Hello, Friend got a new truck. Price of truck OTD = $45k Down payment at time of finance = $2k ($43k financed) Interest = 6.9% Total for 75 months = $55.5k roughly which means it’s about $10k of ONLY interest. Payment = $710/month
Correct me if I’m wrong but in theory this truck can be paid off tomorrow and my friend pays none of the $10k interest, right? Anyway, my friend has a check that he wants to use of about $23k. My question is: is it better to put the $23k towards the auto loan right now (ensuring that the money goes towards the principal) or is there a better alternative like placing the money in a HYSA and earn about a 5% interest (I know it can fluctuate) and use that account to pay off the debt gradually? He’d be paying a lot more than the minimum monthly as well. I guess the only upside to this is though is having more cash liquid if ever needed.
The simple answer is probably no. If your “friend” can’t pay off the loans principal+accrued interest then just paying on the loan is best. A HYSA won’t yield enough interest to save any money. In fact your “friend” would pay more in interest this way.
One good option would be to take a large chunk(maybe 10-15k) and make a payment towards principal. You keep a rainy day fund and reduce the interest owed. Save more and request a payoff once enough money is available to clear the loan. While the benefits of payment history boosts the credit score.
Another good option, if money is no problem, dump the full 23k into principal. From there pay as much as possible on each payment to clear the loan ahead of time. If the loan doesn’t have a prepayment penalty refinancing doesn’t matter. If you payoff the loan early the lender returns any unearned interest. Refinancing costs money and with current rates still rising would probably be no help.
I know both sound the same but one is keeping savings and the other is dependent on having enough money coming in that a rainy day fund doesn’t matter.