Should I pay off a 0% car loan?
Between now and October, your $3,000 will earn $30 in your savings account. If you are late on a payment for your 0% loan, your interest rate will skyrocket.  In my opinion, the risk is just not worth the tiny gain you are trying to achieve in the savings account. If it was me, I would pay off the loan today. A few more thoughts: There is a reason that businesses offer 0% consumer loans.  They are designed to trick you into thinking that you are getting a better deal than you are.  Businesses don't lose money on these loans.  The price of the loan is built into the cost of the purchase, whether you are buying expensive furniture, or a car.  Typically with a car, you forfeit a rebate by taking the 0% loan, essentially paying all the interest up-front.  Now that you have the loan, you might be ahead a few dollars by waiting to pay it off, but only because you've already paid the interest.  Don't make the mistake of thinking that you can come out ahead by buying things at 0%.  It's really not free money. In the comments, @JoeTaxpayer mentioned that fear of mistakes can lead to missed rewards.  I understand that; however, these 0% loans are full of small print designed to trip you up.  A single mistake can negate years and years of these small gains.  You don't want to be penny wise and pound foolish. I struggle with 0% interest things in my personal life.  A responsible me that thinks logically says continue to pay it on time and take advantage of the benefit of the interest free loan you got. It will keep your funds liquid in the case of an emergency, build your credit and teach you self control.  Paying it off now has little to no benefit. It does however tie up $3,000 worth of capital you could be using for building interest or leveraging against other purchases. "Mathematically, the wisest choice is to invest your extra money somewhere else and not pay off your 0% loan early. An extreme example highlights this. Suppose some colossal company offered to loan you a billion dollars at 0 % interest. Would you take it? Or would you say ""No thanks, I don't want that much debt."" You would be crazy not to accept. You could put that money in the safest investments available and still pocket millions while making the minimum payments back to them. Your choice here is essentially the same, but unfortunately, on much smaller scale. That said, math doesn't always trump other factors. You need to factor in your peace of mind, future purchases, the need for future borrowing, your short term income and job security, and whether you think you can reliably make payments on this loan without messing up and triggering fees that wipe out the mathematical advantage of slow paying the loan. You are fortunate because you really can't make a wrong choice here. Paying off debt is never a bad choice IMO. However, it may not always be the best choice." Pay it off. If you do so, you have the liberty to drop or reduce a portion of your collision auto insurance coverage (keeping uninsured motorist). This could potentially save you a lot more than 20 bucks over the next six months. Sometimes I think it helps to think of the scenario in reverse. If you had a completely paid off car, would you take out a title loan (even at 0%) for a few months to put the cash in a low-interest savings account? For me, I think the risk of losing the car due to non-payment outweighs the tens of dollars I might earn. "The question posted was, ""Should I pay off a 0% car loan""? The poster provided a few details: I'm ahead on 0% interest car loan. I don't have to make a payment until October. I currently owe $3,000 and I could pay it all off. Should I do that or leave that money in my savings account that earns 2% interest? The question seems to seek a general rule of thumb for how to behave with smaller debts. And a general rule of thumb could be taken from one of two principles (which seem to be religious camps). The ""free money"" camp believes that you can invest (even small amounts) of money risk-free and receive high returns, tax free, for zero effort. The ""reduce debt"" camp believes that you should pay off debts so that you have the freedom to live your life unfettered. Which religion do you prefer? I tend to prefer paying off debts. The ""free money"" tent wants you to pay the car off over the next 6 months, earning interest. Suppose you can earn 2% interest (.02/12 per month), paying $500 per month for 6 months. So you earn interest on 3000 the first month, 2500, the second month, 2000 the third month, So, are you feeling rich, earning $13.13? How much time did you spending making the 5 additional payments? You could skip coffee once/month and make a bigger difference. The ""reduce debt"" tent would have you pay off the car. Suppose you change your deductible on the car (or drop collision) to save money, and you will also same time by avoid 5 bill payments, But do you still have enough money in your emergency fund, how do you feel about having less insurance coverage, and did you notice the time savings? We really need more information about the poster's situation. The answer should consider the relevant details of the situation to provide an informed response. Here are questions that would enable a response to address the whole situation. Why are these important? Here are a few reasons why the above might be important." The precise answer depends on the terms and conditions of the loan, and whether you can reasonably expect to meet them. For example, if you keep the loan, make no payments, there is a good chance that - eventually - you will trigger a clause in the contract, and suddenly be charged fees or a significant interest rate.     If you don't need to pay anything for a time, odds are you will forget to monitor the loan (after all it is not costing you anything) and suddenly get hit with an unexpected expense. Most loan contracts are structured - by professionals - to benefit the loan provider.     The purpose of a loan provider is to make a profit.   