How To Save Money By Paying Off Your Car

A Fin24 reader recently asked if he should save or pay off his car sooner. We look into both alternatives to find the answer.
U
Melissa
Cohen
Published: Friday, December 23rd 2016
General
Saving can, understandably, be quite a sore point for most people right now. Besides the fact that South Africa has one of the worst savings cultures in the world, all the escalations – in taxes, interest rates, the cost of living – certainly haven't helped. With all these ‘extra expenses’ to factor in, it can be hard to scrape together enough to put away to constitute a healthy savings habit. But, figuring out how to save money when the going gets tough, is how the tough keep going. Car Insurance Comparison(4)

Can Paying Off My Car Sooner Save More Money Than Just Saving?

Recently, a Fin24 reader posed the question, should he pay off his car sooner? Or should he keep paying the minimum and save what he can towards a goal of accruing a deposit for a property? It’s not-so-common knowledge that paying the minimum installment on any debt is good, but not good financial practice. Paying off any debt earlier than the full payment term means a saving on interest. The reader was one year into his 72 months finance period on a car, paying a monthly installment of R3,500. His interest is fixed at 12%. He is also saving roughly the same amount as his car installment, in a savings account, with a two to three year savings trajectory. He wanted to know if he should continue as he is already going, or if he would save more on interest pumping his monthly savings into his car.

South African Savings Institute (Sasi) strategist, Gerald Mwandiambira, provided the following information:

Based on the readers’ figures, he would still pay an amount of R288 702.28 for his vehicle over the next 60 months. R78 702.28 of that amount is interest. The interest rate of the average savings account is 4%. A third of the interest rate on the motor finance. With that rate, over 60 months, the best possible outcome would be a saving of R232 819.91. Only R22 819.91 of that amount would be interest accrued. If he pays the extra R3,500 on his car loan, his car would be paid off in 30 months – half the time. That’s about two and a half years earlier, with a saving of 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. Also, remember your R36 355.53 interest saved by paying the car off early,” advises Mwandiambira. Save more money by saving on your car insurance. CLICK BELOW to compare car insurance quotes across a variety of providers.

Added Benefits

Mwandiambira adds that the reader could save almost what he owes in total on the car right now after paying it off. He also said that the car paid off, ahead of schedule, will be a significant boost to his credit score. Something that would really come in handy when he applies for a home loan.
“You will be financially secure in just two and a half years, creating wealth,” says Mwandiambira.