Personal Finance

How to Pay Off Your Car Loan Early (& Never Pay for Your Car Again!)

Expertise: Mortgages & Creative Financing, Real Estate Deal Analysis & Advice, Personal Development
44 Articles Written

When people ask me about whether or not they should pay off their car, it always leads to an interesting discussion.

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Why?

As is super customary for me when writing articles, teaching, or speaking, I will not speak in theory or ideas but rather from personal experience.

Why not create an asset that can then pay for your car or other toys? Here’s what I did at the end of 2018.

Related: Why Getting Comfortable With Discomfort Is Key in Real Estate

Close up view of bookkeeper or financial inspector hands making report, calculating or checking balance. Home finances, investment, economy, saving money or insurance concept

Create a Cash-Producing Asset

I wanted to purchase a winter vehicle so I would not have to drive my convertible in the cold. But I hate buying cars, knowing they depreciate the second I drive off the lot. I especially hate it if I’m paying with after-tax dollars or even money from my company.

We were looking for a new office building in 2018. We found a property where the seller was willing to do owner financing. (This is one of three ways we buy—never using banks or signing personally on loans.)

He also had two existing tenants in the building that were paying 20-year-old rental rates. Both wanted to stay.

We structured a monthly principal payment that was a bit less than the total rent being collected the day we closed on the property. This meant it was cash flow positive immediately. That left us with two-and-a-half floors of space. Our company would take part, and we’d rent out the rest.

So without even filling the building, we were looking at a $3,000 or so positive monthly cash flow.

I then very conservatively went out and purchased a new Jeep for the winter so my convertible could remain in storage for the lovely New England winters. The Jeep payment is only $650 for 48 months. But with the positive cash flow from the building, we mail in an additional $250 principal. That way, we will pay it off sooner than the original amortization.

Related: Owning Your Own Office Is Easier Than You Think

Did we get an office building by sticking to our buying guidelines—not taking out a bank loan and not signing personally on any loans? Yes.

Did we create a positive cash-flowing asset that then can be used to buy a toy (i.e., Jeep)? Yes.

See, that’s what the wealthiest people do if you study them. They create assets to pay for their toys. They never pay for toys out of after-tax profits.

Should you pay off your automobile loan early? No.

Should your cash-producing asset pay off your automobile loan early? Why not?!

If you learn how to buy on terms, you can learn how to create cash-producing assets that can pay for everything else.

How much is your car payment? Are you trying to pay off your car loan early?

Share in a comment below!

 

Chris Prefontaine is the best-selling author of Real Estate On Your Terms. A real estate investor with over 27 years experience in the field, Chris is the founder of Smart Real Estate Coach and host of the Smart Real Estate Coach Podcast. He lives in Newport, Rhode Island with his wife Kim and their family. Chris is a big advocate of constant education. He and his family mentor, coach, consult, and actually partner with students around the country, teaching them to do exactly what their company does. Between their existing associates nationwide and their own deals, Chris and his family are still acquiring 5-10 properties every month and control between $20 to $30 million dollars worth of real estate deals, all done on terms without using their own cash, credit, or signing for loans.