They do that by encouraging you to pay more -  up front, over the longer term, or both. Personally, I would never take out a zero-interest loan.   It is specifically designed to appear like a gift from the loan provider, while actually (and almost covertly) costing more at some point. If I was in your position (i.e. if I had taken out such a loan) I'd pay off the loan as fast as possible.   If you have more than one loan, however, prioritise by working out which actually costs you more over time.   And pay the worst ones first.    You'll have to look closely at the terms and conditions - possibly with the help of a professional - to work out which is actually work. Don't pay off the 0% loan.  First, set up an automatic monthly payment to ensure you never miss the payment (which could lower your credit score). If you are in Canada, depending on your situation: If you are employed and make more than $50k/year: Mostly to play devil's advocate, I will recommend something different than everybody else. If you can pay off the entire $3,000 balance and are torn between saving that money somewhere that will earn a return and paying it off now to be debt-free, why not a little of both? What if you pay half now and then save the other half and make a big payment at the end. Essentially that becomes two $1,500 payments: one now, one right before the 0% due date. To me, the half up-front significantly reduces the risk, but leaves some cash available to grow. Ultimately the question is more about your personality and level of discipline than about money.   The rational thing to do is hang on to your cash, invest it somewhere else, and pay off the 0% loan as late as possible without incurring penalties or interest.  Logically it's a no-brainer.  Problem is, we're humans, so there's a risk you'll slip up somewhere along the way and not pay off the loan in time.  How much do you trust yourself? Here's my take: 1) Having a car loan and paying it on time helps build credit. Not as much as having credit cards (and keeping them paid or carrying balance just enough to be reported and then paying it), but it counts. 2) Can't you set in your bank, not the lender, something to pay the car automagically for you? Then you will be paying it on time without having to think on it. 3) As others said, do read the fine print. My theory, if you must be in debit, own it at the least expense possible. The interest you will pay by the end, combined with the future value of money. Example: The Future value of $3000 at an effective interest rate of 5% after 3 years =$3472.88 Present value of $3000 at 5% over 3 years =$2591.51 you will need more money in the future to pay for the same item
"It's not a bad strategy. I'd rather owe money at 4% interest than at 6-7%. However, there is something to consider.  Consolidating debt into a new loan can backfire. When you have money borrowed at 7%, you want to get that paid off as quickly as possible. Once you have that converted to 4%, if you think, ""Now I can take my time paying off this debt,"" then you aren't really better off. In fact, if you take too long paying off the new loan, you might end up paying more interest than if you had kept the high interest loan and paid it as soon as possible. Don't lose your drive to get out of debt after you refinance.  As far as how the student loans affect your debt-to-income ratio, I'm not sure; however, if they do count (I think they do), your ratio will not really be going up by taking out the new loan, since you are using the money to pay other debt. Make sure the new lender knows this, so they take that into consideration when making their decision.  Overall, I like your strategy: pay off what you can right away (the car loan and the highest interest student loans) and reduce the interest on the rest. Just make sure that you continue to pay down that debt as quick as you can." "In addition to the two options in your question - pay off the entire loan, depleting your emergency fund; or continue as you are today - there is a third, middle-ground option that might be worth considering. Since you currently have an emergency fund, zero credit card debt, and you stated ""we can afford these expenses"", I think I'd be correct to assume that you're currently making regular contributions to either the emergency fund itself, or to another savings account, etc. Temporarily stop making those contributions, and divert those funds to make larger payments towards the upside-down loan. The additional amount will all be applied to the loan principal, reducing the interest you'll have to pay, but you'll avoid the risk of depleting the emergency fund. Additionally, the insurance premium may possibly be avoided, as in many places in the world it's possible to de-register the car (for example, in California, USA, you can submit an affidavit of Non-Use) then terminate the insurance on it. However, the car will likely have to be parked off-street (or in a location such as a private road governed by rules that do not include legal registration requirements)." An emergency fund of $5000 seems on the low side and I would be worried about spending it down to $2000, that said you want to get out of the car loan. It sounds like you have a little extra disposible income since you think you can rebuild your emergency fund quicker than just the amount you will save from not having a car payment. One option to decrease the hit to your emergency fund is to save aggressively for a month or two to increase your emergency fund by a few hundred dollars and take on some other debt (possibly credit card). You could then pay off the new debt and replenish your emergency fund over a slightly longer period. While some financial planners dislike the idea of an emergency fund while still having high interest debt, to me I would prefer to have $1000 in credit card debt and $3000 in an emergency fund over $0 in credit card debt and $2000 in an emergency fund. Given your time course of 6 months or so to pay off the debt, you might even qualify for a 0% credit card introductory rate (or balance transfer). Your goal of wanting to eliminate your debts early is great. Generally, you can save more money by paying off loans with higher interest rates first. However, it sounds like you are excited about the idea of eliminating one of your car loans in two months.  