Does it ever make sense not to pay off loan?

B

billy-bob

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I'm confusing myself mightily here. Several years of frequenting the aam boards has taught me one thing (just one :)) always pay off debt first.

I bought a car last year and part-financed it with a fixed rate loan over 2 years. The loan costs me 335 per month and has 20 months to go. I've just come into some money and my first thought was, pay off the loan. But if I took the 6700 still due and put it away in even a moderate fixed rate account (say the 3.06 TSB interest first, regardless of the minimum deposit), that will make me a couple hundred quid anyway.

The only issue I could see is if my circumstances changed in the period, where I'd have 6700 locked away and still have to pay off 335 per month, but I've got other savings if it comes to that. The financing was done through the dealer, so I assume the car has been used as collatoral (I'll need to check my paperwork) and will be taken away if I don't keep up repayments.

I'm sure there's some aspect of this I'm not considering, so does it make any sense in this particular circumstance to pop the money away instead of paying off the debt?
 
You have to ask the lender how much it would cost you to pay off the loan immediately. It should not be €6,700. If the interest rate is 9%, I am guessing that they will charge you about €6,000 to pay it off early. But that is only a guess. As it's a fixed rate loan, they might charge you a penalty for paying it off early.

This is a good example of why people should avoid fixed rate loans if at all possible. A variable rate loan can usually be paid off without penalty.

Brendan
 
Brendan, this was my first question to the finance guy when I signed up. Could I pay it off early without penalty. He assured me I could although I have no faith that hasn't changed in the meantime or he made it up to get me to sign. Obvs if it's going to cost me money to pay off, I'll pass, but as I understand it, with a fixed rate, they work out the total repayment over 24 months (so 24*335=8040 for a 7400 loan) and whether I pay that in installments or in one big cheque is not their concern.
 
you are right to analyse this before deciding to pay it off, but i think you have considered all the angles.

As you have already pointed out, there are 2 issues to think about.

1) Which approach will cost you more money

how much is the redemption cost. it might be 6700 or it might be more, or it might be less .

how much money will you earn in interest if you put the 6700 on deposit

2) If the two figures are very close, then you decide if you would prefer to have a lump sum in the bank, or more money to save each month for the next 20 months.
 
read the terms and conditions first and see what it says about paying off early. Anything verbal is just that verbal and means nothing.

when you pay off loan car is yours = an asset can be sold, traded in, at the moment I am pretty sure the loan company has first call.

let us know the result.
 
Just received confirmation that the repayment amount will be e6420 by draft. So what's a draft these days, about e5. So my maths would be e6425 in TSB will net e128 (e85 after DIRT). Not paying it off will cost me e380 though (335*20-6420), so it's a no brainer in this instance.

AAM is always right :)
 
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