go through.

    • 

      dynamic007 on 12/12/2023 - 09:16

      Yeah, I would need to wait 8 months to avoid the early termination fee

      • 

        JDMcarfan on 12/12/2023 - 12:09

        perhaps contact the provider, explain situation and ask for a waiver to the point where the wife goes on mat leave. in saying that if you are getting comped for expenses leaving you effectively net zero out of pocket for the car, why not just keep until ETP is $0 and then close it. Surely, you'd be able to weather reduced cashflow for the timebeing?
        Also, re: refi properties, are you planning to let them know your wife is expecting. If yes, you are going to have to answer YES for are there any changes in expected income, which will likely knock you back for the loan. even if you don't disclose, note that unless your combined income has materially grown (i.e. +30-40% in the last 3 years) a re-fi is likely to net you little in extra borrowing capacity.

    • 

      Almost Banned on 12/12/2023 - 12:34

      If it is an 'early termination fee' it is not 'waived' after two years - you simply aren't terminating 'early'. If you have waited two years, the fee does not apply.

    • 

      Jazstar on 13/12/2023 - 08:46

      If you get a personal loan with commbank no early termination fee and also offset which I use. No way I’d get a loan without those options.

• 

  redfox1200 on 12/12/2023 - 08:30

  +2

  sounds like its $1500 cheaper to just keep the loan

  • 

    dynamic007 on 12/12/2023 - 09:01

    Hey yeah that's what I thought too

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  brendanm on 12/12/2023 - 08:32

  +1

  If you are still getting the $1300 monthly from work, and you would have to use cash to pay it out early, why would you bother? You are simply paying an extra $1500 to those scumbags for nothing?

  • 

    dynamic007 on 12/12/2023 - 09:05

    Yeah this is my delimma when I ran the figures. Essentially the extra 1300 from work would not go to the car and into my bank account where we can use to alleviate some of the cashflow pressure.

    It's like paying $1500 for that pleasure

    • 

      freefall101 on 12/12/2023 - 09:48

      How does using cash to pay for the car now vs paying it regularly change your cash flow? The same amount of cash goes out the door.

      If you have the cash to pay for it just leave it in an offset/high interest account to offset some of the interest from the car loan and slowly draw down on it to pay off the car.

      • 

        dynamic007 on 12/12/2023 - 10:53

        That cash is parked in the offset where we are not using it to help with the monthly expenses if that makes sense?

        • 

          brendanm on 12/12/2023 - 11:05

          @dynamic007: That makes the opposite of sense, the cash is saving you money on your home loan, you are wanting to use it to pay down the car, which will cost you $1500 in cash, plus cost you in the interest you are no longer saving.

        • 

          freefall101 on 12/12/2023 - 11:10

          +1

          @dynamic007: It's all your cash at the end. In this case you either use it to pay off the car loan all at once or to pay off the car loan slowly. Unless I misread your post, it will cost the same regardless of which way you do it, but paying it slowly will reduce the interest on your home loan and avoid needing to pay $1,500 early termination.

          Your whole point of taking it out of the offset to pay the car loan is to lower your monthly expenses, so there's no difference. The money either comes out of there or you tighten your belt more.

    • 

      brendanm on 12/12/2023 - 11:04

      It doesn't change anything though? You are having to use cash to pay it out. Its exactly the same, but you pay $1500 for the privilege, and lose out on any savings interest from the cash that you had.

      • 

        dynamic007 on 12/12/2023 - 11:17

        Thanks for the comments, only difference is part of that cash is new cash. So it won't all be coming from the offset account.

        It's boiling down to $1500 vs savings on interest I guess?

        • 

          brendanm on 12/12/2023 - 11:24

          +1

          @dynamic007: What exactly is "new cash"? Put the "new cash" into the offset account instead

          It's boiling down to $1500 vs savings on interest I guess?

          It boils down to losing money, or saving money. Paying it out loses you money. Keeping it in your offset saves you money. Seems like a no brainer to me.

          • 

            dynamic007 on 12/12/2023 - 11:36

            +1

            @brendanm: Thank you for helping me brainstorm this! Honestly it has been really useful

• 

  elgrande on 12/12/2023 - 08:36

  +2

  Why don't you just ask your accountant?

