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Saving money or paying off car sooner

May 27 2015 14:08

A Fin24 user wants to know if it is better for him to save his extra money each month or to pay off his car sooner and save on interest. He writes:

I have a vehicle financed and pay about R3 500 per month as instalment. It is financed for 72 months at 12% fixed.

Almost a year has passed since I bought the car. I am also putting roughly the same amount into a seperate savings account each month with the aim of accruing enough for a deposit on property within the next two to three years.

My question is: Should I rather opt to pay off the car as soon as possible to save on interest by adding my about R3 000 savings on a monthly basis into repayment of the car, or should I rather carry on as I am doing now?

READ: Earning well, yet no vehicle finance

Gerald Mwandiambira, strategist for the South African Savings Institute (Sasi), responds:

Based on your information, you will still pay an amount of R288 702.28 for your vehicle over the next 60 months of which R78 702.28 is interest.

If you save the same amount at the current average savings account interest rate of 4%, at best you will save R232 819.91 of which R22 819.91 is interest over 60 months.

By paying R3 500 extra you will pay off your car loan 30 months - or about two and a half years - earlier and save R36 355.53 in interest.

It makes more sense to pay extra into the car as the interest saved is significant. Plus, when the car is paid, if you invest R7 000 for 30 months at just 5%, you will save R224 125.07 and remember your R36 355.53 interest saved by paying the car off early.

That means you can save almost what you owe in total on the car right now after paying it off.

The car paid off ahead of schedule, will also improve your credit scoring for when you look to buy a house. You will be financially secure in just two and a half years, creating wealth.

In an ideal world you ought to save money all the time, as you are doing now, to retain a cash emergency fund.

The numbers used are for illustrative purposes.

ALSO READ: Car finance and your credit rating

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vehicle finance  |  savings  |  money  |  money clinic
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