In March of 2009 Mrs. C. and I bought our 2004 Honda Odyssey for around $15,000. We had always driven beater cars and had a string of 3 in a row that lasted less than a year, including one we had to replace the transmission in twice. We chose to finally get a nice vehicle, but to do so we needed to finance it. We had the van financed for 60 months, but 72 months was an option at the time. Had we gone with that option we would have made our final payment only 1 year ago. Even though we went with 60 month financing, we paid it off within 18 months, and for the past 5 and half years have had no car payments.
My Car Payment
Unfortunately, I don’t still have all my records from when we had our van on payments, but I know approximately what the terms were. Our loan was originally for $13,500 over a 6 year period at 6.5%, giving us a monthly payment of around $270. Due to the relatively short duration of the loan, the total interest from this loan only adds up to around $2,300 over the life of the loan. With making double payments and one large payment to knock it out, we paid around $900 in interest, saving $1,400 total. Not too bad, but when you pay off a loan in about 1/4 the time, you would think there would be more savings. Loan amortizations are heavily loaded on the front end, so the sooner you can make bigger payments the better. What if we had gone with the 72 month option? We would have had a slightly lower monthly payment and spent almost $3,000 in interest.
What I value a lot more than the $1,400 I saved in interest was the past 5 and a half years of having no vehicle payments. Having no vehicle payments is a major help when working a job with large seasonal cash flow fluctuations. It drove me nuts having to come up with an extra $270 each month when I wasn’t working. The paid off vehicle gave me peace of mind that we had a nice running vehicle and would not have to worry about losing it or feeling pressured each month for cash flow.
Our Van Today:
Our Odyssey now has over 160,000 miles on it, a far cry from the 52,000 that were on it when we purchased it. Aside from having the timing belt replaced and the valves adjusted last year, we have not had to do any major maintenance to the van. Cosmetically it is starting to show its age. There are rust spots from our Michigan winters and there are scratches and dings in the paint, especially on the backside of the van from using it as a truck to move stuff.
I would like to get 5 more years out of it, but I think 3 is a more rational expectation. 3 years from now it will have passed 200,000 miles and be 15 years old. Currently KBB values it at $2,800. A 2001 Odyssey with 200,000 miles has a KBB of $1,600. When we replace the van we will probably be able to sell it for around $1,000 – $2,000 and we will pay cash to replace it with something in the $5,000 – $10,000 range. I want to delay replacing it as long as possible, because the depreciation on it has slowed down immensely. The numbers above show depreciation of only $400 per year. A 1999 Odyssey with 230,000 miles has a KBB of $1,200, showing that if I am able to make our van stretch out 5 more years, the depreciation for those last two years drops to $300 per year. Delaying the replacement also gives us time to get some more traction on retirement savings and paying our mortgage down.
Paying Off A Car Payment Compared To A House Payment:
Recently I posted an article on paying extra on my house, detailing my plan to pay our house off in just over 5 years. Some of the comments gave me pause about whether or not I should continue to do so (vs. putting the money in stock mutual funds). I never thought to equate paying off my house with paying off a vehicle. One of the arguments that gets brought up in favor of keeping the mortgage is the relatively low amount of total interest you are paying. Using the situation from the van above, the interest saved is almost a side benefit to paying off debt. The real benefit is having no more payments.
Having no payments does a few things. The first is that it frees up cash flow to invest in other areas. Just like with the Dave Ramsey snowball method, once something is paid off not only does that payment go away, but you also have all the extra cash you were throwing at it available to go towards something else now as well.
The second great thing not having a payment does is it lowers the income you need to live on drastically. This is a major advantage for anyone seeking early retirement/ financial independence. Housing and transportation are often shown as taking up over 50% of the average American’s budget. If these things are paid for in full (and modest), then the amount of money needed to reach financial independence can be cut in half! Having debt paid off gives you a bigger shovel to use and a smaller mountain to build.
I love not having a car payment, and will make sure going forward that I don’t put myself in the position to have one again. As a long term goal I want to eliminate as many monthly payments as possible, not add new ones.
Have you paid off a car payment early? In retrospect are you still happy with that decision?