  • 

    dynamic007 on 12/12/2023 - 09:09

    He said go with your gut

    • 

      geekcohen on 12/12/2023 - 09:10

      +1

      What does your guy say?

      • 

        dynamic007 on 12/12/2023 - 09:18

        What I have seen from accountants is they mainly give advice about tax time. So for him it would just be 1 less thing I can deduct (interest on loan) - he is not really interested in looking at the bigger picture from a cashflow perspective.

        My gut said pay it off - until I saw the figures. Now it just seems like 1 big mistake - I should have just purchased the car outright from the start and would have been 6k better off :(

    • 

      Brick Tamland on 12/12/2023 - 09:39

      +1

      That's some proper legit accounting advice there. Hope he didnt charge you too much for those profound words

      • 

        SlickMick on 13/12/2023 - 10:33

        That was my first thought. Are the tax deductions + whatever that cash is doing otherwise (paying off home loan??) more than the interest??
        I don't see what's changed. Paying off loan isn't going to make OP richer.

        What's the term of the loan? Is there another contract lined up?
        I would have thought an accountant would be saying there is a lack of secure ongoing income, so OP needs to clear all debt, and probably sell investments to have a nest egg as it looks like it might be needed.

• 

  Ozbar Gain on 12/12/2023 - 08:41

  How about NEARLY paying all of the car loan so that you don't pay interest, still owe like $100, and then stop paying for for the rest of the year to avoid the $1500 penalty.

  Alternatively pay it all of and have one less thing to worry about. If $1500 is the price you have to pay to sleep better, so be it

  • 

    coffeeinmyveins on 12/12/2023 - 08:53

    Do they even allow that? That sounds like a loophole they will not allow in the contract.

  • 

    meowsers on 12/12/2023 - 09:10

    Most loans still continue payments at the same payment amount hence if you have $100 remaining, your next payment will be $100 and the loan will end.

  • 

    dynamic007 on 12/12/2023 - 09:10

    Unfortunately they don't do that. It's all or nothing type of deal. You can't even pay a massive lump sum to reduce the monthly fee

  • 

    Ozbar Gain on 12/12/2023 - 10:00

    Oh right, sorry. Mine allows me to pay up extra and then pause payments and just let it sit. Interest accumulates on the remaining amount. I do have a fixed term loan though

    • 

      dynamic007 on 12/12/2023 - 10:04

      Who is that loan with? I took mine out with the dealer - which is why it's probably more restrictive

• 

  coffeeinmyveins on 12/12/2023 - 08:54

  +1

  now $6k seems so much for having a loan for 1 year.

  Well it didn't seem like a lot at the time you signed the contract.

  $3000 across the 3 properties per month

  My sides. Maybe consider selling a property if you're up to your neck?

  • 

    dynamic007 on 12/12/2023 - 09:11

    Thank you, yeah IP sellinf is on the cards. Can only action around June/July due to them having long term tenants

    The idea around paying off the loan will help the credit file so we have a better chance at refinancing the IPs

• 

  netjock on 12/12/2023 - 09:49

  We needed a second car last year, and despite having the cash to purchase it outright, I sat down with my accountant and discussed the pros/cons of taking out a car loan and using my work car allowance for the payments. In this strategy, I was claiming back the interest on the loan, mileage, fuel, depreciation etc (with a fully compliant log book) my tax return was great!

  What happened to the cash you had to purchase it outright?

  If you put that money against your PPOR which is non tax deductible it would make sense.

  If you put it in a high interest account at 5% and pay 45% income tax on that, then hire purchase for 9% then it is just bad advice.

  Sometimes there is these interest rate / tax arbitrage strategies but the benefit isn't worth the hassle. In this case you have big break fee.

• 

  dynamic007 on 12/12/2023 - 10:03

  That cash was already in the offset against the PPOR and still sitting there.
  So I would be taking that cash out to square off the loan.

  just FYI when I took out the loan the landscape was different, 2 incomes, 2 properties positively geared, and a car allowance. We knew it would change, just didn't know how bad. We have already put the rent up in the 2 IPs but it wasn't enough to make a massive difference.

