Pay Off Car Loan Or Build Savings?

[jji23]

Hi

I want some advice on what I should do.

Per month

Income; 59,500

Expenses; 35, 105 (incl car repayments 11,675)

LTF; 7575

Leaves 16, 820

I'm caught in 2 minds with regard to this excess. On one hand I want to add 8325 to my car repayments to make my payments 20,000 per month and pay the car off in half the time, which would cut the interest and once finished enable my to save/invest much more. It would leave me with 8495 to save in a fixed deposit account. After a year = 101, 940.

Or should I save all of the 16, 820 and continue with the 4 years and 6 months car payments at 11,674. After writing this out it seems obvious to go with first option.

So, here's my, what I believe to be a big catch and the reason option 2 seems better. I'm 25 next month and have no savings except for an ltf I started this month and a few hundred pounds in the bank in UK.

Thanks for any advice

[Swiss1960]

My advice:

BE SAFE! save the money and build up emergency funds, you never know what happens. Do it for 2 years till you have a good stock of cash and then think about increasing the lease payments. Of course, downside is if your car breaks, you would still be stuck with the lease payments, but at least have money for repairs if needed.

[imovercs]

First, read your loan document. I have no experience with auto loan in Thailand, but several Thai and nonthai friends have borrowed for motorcycle loans and reading their contracts from banks and other lenders reveals there is no savings in paying off the loan. The loan payment is fixed at the time of loan and the interest is also fixed. The time is extended to payoff the full amount but the amount is not based on or adjustable for earlier prepayment. Sounds incredible to westerners but check it out first.

If you can prepay, how much will you save and how much interest can you get on the savings account? This will help determine your choice. As suggested, having cash is always a good idea as the future is not predictable. What about building up longterm retirement funds, use some excess to add to or start retirement funding, again long term outlook needs to be addressed before you have no more longterm.

Personally, I never use credit to purchase depreciating items. Saving now can mean your next vehicle is paid in cash.

[Firefan]

Imovercs have a good point indeed. Check and understand your actual car credit first.

And as Swiss said; Not having emergency cash should probably be the first thing you sort out before anything else anyway. Having at least 6 months of living costs with reasonably easy access is a rule of thumb by many financial advisers, but use whatever works for you (say 3-12 months worth). This could still go in a time deposit as long as you can take some of it out (against maybe losing a bit of interest) with short warning.

Cheers!

[CharlieH]

Agree with post above, I checked mine because wanting to do the same and everything is done up front, there is no benefit whatsoever to paying it off early the amount remains the same so other than not having to pay it every month for the term, there is no benefit so you might just as well let it run its course now and save the money elsewhere (if your agreement is the same).

[givenall]

My advice:

BE SAFE! save the money and build up emergency funds, you never know what happens. Do it for 2 years till you have a good stock of cash and then think about increasing the lease payments. Of course, downside is if your car breaks, you would still be stuck with the lease payments, but at least have money for repairs if needed.

Besides, I think you still end up paying the interest on your car based on the contract length so there is no saving on interest either. Check with your car loan company to see before you decide to pay off your car earlier

[Javabear]

I got caught up on the car loan contract too. I went to pay it off 2 years early and found there was no svings by doing so. I had the cash in hand and told them they could just wait for it for 2 more years. I wasn't going to give them the full amount for nothing.

[fletchsmile]

First priority should be to build up an emergency fund in cash, with a general view of about 6 months expenses if you're working, so in your case 6 x 35k would be around 200k, and saving 16k a month would take about a year to build up.

The emergency fund is exactly that, for emergencies, but it should also be a cushion if for some reason you lose your job or can't work for a while. An important factor to remember is that if you're unemployed no-one will give you credit so your cash flow really becomes important, and your ability to raise cash from other sources would be limited. i.e You wouldn't be able to change your mind and get a car loan again if you're out of work if you've paid it off.

Check the interest rates on your car loan, and whether there are any penalties for early repayment or other clauses which would make it not worthwhile. Now if it was a credit card at 20%pa interest, I'd say pay that as a priority even before emergency cash. For an auto loan of say 7% APR, even though it's unlikely you'll get the same return on a savings account, I'd say your cash flow liquidity and emergency fund is more important.

In a year's time when you have your emergency cash, you then have the choice of:

1) Pay off your loan with your XS cash of 16k a month

2) Build more cash, with a greater emergency fund, even though cash savings rate is less than your savings rate

3) Add to your investments, such as pay more into your LTF until you max out, and/or then add to other similar investment funds to perhaps diversify your portfolio.

