Should I pay off my truck???
Real Estate Investor · Fort Myers, FL · Member since 2014 · 50 posts · 4 votes
Hi! Trying to set my investing career off right. I always had the opportunity cost mindset and kept low interest debt to save for another rental property. Recently listened to a Dave Ramsey rant and he talks about paying off all small debts prior to saving. I have $55k in my savings and I owe $23k on my truck at 3.5%. $4,200 in interest savings if I pay it off today. Struggling because I’ve been saving for another property. I can probably save that $23k in a little over a year. Should I do it??
Don't listen to Dave Ramsey.
So your owe $23K on your truck at 3.5%. By my calculations you are paying $805 in interest this year or an average of $67 per month.
With your $55K you have two options. 1) pay off that truck and save yourself $67 per month or 2) buy a rent property with a $23K down payment and generate $200 to $500 per month in cash flow. Which is better?
Looks like I am late to the party here. Glad you found Dave Ramsey. If you haven't already balance him out with Robert Kiyosaki. The part they both have in common is that consumer debt (cars, boats, credit card debit carried over, student loans ect) are all not your friend in the long run.
As many suggest the extent to which it affects you depends on your actual goals and plans. Assuming you do plan on being fairly aggressive it is likely going to be best to get the car loan out of the way. As a few others suggest it is dragging down your debt to income and can easily cost you the ability to get a real estate loan. I am sure by now you know that all loans are not created equally. @Greg Scott points out that as you build your cashflow from your houses then future loans become easier to get. Depending on your personal income that $800 payment can make a huge difference.
You state you have $55k in cash. Paying the truck off today will instantly result in a positive cashflow equal to that payment. You can then still put about 25K down on a 100K house that cashflows well. If you got even $200 in cash flow off the house between not paying the payment and the cashflow you have a $1000 a month swing in cash. You are also much more favorable for your next loan.
While selling the truck certainly is an option and could really short circuit every thing, I personally think if you can and want to pay cash for a vehicle then drive what you want. You just need to understand what impact it will have your long term plans.
@Nick Dillaha I've been following along here. I still stick with my post above, but just needed to express a couple other things as well. I'm quite surprised how harsh folks have been about the truck debt. I bet half the critics have their own auto loan debt. Long story short, YOUR NORMAL. Most folks on here and anywhere have car/truck loan debt. That being said, we aren't on here to discuss how to be normal which is why I think your getting such strong opinions.
I think you have done great. You have low interest debt that you already knew was a problem (otherwise you wouldn't have posted this) and you have a good amount already saved with intentions to save more. You have OPTIONS because of that savings and that is a great place to be. Congrats!!
Now go pay off that debt because you said your not actively looking/expecting to get great deals right now.
P.S. start looking and expecting to find great deals. :)
@Nick Dillaha
For many people this is an emotional response. It feels good not to have debt, feels secure, and that’s why many will recommend it. If you look at the math though and you have investment alternatives that will generate more than 3.5% then the decision is simple and always gives the same answer. Invest the cash instead of pay off the debt.
My personal belief Since a vehicle is a depreciating asset, I never want to put any capital into it. Finance it and think of the monthly payment as a rental or business expense. Paying cash just takes capital away from what I could be investing. I like cars and trucks and typically drive a newer high end vehicle, but with almost free money on the interest, I always finance it. I can always find better uses for large chunks of cash than to buy a vehicle that will immediately start decreasing in value. You can make the argument that it would be wise buy an older less expensive car, but you might be $10-15k to get into something reliable and if you have that cash you can always do better by investing it.
Thank you @Greg Scott for your response. I know Ramsey is really conservative and speaks mainly towards the average Joe. I'm making roughly $84 in my Wealthfront account a month just on the money in there so it more than covers my interest on the loan. I just haven't found anything worth buying in my area so I've been toying with my "second" best option with my savings.
