Do You Still Have to Pay Off a Low-Interest Car Loan in 3 Years?

Marky Mark’s question is up next. That’s a fun one. “Feel it, feel it.” Is it still imperative to pay off a car loan in 3 years if it is a low-interest rate, less than 2%, especially when high-yield savings accounts earn greater than 4% in a lot of cases right now? The arbitrage seems too good right now to pass up. So what do you say to Marky Mark? Did Mark ask if it’s imperative to pay off in less than three years? He said in three years, less than three years, three is in three years. He didn’t give any specifics about the price of the car; he just said the interest rate was lower than 2%, which is a low-interest rate.

“Do me a favor real quick, BR. I want you to answer this question, this question within a question. This is like Inception. What was the purpose of 20/3/8 ? Like, walk through why do we want 20/3/8 to be a thing, and then I’m going to piggyback on top once you say that thing.”

“Yeah, 20/3/8 is supposed to be your bridge to reliable transportation so that you can actually get to your job. That’s it. Because that’s the beginning of your wealth-building journey. And I have found out so many of the gurus of personal finance expect you to drive around in the $2,000 clunker, which, by the way, I don’t even know if you can buy those right now. And there’s even funny; I had a listener send me a great clip out there on YouTube. I think there’s a few cuss words, so be careful, but it talks about my $1,000 car, $2,000 car. It’s a funny music video. You know, go check that out because it is so hilarious. I want you to be thinking Corolla, not Land Cruiser. This is not supposed to be your arbitrage moment to maximize your financial decisions. I don’t think it’s worth the hassle factor of that. Plus, it also goes against the spirit, the heart of what this bridge is supposed to be creating for you. Cars are financial napalm. Don’t use 20/3/8 , you know, just like Dave Ramsey has ‘Dave-ish.’ Mhm. Don’t do 20/3/8 -ish. I love it. I mean, do it; do it right. So it’s supposed to be a bridge. What that does not suggest is that you can’t pay cash for a car. You certainly can. It does not suggest that you can’t pay a car off more quickly than three years. You certainly can. But it’s supposed to be a bridge.”

“Now, I will confess. I’m going to confess, right? Right. I like you being transparent. Well, here’s what we say: you can’t go more than three years. That’s the no-no. You can’t go out more than three years. You can’t buy a luxury vehicle; you can’t do that. But I’ve done this before, Bo, where I was enticed, right? Somebody said, ‘Hey, you know what? If you buy this car, 0.9% financing, 1.9, 2.9%, I’ve done this before. I said, ‘Okay, I can pay 1.9% on this car, and I know that my high-yield savings account is something like 3% or so, you know, something like that, and this is a reliable piece of transportation. I had the intent that, you know what? I’m just going to take advantage of this low-interest rate. I’m going to have cash sitting in my high-yield account, and there’s going to be an arbitrage opportunity. But I’m only going to do that for the 36 months because I understand the rule. I can’t go past that. I have set out with that intent before, and I think, frankly, Marky Mark, if you said that you were doing that, I’m not going to fight you a ton on it.

However, this is what I’ve done every single time. I get eight months in, 10 months in, maybe 11 months in, and it just drives me nuts. I just hate having the car payment. So when I have the wherewithal and the ability to just pay it off and pay off that car loan, I find that’s just so much easier to do that. It’s one less thing. I can pay off that car loan; I can then take whatever I was throwing towards that payment, and I can go have that money working for me elsewhere. So is it imperative to pay off in less than three years? I would say it depends on your situation. Where the imperative lies and what you are doing with your dollars and what you are not doing with your dollars. What you cannot do is stretch it out over three years. And I would ask the question, is that arbitrage deal that you’re paying between your cash making 5%, whatever in trein, your car payment is, is that more advantageous than the 88 times over arbitrage of you paying off that car and then sending all of your money to go earn a rate of return commiserate with your wealth multiplier and really start amping up your army of dollar bill. And don’t forget the three years paid off plus the 8% of income are supposed to work together, and the fact that they also limit how big of a bite at the apple you get on this grace rule essentially because I’m worried somebody takes advantage of the arbitrage. They think it’s the arbitrage oasis where they get a 2.9% rate, and they go, ‘Well, yes, well, if it was great for three years, why not four years? Why not five years? Why not six years?’ And then you’re not only using the low-interest rate to then justify buying a much larger purchase price because it spreads out that 8%. No, those work together because I don’t want you buying the big fat car earlier than you’re supposed to.

It’s supposed to hurt because your money doesn’t need to be in a car. It needs to be working for you through the Financial Order of Operations so your army of dollars can work harder than you can with your back, your brain, and your hands because there’s a better way to do money, and it’s not sitting in that car.”