At that stage a lot comes down to your attitude to risk. Personally I'd prefer the higher risk option of 3) and investing in the hope that your return on investments after tax exceeds the loan interest rate. Given you are young, that works in your favour for taking more risk. Key to this is having your emergency fund in place.

BTW I was doing 3) similar to you on our mortgage, even though I could pay it off, on average my belief was I could earn double digits on investment vs single digit payments on the loan, and I had a salary coming in anyway, plus various tax reliefs on mortgage interest and investments. It worked out that way and investment gains exceeded loan interest. But, you don't want to have to sell your investments at an opportune time because you have no emergency cash. Worth adding once I finished work though I paid off the loan in full as I didn't want the risk of not earning a high enough return on investments with no salaried income. I still made sure I had enough cash after doing so, and now I keep about 3+ years in cash with no salary income. (A reminder that the 6 months is not a hard and fast rule and depends on your circumstances)

Edited March 28, 2012 by fletchsmile

[CWMcMurray]

I agree with the others...

First thing, 3-6 month emergency fund

Then max out your LTF, this only needs to be invested 5 years so this is a good mid range investment

Then max out your RTF, which based upon your income seems to be about 9k per month. This is a good long term investment and also tax deductable.

This still then leaves you over 7k per month to play with. If me, I would just save this per month for unexpected things that always come up over the year or little things you decide to buy (new laptop, new phone, vacation, car insurance, car repairs, health insurance). This way you never need to break into your emergency fund.

As others have mentioned, all the car loans I have seen (and had) in Thailand do not reduce interest if paid off earliy, so makes no sense to do so.

Based upon the above... the LTF is only arround till 2016 so that means all funds from LTF could be withdrawn in 2021 without any penalty. At that time you will be 34 and will likley be thinking about buying a house/condo; you could use this money for that purpose

The RTF of course should be maxed out every year and not touched until you are ready to retire.

Of course if marraige or kids are in your future... then it all could change very quickly..

[fletchsmile]

I agree with the others...

First thing, 3-6 month emergency fund

Then max out your LTF, this only needs to be invested 5 years so this is a good mid range investment

Then max out your RTF, which based upon your income seems to be about 9k per month. This is a good long term investment and also tax deductable.

This still then leaves you over 7k per month to play with. If me, I would just save this per month for unexpected things that always come up over the year or little things you decide to buy (new laptop, new phone, vacation, car insurance, car repairs, health insurance). This way you never need to break into your emergency fund.

As others have mentioned, all the car loans I have seen (and had) in Thailand do not reduce interest if paid off earliy, so makes no sense to do so.

Based upon the above... the LTF is only arround till 2016 so that means all funds from LTF could be withdrawn in 2021 without any penalty. At that time you will be 34 and will likley be thinking about buying a house/condo; you could use this money for that purpose

The RTF of course should be maxed out every year and not touched until you are ready to retire.

Of course if marraige or kids are in your future... then it all could change very quickly..

Some good advice in there. I would disagree with the RTF though for 2 main reasons:

1) Linking a 25 year old expat into a Thai pension style investment which is accessible 30 years later at age 55 is far too inflexible, with the following just some of the drawbacks to that inflexibility including:

- Life changes a lot and often unexpectedly and there's no guarantee he will be in Thailand or even anywhere near at that age, so it's good to be able to take it with him when he leaves or at least a max of 5 years wait like an LTF. In a global world portability is important.

- It's also highly likely he might want to use that money for something else well before then, eg downpayment on a home, dowry, new car, even a kid's education. There will be many financial items he may want before then. RTF for a 25 year old Thai maybe, but I'd caution against it for a 25 year old foreigner / expat.

- It reduces chances of taking early retirement before 55. He's a smart guy starting planning early, and may decide he wants financial independence earlier

- There's also a narrower range of investment funds for RTFs than non-RTF funds

2) The tax benefit won't be that great on an RTF if he's already taking out an LTF. The marginal rate will be about 10% on most of it, and 10% doesn't really compensate for the lack of flexibility.

[59,500 x 12 = 714k. He'll have around 90k of allowances, so taxable on 624k. First 150k @ 0%, next 350k @ 10%. Next 124k @ 20%. So for tax relief, he's already using the lion's share of his 20% band on his LTF, and particularly if he maxes his LTF out at 15% of salary, the effective/marginal tax relief on RTF therefore drops into the 10% band.

