Pay off the car loan or keep a savings?

[Ygle]

Between the recent fed tax money and some extra work we now have more than enough money in the bank to pay off our 5.49% car loan, but with other things finances are getting tight and I do know we will have a couple of big expenses looming in our future (maybe it won't be so bad, though) with home repairs and medical bills. I'm just not sure how to look at this... I hate having money in the bank with this big debt on my back, but I don't want to be kicking ourselves later since we've got this pretty good rate, I think. How can I make this decision... any thoughts, suggestions?

I keep finding myself back at the computer with my finger on the mouse button ready to hit transfer and then I break out in a sweat and close the browser... what to do? What to do?

[Jilian]

If you can pay off your loan and still have at least $1,000 left in your emergency fund then I'd pay off the loan. You likely aren't getting 5.49% interest on your EF, so you are losing money each month by hanging onto the loan and just leaving money in an EF.

I'm guilty of the same thing. I just feel more comfortable with a bigger EF. It is hard for me to let go of savings to pay off debt too but I'm getting better at it.

[EmsMom]

If you can pay off the whole car loan, I say go for it. Especially if there is a little bit extra. Then your monthly car payment can go directly into the bank. You will save the 5.49% interest on the car loan and get a tiny bit of interest on your savings. But, if that money is only going to whittle down the car loan a bit I probably wouldn't. A savings cushion is very nice to have and 5.49 isn't an outrageous interest rate. If you are close to paying off the loan with what you have saved, I might try to squeeze a bit extra from the budget every month towards paying down the car loan and when it got lower, go ahead and pay it off with savings. In the long run, of course you are better off without paying 5.49% interest. But if you trade it for a credit card loan at, say 15% or more interest because you have no savings and you had an emergency, that would be worse.

[Ygle]

Originally Posted by Jilian

You likely aren't getting 5.49% interest on your EF, so you are losing money each month by hanging onto the loan and just leaving money in an EF..

This is what keeps bringing me back to that transfer button..

Originally Posted by EmsMom

In the long run, of course you are better off without paying 5.49% interest. But if you trade it for a credit card loan at, say 15% or more interest because you have no savings and you had an emergency, that would be worse.

This is what I'm really struggling with... I'm just so afraid of that happening and for some reason right now it seems really challenging to get our budget in order, I feel like more is going out than coming in, I just don't have a complete grasp on how fast that is happening so it's nice to have that buffer in the bank. But really, we should be striving to get those outgoings down, but then again we do have some projects that need to be done and I have no idea what the cost will ultimately be, but then we can be putting those payments towards that...

I know I should be *ecstatic* (and really I am) that I have this opportunity to make this choice but for some reason it's giving me way more stress than when we didn't have this extra money, crazy!

Thank you so much for the feedback, getting other perspectives is so wonderful and helpful, I greatly appreciate it!

I think I'm just going to do it...

[Ironica]

One way to go about it is, split the difference... pay off the car loan twice as fast, but put a chunk in savings too.

[SleeplessMommy]

If you are getting 1-2% on your savings account, your actual interest rate on the car is only about 4%. How much emergency fund is enough for you? In canse of accident or vehicle failure can you get a replacement?

[Ironica]

Oooh... something else to consider: if your car loan requires you to carry more insurance than you normally would (lower deductible, higher coverage, etc.) you may save on insurance by paying off the loan.

[SuzyLee]

I would want one months expenses at least as an EF. I would consider sending everything except 1 months expenses.

[shelbean91]

How far in the future are the other bills? I'd pay off the car loan, but keep making 'payments' to a savings account. Then use that account to pay the other bills when they come up.

[phathui5]

Things you know are coming up are things that I would start budgeting for now, not plan to use savings for. I'd plan the projects out, work up cost estimates, etc. Then you know how much you'll need instead of the cost hitting you later.

[Free Thinker]

I dont have enough info to make a decision based on what you wrote. What are the upcoming expenses? Would you still have $$ left in an EF? How much (a months expenses, 3 months)? I think I would pay the car off, but that's because I hate having any debts, and I'd rather make due w/ what I've got and not have to worry about the car payment each month. One thing I would make sure of is that ther eis no fee for paying the car off early. Congrats on having to make a hard decision