There is nothing wrong with that; it is good to be excited about eliminating debt.  I like your plan. Pay off the $14.6k loan first, then apply the $635 monthly payment to the $19.4k loan.  You'll have that loan paid off almost 3 years early.  Perhaps you'll find some additional money to apply to it and get rid of it even earlier. After you've eliminated both car loans, save up that $1000/month for your next car.  That will allow you to pay cash for it, which will allow you to negotiate the best price and save interest.  0% loans are not free money. Other answers will tell you to wait as long as possible to pay off your 0% loan, but I think there can be good reasons to eliminate smaller loans first, regardless of interest. A Lease is an entirely different way of getting a car. In two situations it makes sense, in all other scenarios it generally doesn't make sense to lease. In the case of always wanting a new car every 2 or 3 years it can make sense to lease. Of course if you drive more the allowed miles you will pay extra at the end of the lease. If you can take the monthly lease as a business expense leasing makes sense. Otherwise you want to pay cash, or get financing. Does zero percent make sense? Sometimes. The only way to make sense of the numbers is to start with your bank, have them approve of the loan first. Then armed with the maximum loan amount they will give you and the rate and the length of the loan, then visit the dealer. You have to run the numbers for your situation. It depends on your income, your other expenses, your credit score, your bank, what deal the dealership is running, how much you have for a down payment. Here is an example. For a recent loan situation I saw: 36 months, 1.49% rate, 20K loan, total interest paid: ~$466. Armed with that information can the person get a better deal at the dealership? There was only one way to find out. In that case the credit union was better. The rebate was larger than the interest paid. Paying off your loan in full will most likely not help your credit score, and could potentially even hurt it. Because car loans are installment loans (and thus differ from consumer credit), lenders really only like seeing that you responsibly pay off your loans on time. They don't really care if you pay it off early--lenders like seeing open lines of credit as long as you manage them well. The hard inquiry will simply lower your credit score a few points for up to two years. So, from a credit score perspective, you're really not going to help yourself in this scenario (although it's not like you're going to be plummeting yourself either). "In addition to all the points made in other answers, in some jurisdictions (including the UK where I live) the consumer credit laws require the lender to allow the borrower to pay off the loan at any time. If the lender charges interest and the borrower pays off the loan early then the lender loses the interest that would have been paid during the rest of the loan period. However if the actual interest is baked into the sale price of an item and the loan to pay for it is nominally ""0%"" then the borrower still pays all the interest even if they pay off the loan immediately. If you think this game is being played then you can ask for a ""cash discount"" (or similar wording: I once had problems with a car salesman who thought I meant a suitcase full of used £20s), meaning you want to avoid paying the interest as you are not taking a loan." Dude- my background is in banking specifically dealing with these scenarios. Take my advice-look for a balance transfer offer-credit card at 0%. Your cost of capital is your good credit, this is your leverage. Why pay 4.74% when you can pay 0%. Find a credit card company with a balance transfer option for 0%. Pay no interest, and own the car outright. Places to start; check the mail, or check your bank, or check local credit unions. Some credit unions are very relaxed for membership, and ask if they have zero percent balance transfers. Good Luck! You can earn significantly more than 0.99% in the stock market.  I'd pay the $450/month and invest the rest in a (relatively conservative) stock market fund, making monthly withdrawals for the car note. If (and only if) there is a zero interest installment plan available, technically the only uncontrollable risk is that there will likely be a hard inquiry on your credit report which may or may not also have a corresponding debt obligation attached to it. (Personally, I recently signed up for one such plan with Google and I had a hard inquiry but no debt added to my report). The other risks are that 1) your monthly payment goes up, so if you are living on a tight budget the added payment might make it harder to meet your next bill, and 2) you could miss a payment which generally triggers interest to accrue retroactively at a high rate, and in some cases could be grounds for immediate repayment. The pro / reward of these plans is that you have to spend less of your capital upfront, which you may be able to use for other purposes (presumably with a higher net present value than purchasing the item you're considering outright). A larger example would be purchasing a new car. You want to buy a $50k car and you have the cash on hand to pay in full, but you are being offered 0% interest for 36 months. You may be more inclined to take a loan at 0% with 0 down payment and invest your money in another vehicle (no pun intended) that offers you a decent rate of return and you will come out ahead in the end. Of course, this example works in a perfect world where you can get such an offer, there are no extra fees available, you aren't worrying about your debt-to-income ratio in preparation for a big purchase like a house, there isn't a higher insurance premium to consider, etc. In short, 0% financing, be it for a phone or a car, can be a nice perk for the informed consumer who is not using the financing as a way to purchase outside their financial means, but it is offered by companies as a way to make people buy things they normally would not and, hopefully, capitalize on people missing payments in order to reap the sweet 20%+ interest rates generally seen with these offers.  