Due to my redundancy, I am in the position of being able to clear my car loan. Details of loan were
1 payment of £304.85
35 x £209.85
Final Payment £5440.00
Total payable £13089.60
So far, I have paid
1 x 304.95
17x 209.85 3567.45
Total 3872.40
If I keep the loan going, I have 13089.60 - 3872.40 = 9217.20 still to pay. However, if I settle this just now, the settlement figure I have been given is 8878.65.
So if I clear, I will save £338.55. I like the idea of not having a loan but is it worth it for £338.55? Could I put the £8878.65 anywhere that would give me more than £338 in interest between now and July 2007?
Or should I be thinking that as well as saving £338, then I could also accumulate interest on the £209.85 a month I am saving as well?
Re The final payment of £5440, alternative to this I can just hand the car back and not pay it. However I am sure my Scenic will be worth more than that, unless Renault do a Rover between now and then!
Is there anything that I am not thinking of that I should be?
If I don't clear this loan with the money, I will probably just be putting it into some sort of high interest account as I don't need it just now.
Any thoughts / advice would be appreciated.
[Mods, feel free to move this to IHAQ if you feel that it is not car related]
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I reckon you would need 6.5% pa after tax to get the £338 out of the £8878 in 7 months (which makes sense, as that is probably about the loan rate). So no, you won't do it, and settling the loan will be cheaper. Probably only a couple of hundred though. Gets it off your plate though, and stops you spending the money on something else in the mean time!
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RichardW
Is it illogical? It must be Citroen....
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"I reckon you would need 6.5% pa after tax to get the £338 out of the £8878 in 7 months". If I read the original post correctly, the loan ends in, and one can easily get £338 on £8878 in 19 months!
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"Ends in 2007" - major typing omission!
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Its marginal either way with you being slightly better off financially by paying it off. However....
If paying it off would use a small amount of your current cash levels then I would do it, since it is slightly cheaper and it is one less thing to worry about.
If it would be 100% of your available cash then think carefully. You say you don't need it just now, but what are the chances of you need it in the next 18months ? What are the chances of an emergency ? I never like to have no access to cash because you never know what might happen.
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if you decide to put it away in savings:
try www.theaa.com/savings/index.html
final payment of £5440, >>
that is the amount you will have in your savings account for 19 months, and you can earn around £300 net( i.e. after tax has been paid ) on that.
the remainder of the cash ( 8878.65 - 5440 ) = say 3440 roughly is what will have to finance your 18 remaining instalments. the interest you earn will go down every month as you draw down from this £3440. but roughly, the net interest will work out to be about £100.
overall you will make about £400 net in interest. whereas the £338 immediate saving will produce about £20 in net interest over 19 months giving you say about £360 in July 2007. So the real difference betwen the two options works about at about £40 in July 2007.
so by my reckoning you will be slightly better off saving the money. the added bonus of that is that you will have ready cash in hand available in case you need it for some emergency.
warning: these are just quick mental calculations.
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2006, 2007....it's all the same isn't it????
I've got my coat on already.....
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RichardW
Is it illogical? It must be Citroen....
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Dalglish suggested: "if you decide to put it away in savings...the real difference betwen the two options works about at about £40 in July 2007. So by my reckoning you will be slightly better off saving the money. the added bonus of that is that you will have ready cash in hand available in case you need it for some emergency."
Two other questions you should ask are: 1) If you clear the loan and save the money, can you get access to your savings - or part of them - on demand, and 2) if you can't, would you be able to get a loan at the same, or better, rate than you're paying on the car loan?
Either of these options covers you if an emergency arises - Daglish makes a very good point about having ready access to cash if you need it. If paying off the loan now means you'd find it harder to raise the money later, I'd keep the loan going for the sake of £40-50 difference in your position.
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Do you have a mortgage? If so switching to an offset mortgage that includes the remaining car loan would allow you to clear the loan and still have cash available for emergencies. For instance if you borrow an extra £8878 on your mortgage to clear the loan and put the £8878 savings in an account offset against the mortgage you will pay no interest on the extra mortgage borrowing and still have the cash available for when you need it, though at mortgage-rate interest rates. Crucially though you won't need to make additional monthly payments to get your hands on it and any savings you have on top will give you a tax free "return" of whatever the interest rate on the mortgage might be. The extra you will pay in monthly mortgage payments on £9000 will be far less than your current £209 car loan payment, though of course they will go on for the term of the mortgage, or until you get sufficiently ahead with the mortgage payments to reduce them.
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Thanks for all your thoughts guys. Looking at the figures, it doesn't look too much to be gained either way. In answer to some of the queries, paying the loan off wouldn't be using all my redundancy and as for my mortgage, I don't want to do anything with that till my endowment compensation claim is dealt with!
I think I am leaning towards the idea of clearing the loan as there is something , probably old fashioned nowadays, that says to me that where possible, try and be loan and debt free!
Many thanks again, I will read and ponder over your advice for the next dew days.
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