Every single person who dismisses Dave Ramsey says the same thing. Dave gives advice for average people and of course they are not average. My point isn't whether you are average or not, but rather just be careful that you are not rationalizing your decisions.
A used Toyota truck at $23K isn't the cheapest vehicle you could drive by a long shot. I sold an 11 year old minivan to a family for $6500 and they were replacing a 16 year old minivan. They could not have been happier with their upgrade. It is all perspective. Some people drive a $23K truck and think they are sacrificing. Others pay $10K cash for a truck a few years older and think they are driving in luxury.
The point people are trying to make is, if you paid $10K or less cash for the truck, you would have no debt and $13K more available to invest. More cash to leverage into bigger gains over time.
The best advice I could give a younger person is be frugal and invest while you are young. Then when you are in your 40's and 50's you can pay cash for a new truck. The trouble is so many people start out with higher expectations and as they get older, they just need more and more.
That all being said, you already have the truck. I am not sure selling it is the best idea. Just drive it for many years and get your money out of it. As far as paying off the loan, I would pay if off in your case. Prices are inflated right now, so waiting a year to buy a property isn't going to hurt you at all. You will be in a stronger financial position. If you don't pay off the loan, then invest the cash in a cash flowing asset.
'm quite surprised how harsh folks have been about the truck debt. I bet half the critics have their own auto loan debt. Long story short, YOUR NORMAL. Most folks on here and anywhere have car/truck loan debt. That being said, we aren't on here to discuss how to be normal which is why I think your getting such strong opinions.
You're right. The statistic is that 90% of the cars on American roads today are financed. In the age of Lyft, near-universal cell phone coverage, and the $87 tow-anywhere AAA membership, 90% of car owners believe that they absolutely need to have a car reliable enough to have to make payments on it. It's not because they want the prestige they falsely believe a newer vehicle grants to its driver. I made that particular excuse to myself for years. I wasn't brainwashed, no, no, no, not me. Do you know how much three new dealer-financed RAV4s cost, even when you trade in the previous car? And we paid it like the drooling money idiots we were. Thankfully, we have zero car/truck loan debt now.
You're also absolutely right about normality. At this stage, I have zero interest in being normal. Normality brought me nothing but financial grief and worry for decades.
@Yuriy Zaremba the low mileage is probably why it was so expensive, granted I’m not a truck person.
The low interest rate is to make you think you’re getting a good deal. Car dealers make more money financing vehicles than they do on cash purchases.
@Nick Dillaha I think paying off small debt would apply to other who have trouble with saving and are not investing wisely. If you buy another property, that property would help pay off the truck for you using other people’s money. However if you are not going to be able to purchase another property for years to come then maybe it would benefit you to be done with the truck loan and then save for the property. I think having an idea of what time frame your looking at can help with this decision. Hope this helps some.
I own 5 cars all Chevys -two of which are a Camaro and a corvette , while I love them I don’t love how they negatively affect my finances ! As Jim so eloquently pointed out , there’s no honor in being a “car guy “ it took me a long time to learn this painful truth . A vehicle is such a lousy investment ( it’s actually not) that it really doesn’t matter if you got 2% or zero percent loan on .most new cars lose something like 70% of their value before the 6 loan is even paid off
It depreciates so rapidly that it can’t realistically ir rationally be justified unless you were very wealthy .
There’s a huge opportunity cost as well . That 500$ a month could instead go into something that generates a huge return over time but most folks never realize this .
A dollar today is worth 16$ in 25 years . When you go to make a purchase on a big ticket item multiply the cost by 16 and ask yourself if it still makes sense to buy it . Most Cars on the road cost a million dollars the owners just never did the math
Keep in mind that for every $400 worth of debt payments you owe per month, you lose about a $100k in buying power!
@Dennis M.
That makes a dollar loaf of bread look expensive at $16! Ouch!
Sticker shock!
And only thing that’s cheap in today’s society is silver & crypto & ammo!