In your specific situation with the phone, you should consider if you get a discount on your monthly plan for purchasing outright, or if you can get the phone subsidized if you sign a contract (and you know you like your provider enough to stay for its duration). If the monthly plan rate stays the same and you're looking at either $500 now or $500 over 24 months and you don't mind a hard inquiry, there's not much of compelling reason to pass on the financing and hold on to your $500. If you are very sure, say 90%, that you'll pay the zero percent card off before paying interest, that would be my choice. Less certainty than that, I think the 6.8% over a longer term is less of a cash flow issue, and you can still pay it in full upon getting the job bonus. First of all, congratulations on paying off $40k in debt in one year. Mathematically, you'd be better off making the standard car loan payments and putting your extra money toward the student loan. However, there are a few other things that you might want to consider. Over the last year, you've knocked out a whole bunch of different debts.  Feels pretty good, doesn't it?  At your current rate, you could knock out your new car loan in 6 months.  Then you'd only have one debt left.  If it sounds to you like it would be nice to only have one debt left, then it might be worth the mathematical disadvantage you would get by paying off the car early instead of putting the money toward the last student loan. The car loan is 0%, but if you are late on a single payment, they will take that opportunity to raise your interest rate to something probably higher than the interest rate of your student loan.  For this reason, you may decide it is not worth the hassle, and you'd rather just eliminate the car loan as quickly as possible. Either choice is fine, in my opinion, as long as you have a purpose behind the choice and you are committed to eliminating both debts as quickly as possible. As an aside, it is important to remember that even a 0% loan is not really free money, and needs to be paid back.  You know this, of course, but sometimes you see a 0% loan advertized and it feels like free money.  It's not.  You have probably already paid for the loan by forfeiting a rebate.  So although, at this point having already taken this loan and paying for it, you will come out ahead by dragging out your car loan for the full term, in the future do not think that you can make money by buying something at 0% interest. "Making extra principal payments will reduce the term of your loan. I wouldn't sign up for a biweekly schedule, just do it yourself so you have more flexibility. A simple spreadsheet will allow you to play ""What if?"" and make it clear that extra principal payments are most effective early in the term of the loan. My wife and I paid off our home in less than 10 years with this approach. Some will say that the opportunity costs of not using that money for something else outweighs the gains. I would say that not having a mortgage has a positive impact on your cash flow and your assets (you own the home), which combine to create more opportunity, not less. That being said, It should be obvious that paying off higher interest debt first is the priority, (Paying off a zero percent interest car loan early is just foolish)" The first thing is to look at the monthly cost of the loan. The one from the company is interest free. While it is unlikely that a bank will have a zero percent loan, you will also have to look at what the seller will offer.  The next thing to look at is the term of the loan. When comparing two loans with the same interest rate the shorter term loan will cost more per month. Many times when an auto dealer offers a zero percent loan they also  have a very short term: 12-24 months; Many people can't afford the monthly payments with that short a term.  You said you could afford to save the other $2000 in about six months. That means you could set aside $333 a month to do it in six months. If the loan from the employer has a term longer than 6 months you should be able to afford the loan. Keep in mind that the employer will probably be taking the money right out of your paychecks.  You do have to look at the conditions attached to the loan. What does accepting the loan do to your employment situation? If you leave early do they want you to pay it back in 30 days, or will they take the rest from the final paycheck, or do you have longer?  You do have to look at the term of the loan, and see if you can pay it off early. If they require a 12 month term can you end it earlier, or change the monthly payment to end it early? The reason why you care about the term is that if the term is 24 months then after a year you still owe them $1000; which if you have to pay back immediately if you quit, it may make it hard for you to leave the company. A minor note: They probably are not reporting it to the credit reporting agencies therefore it wont help your credit score. This is probably not a big issue since you are considering going without a loan. so this is a loan for a house? a loan on a house? a new mortgage? you shouldn't just get a loan for the hell of it any time. interests rates are low because the yields on US treasuries have been pushed closer to zero, and thats pretty much that. the risk is on the bank that approves the loan, and not you. (your ability to repay should be truthful, but your payments are smaller because the interest is so low)