High Finance

High Finance

I was planning to pay off the only car loan we have, but the more I do the math, the less sense it makes.

I owe a bit under $18,000 on it. If I put the money into a five year CD at the credit union, I can earn 4.30% on it--or about $774 a year. I'm in roughly a 39% combined federal and state income tax marginal rate bracket (and I will probably still be there next year, unless Obama was lying to all of us--which could never be!) That's $472.14 a year after taxes, or $39.34 a month interest income.

The last car payment statement shows that I paid about $65 in interest to GMAC for the month (and this isn't tied to a house mortgage, so none of it is deductible).

So if I paid off the car loan, instead of putting the money in a CD, I would save about $25 a month--this year. Because the finance charge is calculated based on declining balance, next year the finance charge that I will be paying will be less (probably about $50-55 a month), so I would only save about $10-$15 a month by paying off the loan right now.

The savings is so small, and the advantage of having the money in savings is so substantial, that it just doesn't make much sense to pay off the car loan.