Why You Should Never Pay Off Your Car Loan Early

Why You Should Never Pay Off Your Car Loan Early

i've heard a lot of people say how happy they are when they pay off their car loan early but today i'm going to discuss why you shouldn't pay off your car loan early i am tiffany thomas with wealthytiffany.com and i achieved financial freedom at age 38 and if you are looking to achieve financial freedom at a young age as well hit that like button and hit the subscribe button and we are going to dive right in i'm going to be sharing five different reasons to not pay off your car loan early and make sure to stick around to the very end because number five is actually my favorite reason and i'm going to share reasons that you may want to pay off your car loan early all right the first reason to not pay off your car loan early is so that you can keep cash for emergencies if you don't have an emergency fund right now you would want to make sure that you have a certain amount for emergencies because you never know what will happen you could get a flat tire and need to purchase a new tire or if you are a homeowner like i am your water heater could go out or your furnace or even your air conditioner which might be on the top of the roof and you might need to get one of those replaced and they can be pretty expensive so you want to make sure that you have some sort of cash reserve on hand or at least access to cash so if you're thinking about paying off your car loan early but then completely depleting your emergency fund that is not the best idea you don't want to have to take out a personal loan that is going to be a higher interest rate than your auto loan and also if you aren't so sure how much you have in your emergency fund or maybe you just struggle a little bit with keeping track of all of your finances i personally like to use personal capital you can hook all of your financial accounts to personal capital so all of your credit cards your auto loan your mortgage your retirement accounts your 401k your roth ira you can have all those accounts in one place so that you can see your whole financial picture all in one place and if you are interested in that i will leave my referral link below in the description you can click on that to get a free 20 amazon gift card the second reason to not pay off your car loan early is if you have debts elsewhere maybe you have credit card debt or you already have a personal loan and if that's the case those other types of debts will probably have a higher interest rate than your auto loan so you would want to focus on paying down the highest interest rate debt that you have and then work on the next debt and then the next one and so on but you wouldn't want to just pay off your auto loan if you have a really low interest rate on that auto loan because that means you would be paying even more on your other debts because of the higher interest rates they may have the third reason to not pay off your car loan early is to help build your credit making your car payments on that auto loan can help you build your credit in two different ways at least the first way is to add a longer history to your credit score the more history you have on your credit then the higher it can push your credit score if of course you are paying all of your bills on time and being responsible with your finances the second way can help your credit score is through the credit mix when calculating your score it's nice to see different types of credit on your credit score so if you have a mortgage loan an auto loan a credit card that you're paying off in full every month then you have different types of loans and creditors can see that you can handle different types of loans and paying those off over time so it could help boost your credit score if you continue to make your payments on time and if you are curious on how to increase your credit score in other ways i do have a video for you i will leave a link above and below you can check that out later on the fourth reason to not pay off your car loan early is if you will have prepayment penalties you'll want to make sure you understand how your auto loan was set up sometimes there is a penalty if you decide to pay off that loan early so you want to double check and make sure that you are not going to pay more by paying off your car loan early because if the penalty is higher than what you would save in interest then that's not going to be worth it and the fifth reason for not paying off your car loan early is that you can make more money elsewhere you can invest that money you would be putting toward paying off your car into the stock market or even another investment and make more money than you would actually be paying in interest on your auto loan take a look at the interest rate on your auto loan and if it is a lower interest rate then you can invest that money and make a higher return than you'd be paying in interest and let me share an example of exactly what i'm talking about if you're looking to purchase a new car the average price would be thirty six thousand four hundred and eighty seven so let's just say you are not going to go that high and you purchase a car for 30 000 and the average auto loan is around 4 so let's use 4.09 for the interest rate on our auto loan let's say you've already had your car for one year and you have a five-year auto loan so if you were just to pay off the auto loan over the next four years the remaining four years then we can look at our auto loan calculator and see exactly how much we would be paying at interest if we were to pay off the loan over five years that would be three thousand two hundred and twenty three dollars in interest so if we were only paying that for a year we can come down to the amateurization schedule and see how much we would pay in that first year that would be one thousand one hundred and twenty four dollars in interest so our remaining balance would be twenty four thousand nine hundred and forty eight dollars so if we take our total interest that we would have paid that three thousand two hundred and twenty three dollars minus that first year's worth of interest the one thousand one hundred and twenty four dollars we will get 2099 that we would be paying in interest if we continued through the full five years of the loan but instead if we take this amount this hundred 24 forty eight dollars and invested it instead of paying off our loan early and saving that two thousand and ninety nine dollars in interest and let's just say you invested in an index fund which is very simple to do that tracks the s p 500 and that has a return of about 10 percent so if we invested it in that fund that s p 500 fund which has a 10 return and we invested it for the remaining four years of our auto loan terms that 24 948 would turn into 37 and fifty six dollars which is a huge amount if we take thirty seven thousand one hundred and fifty six minus the twenty four thousand nine hundred and forty eight dollars the original investment then we will get a balance of twelve thousand two hundred and eight dollars so we would have made over twelve thousand dollars if we would have invested that money instead of saving just 2099 in interest that is a huge amount that you can make by investing your money instead of paying off your auto loan early and the great thing about that is if you actually added to that amount every month or even just once a year then you could grow that amount even further and while that money is continuing to grow even if you add to it or not your car is a depreciating asset so it is losing value over time comment below and tell me if this is making sense so that i know you are following along so that is the fifth reason that you may not want to pay off your car loan early and that is my favorite because you can take a look at your money situation and say oh okay i now have this lump sum of money but i'm still able to make my car payment but with this lump sum of money i could invest it and make even more money rather than paying off an auto loan that has a pretty good interest rate that would be lower than the interest rate i would be making in the stock market and all of that being said i understand that personal finance is a lot more personal than it is finance so if you feel more comfortable paying off your car loan early if that gives you a lot of satisfaction and peace and you're able to sleep better at night then by all means take the initiative and pay off your car loan early just recognize that there are other options that you could be making more money if you were to invest that money instead of paying off your car loan early but it's entirely up to you because it is very personal and if you are trying to decide if you should pay off your car loan early or if you should not here are a few reasons that you may want to pay off that car loan early if you only have your car loan and your mortgage payment and you just want to free up that money with your car loan and perhaps put it toward paying off your mortgage then that's an option you could pay off your car loan early and start putting that monthly payment towards something else that is going to benefit you more or help you sleep easier at night and another reason is maybe you do have enough in your emergency fund right now that you could take some and pay off that car loan early so you wouldn't have to worry about making that payment each month but still feel comfortable with the amount that is left in your emergency savings or maybe another reason is that you want to improve your debt to income ratio so if you are paying off your debt if you're paying off that auto loan then that will decrease your total debt and your monthly debt payment and that means your debt to income ratio would be better so in that regard it could help increase your credit score if you're looking to lower your debt so in all honesty it really depends on you and your situation i just wanted to share these thoughts with you today so you can start to think about money in a different way rather than just following what everyone else is doing you can really think okay what is going to be best for me how can i make my money work even more for me and that way when i'm taking care of myself then it is so much easier for me to help other people comment below and tell me at one of your favorite tips on how to make your money work for you and if you found this video helpful please hit that like button and share it with someone else who would like to hear this information and hit the subscribe button to subscribe to my youtube channel and hit the little bell to get notified on when i post new videos and if you want more content for me check out the videos on the side of the screen thanks so much for watching i'll see you in the next video

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