Chaosplay

This morning I got checks from my credit card company to use against my credit line. They were offering 0.00% APR until August 2010. Then it goes back to my normal credit card APR of 12%. My current auto loan interest is about 7%. Sounds like a deal.

But, of course, in fine print there was transaction fee of 3% of total check amount. So I did some math:

• I owe about $9000 on my car.
• 3% of 9000 = $270
• I would need to pay off this amount in 9 months to avoid much higher APR.

Now let’s look at what would happen if I pay off my current loan in 9 months at 7% APR.

1. Month 1: Balance: $9000, Payment: $1000, Interest paid: 9000 * 0.07 / 12 = $52.50
2. Month 2: Balance: 8000+52.5 = $8052.5, Payment: $1000, Interest: $47
3. Balance: 7052.5+47 ~= 7100, Interest: $41.5
4. 6100+41.5 = $6141.50, Interest: $35
5. 5141.5+35 = 5176.5, Interest: $30
6. 4176.5+30 = 4206.5, Interest: $24.5
7. 3206.5+24.5 = 3231, Interest: $19
8. 2231+19 = 2250, Interest: $13
9. 1250+13 =  1263, Interest: $7
10. 263+7 = 270, Payment: 270, Interest: $1.5
11. Total interest paid: $271

So it is just a dollar more to continue with my current loan, but this gives me piece of mind that I don’t have to make huge monthly payment to avoid much higher interest rate.

Above calculations are a little rough, you will probably want to use some online calculator to figure out more precise numbers like: this one.

Yesterday, I talked about how I was going to save and invest most of my income. Some of my friends asked me why not pay off my car first. So I did some calculations. My car loan is at 7.69% interest. My savings APR is 3.49% at HSBCDirect. And I am expecting 8-10% return on my investments in long run.

Based on some rough estimates, I can payoff my auto loan in 10 months. I will save $1,400 in interest. I will have $5,000 less in my savings, $5,000 less in regular investments, and $5,000 less in IRA. My net worth wont change much with either option.

Based on interest and return rates, it is clear that I am better off by investing with expected return rate of 8%. However, I am not really saving money in my saving account. Then on the flip side, the security and peace of mind that liquid asset provides has a lot of value too.

After some thinking I have decided to cut savings by 96% and double my car payments each month. By doing so, I will save $1,000 in interest and payoff my loan in 20 months. I will have $8,000 less in my savings. So in order to recover lost savings I will have to save extra $400 for 20 months after I finish car payments.

*Please note that this is just my situation. Everyone’s situation will be different.