{BTW Just thought that he didn't say whether income is gross or net, so may be more available on the 20% band, but probably not all, and even then it's still a poor trade off for locking up your money for 30 years}

There's also a good chance he could put it in a tax efficient vehicle elsewhere, particularly if he moves country, or at some point he could be in a higher tax bracket and gains higher relief.

Edited March 28, 2012 by fletchsmile

[jji23]

Hi

Thanks for all your advice. I had a look last night and as many of you guessed the interest is fixed from the date of the agreement, so the only thing paying it off early would do is free up more funds which is in its own right quite desirable. But, like most people have said I need a fund of money for emergencies etc. I'm going to open a fixed deposit 12 month account today at bkk bank it seems the offer 3 % which is ok, I think. Anyone know any better fixed deposit accounts?

I did have a look at the RMF but balked at the 55 years old minimum withdrawal. While I do plan to stay here, I can't be sure what might happen in the future and wouldn't feel comfortable being locked into that. Does anyone know if one of Aberdeen, ING or Standard Chartered offer anything similar which can move with me?

I'm beginning to build up knowledge of the stock markets and would like to build a portfolio once I have an emergency fund. I'm not to sure about Thai Stocks! But that is what I'd most likely start doing once I have an emergency fund and more financial intelligence.

My income is net, after tax. Part of it comes from private tutoring though if you know what I mean!

[fletchsmile]

Hi

Thanks for all your advice. I had a look last night and as many of you guessed the interest is fixed from the date of the agreement, so the only thing paying it off early would do is free up more funds which is in its own right quite desirable. But, like most people have said I need a fund of money for emergencies etc. I'm going to open a fixed deposit 12 month account today at bkk bank it seems the offer 3 % which is ok, I think. Anyone know any better fixed deposit accounts?

...

For an emergency fund easy access is generally better. If an emergency happens the problems with a fixed deposit are possible breakage/termination fees on the term if cancelled early plus the hassle of breaking it which will probably involve going to a branch, rather than using an ATM card or internet banking transfer for an easy access account with immediate access. People often post on here best interest rates from banks and worth checking these out, as you should be able to get easy/immediate access and around 3%. StanChart for example has an eSaver account (internet banking only - no ATM) with 3% interest and immediate access.

Aberdeen, ING, Stan Chart all offer ranges of plan mutual funds/unit trusts similar to LTF/RMFs. At the end of the day LTFs and RMFs are just mutual funds/ unit trusts with a tax wrapper around them in return for various restrictions.

Edited March 29, 2012 by fletchsmile

[mezcal]

It is true that the amount of interest you will pay will not be reduced for early repayment. But, bear in mind that if you wait another 4+ years, the vehicle depreciation also comes into account, which could be substantial by that time depending on the vehicle (and other factors).

So if you have the money to pay it off sooner rather than later, you do gain a financial benefit.

[technologybytes]

It's not unusual for vehicle loans anywhere in the world to have pre-loaded interest. With such loans you can contact the lender to get a price for paying off the loan, but increasing payments may not be of any benefit.

I understand what people say about pay off early because it's a depreciating asset, but it's not really an issue as it's just a financial liability, the car value will depreciate if you pay it off or not at the same rate.

I'd start to save and get a bit of a rainy-day fund before I'd worry about paying off the car, then once you have enought of a fund to keep going for 6 months if you lost your income, that's the time to start to think about investment vs loan repayment, but only repay the loan early if there is a financial advantage to doing so.

The fact that you are thinking about this now is good, starting to think about your financial future at 25 is a huge advantage compared to thinking about it at 35 or 45. Above all, try to ensure that you finances improve month on month and that you don't go backwards by taking on any more debt.

Look out for a book called "I will teach you to be rich" by Ramit Sethi, it's really aimed at guys about your age and shows the benefits of starting investing early even if you only have a small amount to invest each month. I wish I read it when I was 25, only the author probably wasn't born then ! But, get that emergency fund behind you first.

[jji23]

Hi

Thanks for all your advice. I had a look last night and as many of you guessed the interest is fixed from the date of the agreement, so the only thing paying it off early would do is free up more funds which is in its own right quite desirable. But, like most people have said I need a fund of money for emergencies etc. I'm going to open a fixed deposit 12 month account today at bkk bank it seems the offer 3 % which is ok, I think. Anyone know any better fixed deposit accounts?

...