    Costin I. Rental Property Investor from Round Rock, TX
    Replied about 2 months ago
    So, you got the cash flow from a financed asset to pay the car payments, for the car loan? Why not pull money out of an asset and pay the car completely? That way the interest is on the asset and deductible – wouldn’t that be better?
    Account Closed Specialist from Middletown, RI
    Replied about 2 months ago
    So, you got the cash flow from a financed asset to pay the car payments, for the car loan? No cash flow comes from NOI of the asset Why not pull money out of an asset and pay the car completely? -We don’t use banks so to “pull the money out” I assume you mean some type of equity loan against the asset. I don’t sign personally and borrow ever. Create NOI and pay for asset. That way the interest is on the asset and deductible – wouldn’t that be better?
    Steve W. from Monroe, WA
    Replied about 2 months ago
    Inspiring example of maximizing office building hacking. Two questions: “Did we create a positive cash-flowing asset that then can be used to buy a toy (i.e., Jeep)? Yes. See, that’s what the wealthiest people do if you study them. They create assets to pay for their toys. They never pay for toys out of after-tax profits.” – Isn’t that cash flow taxed, thereby paying for the Jeep with after-tax profits? “We found a property where the seller was willing to do owner financing. (This is one of three ways we buy—never using banks or signing personally on loans.)” – What are the other two ways?
    Account Closed Specialist from Middletown, RI
    Replied about 2 months ago
    Inspiring example of maximizing office building hacking. Two questions: “Did we create a positive cash-flowing asset that then can be used to buy a toy (i.e., Jeep)? Yes. See, that’s what the wealthiest people do if you study them. They create assets to pay for their toys. They never pay for toys out of after-tax profits.” – Isn’t that cash flow taxed, thereby paying for the Jeep with after-tax profits? Depends upon your LLC. I had an old loss-carry forward to the draws are tax free. If you had a regular LLC set up you can expense the car but that’s up to your CPA. You can use ours, he’s available for investors. “We found a property where the seller was willing to do owner financing. (This is one of three ways we buy—never using banks or signing personally on loans.)” – What are the other two ways? Lease purchase and subject to existing financing.
    Vaughn K. from Seattle, WA
    Replied about 2 months ago
    In short, this is basically just the argument that if you can take on debt at a rate that is lower than an investment will return, take on the debt instead of paying cash, and make the investment with the cash. Anything beyond that is just head games one is playing with themselves about how they’re thinking about it, or perhaps tax considerations. I made one of my vehicles owned by my company several years back… But because I wasn’t purchasing an expensive vehicle, I ended up realizing I would have been better off just using the standard business deduction owning it as a personal car! There are lots of ways to work things… Just think it through.
    Account Closed Specialist from Middletown, RI
    Replied about 2 months ago
    Create NOI that pays for asset. Never sign personally on property loans.
    Dave Rav from Summerville, SC
    Replied about 2 months ago
    I love this! Definitely the way to do it. And you know what? Why not reward yourself after snagging that deal! Heck, even with the bloated car payment of $900/mo (and for a Jeep!!) you’re still winning. All due to the highly positive CF from that deal
    Account Closed Specialist from Middletown, RI
    Replied about 2 months ago
    You bet Dave!
    Ilir Lako
    Replied about 2 months ago
    “They never pay for toys out of after-tax profits” From what I read in the story, you paid with after-tax profits. It is great that you found a new source of cashflow to cover that expense. Was the Jeep registered as a company car and depreciated in your tax filings? Maybe I am missing something, but not sure how that expense was pre-tax.
    Joseph M. Rental Property Investor from Sacramento Area, CA
    Replied about 2 months ago
    @ILIR: Please see my response. Hope that will answer your question.
    Account Closed Specialist from Middletown, RI
    Replied about 2 months ago
    They never pay for toys out of after-tax profits” From what I read in the story, you paid with after-tax profits. -Definitely not. We had a loss carry forward for one and secondly, you can pay the car out of NOI and expense it but that’s between you and your CPA. If you don’t have one, ours works with a lot of our students.
    Susan Maneck Investor from Jackson, Mississippi
    Replied about 2 months ago
    Like everything else, this depends on how much interest you are paying. Higher interest loans should also get paid first. However, when I paid off my car my credit rating went down! They like you to have various kinds of debt and I only had mortgages, first-place HELOCs and credit cards (with low-rate balance transfers, of course.) Of course my credit ratio went down, enough for me to buy a condo in Tahoe.
    Joseph M. Rental Property Investor from Sacramento Area, CA
    Replied about 2 months ago
    I am willing to bet that Chris (the author) bought the Jeep for business purposes and is having his company pay for the Jeep car payments. The would be a company expense. Because of such, he is using pre-tax money; not after-tax money. Remember businesses (S-Corp, LLC, C-Corp..) earn money, pay expenses and then get taxed. Individuals earn money, get taxed (at a higher rate) and then pay for expenses. Huge difference. That is one of the big advantages of treating RE investing as a true business. If I am in error Chris, please correct me. Thanks, Joseph
    Account Closed Specialist from Middletown, RI
    Replied about 2 months ago
    Many ways to skin that one Joseph but your comments are spot on.
    Proncias MacAnEan Investor
    Replied about 2 months ago
    I don’t understand this: “We structured a monthly principal payment that was a bit less than the total rent being collected the day we closed on the property. This meant it was cash flow positive immediately.” Wouldn’t that only make it cashflow positive if the interest was 0%, there was no property tax, no insurance and no maintenance costs? One other thing; why is someone selling you a building, with seller financing, for a payment that is less then the current rent they are receiving, especially when they could rent out that empty space.
    Royal Kennedy
    Replied about 2 months ago
    What happened with the tenants that were paying old rents ? Did they leave when you upped them or are they still there paying below market rents ?
    Account Closed Specialist from Middletown, RI
    Replied about 2 months ago
    We raised the rents and they stayed. It’s in a great location.
    Roy Kennedy
    Replied about 2 months ago
    That’s good news what were the old monthly rents and what did they go up to ?
    Account Closed Specialist from Middletown, RI
    Replied about 2 months ago
    Wouldn’t that only make it cashflow positive if the interest was 0%, there was no property tax, no insurance and no maintenance costs? -We don’t pay interest – principle only. Point of that line is BEFORE ADDING MORE TENANTS in the building, the existing tenants already covered the underlying new loan and expenses. One other thing; why is someone selling you a building, with seller financing, for a payment that is less then the current rent they are receiving, especially when they could rent out that empty space. -If you think like that you’ll never go buy property. This seller was retiring and had zero desire to build the building back up with renters nor did he want to own any more. There are a myriad of other scenarios I could give on other deals but keep an open mind and don’t prejudge why a seller will sell. Why did a beautiful home in Pa. sitting on 10 acres worth $400,000 get transferred to us that was debt free for zero money down and principle only payments? He wanted to go to Texas to be with his family.