Accelerate paying off the car or not?

**kjarrett** · 05-01-2012, 10:45 PM

Hi,
I ran across this forum while searching for the answer to my question. In addition, I happen to be quite frugal as well, so yeah; I'm loving this forum!

I bought a new 2011 Mazda 3 last year and put a large down payment on it. I currently owe $12,229.85 on it at 1.99% for the next four years.

I don't have any other debts and I absolutely HATE the fact that I have this loan hanging over my head. I would really like to accelerate payments on the car to pay it off faster. (I pay around $250/month now)

But, I would also like to start saving for a down payment on a house. I don't have any real plans to buy one yet but would like the option in about 5 years. Also, I have a $10,000 emergency fund and $2,000 regular savings.

Should I focus on paying off my car or start saving for a house?

What makes it difficult for me is that my interest rate is lower than the inflation rate so it really doesn't do me much good to pay it off faster. It would only give me a piece of mind and more focus on one goal.

I could possible just start saving for the house which could give me more interest and therefore more money.

Decisions, decisions...
What do you guys think?

Thanks!
Kat

**mndtrp** · 05-01-2012, 10:55 PM

When I was in your position, I did both. When my car was paid off, I rolled the payment into the home savings.

**Charro** · 05-02-2012, 05:41 AM

You don't say how much money you make. If you have a lot left over, I would save for the house. You may get lucky and still get a low interest loan in five years. Another option would be a cheaper vehicle. You might lose a little money up front, but there are great reliable cars that don't cost a ton. In five years your car will have depreciated considerably. When you drive it off the lot it is considered a used car. I used to do that. Get wowed by a really cool car. It didn't seem so cool to me after a time when I had that car payment for so long and by then the car didn't give me the thrill I still wanted. I made up my mind to make those kind of purchases only if I had the money saved up front. It's still debt.

**Greebo** · 05-02-2012, 07:28 AM

I'd get rid of the car debt first. The less overall debt you have when you buy a house, the better prepared you are for the unforeseen expenses of home ownership.

**kjarrett** · 05-02-2012, 08:58 AM

I make around $35000 right now.
I've recently been promoted and will be receiving a raise up to at least $40,000 in a couple of months here. I think it might even be more...somewhere between $40,000 and $48,000.

I was just thinking; saving immediately and just paying regularly on the car will not have very many benefits either since interest rates are so low.

I guess there might not be a monetary benefit no matter which way I go.

But, paying it off faster does make me feel more secure.

**Greebo** · 05-02-2012, 09:05 AM

Originally Posted by kjarrett

I make around $35000 right now.
I've recently been promoted and will be receiving a raise up to at least $40,000 in a couple of months here. I think it might even be more...somewhere between $40,000 and $48,000.

Which is great, and means paying off the car will happen very quickly.

I was just thinking; saving immediately and just paying regularly on the car will not have very many benefits either since interest rates are so low.

Unless something happens and you lose your job, which is always a possibility. They don't repossess paid off cars after-all.

Seriously what I would do before you think about buying is, first to repeat, pay off the car asap. Second, build your EF up to cover 6 months of expenses (that's bare minimum expenses), and then and only then, save up a downpayment.

You want to go into home ownership in a *strong* financial position - and you're halfway there.

05-02-2012, 09:36 AM

How much of a down payment are you looking to have when you purchase the house?

**kjarrett** · 05-02-2012, 10:18 AM

I don't have any concrete plans to buy a house yet since I'm only in my mid-twenties. But, it is something I would like to do in the future. I just moved to a new town so I'm not even sure I want to buy one here. Nothing is really decided.

I want to save at least 20% for a small cottage type house. I'm guessing around $130,000. So, maybe $26,000 for a downpayment?

**Greebo** · 05-02-2012, 10:34 AM

Originally Posted by kjarrett

I don't have any concrete plans to buy a house yet since I'm only in my mid-twenties. But, it is something I would like to do in the future. I just moved to a new town so I'm not even sure I want to buy one here. Nothing is really decided.

I want to save at least 20% for a small cottage type house. I'm guessing around $130,000. So, maybe $26,000 for a downpayment?

Good start.

Since you don't know that you want to buy/stay where you are, even more reason to focus on car debt first.

**kjarrett** · 05-02-2012, 10:49 AM

Will paying the loan of early hurt my credit in any way?

For example, not having any debts could be detrimental to your FICO score.

**Greebo** · 05-02-2012, 11:30 AM

I should tell you that in my view, the credit score is simply a tool that in order to increase, you need to go into debt, so that later, you can go into more debt.

I am not interested in credit scores - but FYI when I cancelled all of my cards and paid off all of my non mortgage debts, my score only dropped about 15-20 points.

**frugalfranny** · 05-02-2012, 01:43 PM

Originally Posted by kjarrett

But, paying it off faster does make me feel more secure.

I think you answered your own question with this statement.

You have to do what is right for you.........but agree on getting the car payment out of the way and EF in place before you house hunt.

Don't worry so much about your credit score until right before you start to house hunt........and that sounds like it will be a little time.

Little things can affect the score but unless you have defaulted on something, nothing with be major.

IE: Two banks have run a credit check on me while working on my father's estate............my score dropped seven points......no big deal. It recovered within a month or so........I know because another bank just ran one........and I have asked to see all of them! (although one SLIMY BANK didn't even tell me about it.........I discovered it-----the other two have been honest!!)

Your score can fluctuate within the month even due to charges you make on a credit card.

**Rosebudget1** · 05-02-2012, 01:54 PM

You will feel so good when you have no debt! Pay off the car!

**kjarrett** · 05-02-2012, 09:49 PM

I agree... maybe I'll do both. I have around $300 left over after all is said and done. Maybe $150 to the car and $150 to savings.

My dad is trying to convince me to just save all of my leftover as the interest rate for saving is marginally higher. But, I think it would emotionally benefit me just to accelerate my payments towards the car.