For an emergency fund easy access is generally better. If an emergency happens the problems with a fixed deposit are possible breakage/termination fees on the term if cancelled early plus the hassle of breaking it which will probably involve going to a branch, rather than using an ATM card or internet banking transfer for an easy access account with immediate access. People often post on here best interest rates from banks and worth checking these out, as you should be able to get easy/immediate access and around 3%. StanChart for example has an eSaver account (internet banking only - no ATM) with 3% interest and immediate access.

Aberdeen, ING, Stan Chart all offer ranges of plan mutual funds/unit trusts similar to LTF/RMFs. At the end of the day LTFs and RMFs are just mutual funds/ unit trusts with a tax wrapper around them in return for various restrictions.

I did some research and the Standard Chartered eSaver account seems like a much better option. Opening 1 later today. Are you a financial adviser?

[fletchsmile]

Hi

Thanks for all your advice. I had a look last night and as many of you guessed the interest is fixed from the date of the agreement, so the only thing paying it off early would do is free up more funds which is in its own right quite desirable. But, like most people have said I need a fund of money for emergencies etc. I'm going to open a fixed deposit 12 month account today at bkk bank it seems the offer 3 % which is ok, I think. Anyone know any better fixed deposit accounts?

...

For an emergency fund easy access is generally better. If an emergency happens the problems with a fixed deposit are possible breakage/termination fees on the term if cancelled early plus the hassle of breaking it which will probably involve going to a branch, rather than using an ATM card or internet banking transfer for an easy access account with immediate access. People often post on here best interest rates from banks and worth checking these out, as you should be able to get easy/immediate access and around 3%. StanChart for example has an eSaver account (internet banking only - no ATM) with 3% interest and immediate access.

Aberdeen, ING, Stan Chart all offer ranges of plan mutual funds/unit trusts similar to LTF/RMFs. At the end of the day LTFs and RMFs are just mutual funds/ unit trusts with a tax wrapper around them in return for various restrictions.

I did some research and the Standard Chartered eSaver account seems like a much better option. Opening 1 later today. Are you a financial adviser?

Haha. No, I'm not a financial adviser - just someone who has taken an interest in my money and followed these things for a few decades, with a few related professional qualifications and finance career experience thrown. I like the idea of financial independence.

Funnily enough I did think about becoming an IFA. In a place like Thailand though there are just so many sharks that muddy the waters, making it difficult for real professionals as everyone gets tarred with the same brush. Plus I don't like the conflict of interest of selling a product to someone when I know they can get a similar and often better product for lower cost or even free elsewhere.

[fletchsmile]

Hi

Thanks for all your advice. I had a look last night and as many of you guessed the interest is fixed from the date of the agreement, so the only thing paying it off early would do is free up more funds which is in its own right quite desirable. But, like most people have said I need a fund of money for emergencies etc. I'm going to open a fixed deposit 12 month account today at bkk bank it seems the offer 3 % which is ok, I think. Anyone know any better fixed deposit accounts?

...

For an emergency fund easy access is generally better. If an emergency happens the problems with a fixed deposit are possible breakage/termination fees on the term if cancelled early plus the hassle of breaking it which will probably involve going to a branch, rather than using an ATM card or internet banking transfer for an easy access account with immediate access. People often post on here best interest rates from banks and worth checking these out, as you should be able to get easy/immediate access and around 3%. StanChart for example has an eSaver account (internet banking only - no ATM) with 3% interest and immediate access.

Aberdeen, ING, Stan Chart all offer ranges of plan mutual funds/unit trusts similar to LTF/RMFs. At the end of the day LTFs and RMFs are just mutual funds/ unit trusts with a tax wrapper around them in return for various restrictions.

I did some research and the Standard Chartered eSaver account seems like a much better option. Opening 1 later today. Are you a financial adviser?

Haha. No, I'm not a financial adviser - just someone who has taken an interest in my money and followed these things for a few decades, with a few related professional qualifications and finance career experience thrown. I like the idea of financial independence.

Funnily enough I did think about becoming an IFA. In a place like Thailand though there are just so many sharks that muddy the waters, making it difficult for real professionals as everyone gets tarred with the same brush. Plus I don't like the conflict of interest of selling a product to someone when I know they can get a similar and often better product for lower cost or even free elsewhere.

BTW Start early, take an interest in finance, educate yourself like you've already started doing and you'll reach a point where you yourself would be the best financial advisor you could want when it comes to managing your won money.