• 

  jv on 12/12/2023 - 10:04

  +1

  yes

• 

  garetz on 12/12/2023 - 10:10

  What are the benefits of paying it early ? It seems like you are paying more for no reason, just pay it off as you need to, and wait till its over to free up the cash.

  The money looks better off staying in the offset.

• 

  Duckie2hh on 12/12/2023 - 10:31

  Put spare cash into offset to reduce non-deductible debt first. If you do not have sufficient cash buffer to weather the loss (whilst your wife is on maternity leave), you will need to consider reducing your expenditure, followed by potentially selling off a car…. Hold onto your IP as long as possible.

  • 

    dynamic007 on 12/12/2023 - 10:51

    Thank you, I am on step 2 of that plan. We reduced expenditure and have squeezed that as much as we can….so it's down to the Car or IP. With the IP we have to wait until June/July

    • 

      Duckie2hh on 12/12/2023 - 12:29

      Why June/July?

      • 

        dynamic007 on 12/12/2023 - 12:41

        Sorry I should have explained, I have Long term tenants, and that's when the contract ends. We have looked into it and was advised the likelihood of selling while it has a long-term Tennant is lower as you will be limited to investors who are happy to keep it rented or people who want a longer (120days) settlement

        thats also taking into account people viewing the house while occupied and the tenants not presenting it in the best light.
        and add in the VCAT laws to try and evict them early etc

        in May we can give them notice to vacate

        • 

          Duckie2hh on 12/12/2023 - 15:56

          @dynamic007: See how you go mate. Buying/selling properties have huge recycling cost (taxes, stamp duty, REA fees, etc). Therefore you should try to keep it for as long as you can.

          Good luck.

• 

  Dollar General on 12/12/2023 - 10:33

  Car loan interest you can at least claim on tax.

  I would put any extra funds into you PPOR mortgage and knock that loan down instead

  • 

    dynamic007 on 12/12/2023 - 10:50

    Very good point thank you

• 

  Drakesy on 12/12/2023 - 11:03

  +1

  Funny thing is many car loans are drawn up in such a way that you'll pay all the interest first and the principle second. So say you have a 5 year loan you'll need to pay 5 years of interest before the principle is paid down, reducing the benefit if you were to pay it down early.

  But of course every contract is different.

  NGL This situation is everything wrong with Australia at the moment and a product of ridiculously low interest rates and we've been kicking the can down the road since covid.

• 

  burningrage on 12/12/2023 - 11:15

  It has been a while since I had a car loan but my recollection was that Interests are already capitalized in the loan so doesn't matter you pay early or not, your payout will always include that say, 5 years of interests already factored in.

• 

  dynamic007 on 12/12/2023 - 11:18

  Update! Just spoke to them and this time got through to the hardship team. they said I could pay a lump sum down (half of the loan remaining) which will enable me to take a pause for a year on payments and then resume. That will save me the $1500 early termination fee

  • 

    ginormousgiraffe on 12/12/2023 - 11:30

    But you are still going to be paying the same amount in interest anyway?

    Why not have the capital available to you if it costs the same anyway?

    • 

      dynamic007 on 12/12/2023 - 11:37

      Yes will be paying the same amount of interest, maybe slightly less as I have taken half the loan away. Plus I Save an extra $1500 from the early termination fee

• 

  82norm on 13/12/2023 - 09:16

  +2

  Hardship team….did u mention you have 2 IP’s positively geared, one other car and a PPOR ( albeit mortgaged).
  If that’s hardship, hate to see when it gets tougher. BTW. I’d ditch that accountant.

• 

  RMBC on 13/12/2023 - 09:47

  Your accountant did you dirty; the only reason you got a deduction was through incurring extra expenses unnecessarily, ie the interest. You'd have had more money in your pocket, albeit less of a refund, if you'd funded it in cash in the first place. Depreciation and running costs on the vehicle would still be deductible under either scenario to the extent they were work related.

  In relation to the payout, if you're paying the same amount either way, you're better off spreading it out over multiple years rather than incurring it in one. If your accountant was unable to give the above advice, it's time for a new accountant