I have been contemplating taking the plunge and paying off my car loan. For simplicity, let's say I owe $27,000 (it is actually a little less). The interest rate on this loan is 8.43% and the monthly payment is $555.91. I have been thinking about taking the $27k from my savings and paying off the loan. This will free up a huge amount of money each month to use for paying off my remaining credit cards and increasing my savings and investments. I have about $39k in cash in a checking/savings account paying 5.05%. I know purely looking at the numbers, it makes sense to pay off the car loan as the rate is higher than my savings rate. But for me, there is a psychological aspect. I am so scared of running out of money and having to live paycheck to paycheck or even worse, losing my job and not having money to pay my bills that I am willing to keep this debt for a little longer (no more than 2 yrs). I feel I need to have at least $35k in cash at all times to feel somewhat secure should something major happen. I also have an investment property which adds to the need to have more liquid cash.


If you were me, what would you do?????

10 comments

  1. Patrick // July 24, 2007 at 9:18 PM  

    Tough call. $35,000 is a lot of money to keep around as cash. It is probably a lot more than you would need as an emergency fund (3-6 months living expenses). But if you feel you 'need' to have it around, then by all means do what makes you feel comfortable.

    The other option is paying off a substantial portion of it and refinancing the difference which would lower your payments. Your bank may be able to work with you on this if you show them your plan. You could also potentially lower your payments. Just an idea.

    Good luck!

  2. lowman25 // July 24, 2007 at 11:41 PM  

    1) Before paying anything off, make sure to read the language on the car loan. Some loan agents write the loan so that the payoff amount includes the interest you would have otherwise paid if you hadn't made the lump sum payoff. For example, a five year, $50k loan at 10% would mean monthly payments of $1062.35. After 1 year, you'd owe $41,886.62 in principle. However, your payoff amount would be $50,992 ($1062.35*48). Most people in the car industry are pretty sleazy, be careful.

    2) I understand wanting to have more than 6 months of living expenses, but what about opening up a home equity line of credit you'd promise yourself you'd only use in an emergency/loss of job. If you have the discipline, it might help you pay off your debts earlier and sleep well at night.

    Anyway, good luck from a 29 year old soon to be not single guy!

  3. Dave // July 25, 2007 at 1:17 AM  

    Pay it off. There is a huge difference between 8.43% (not tax deductable) and 5.05% (taxable).

  4. SingleGuyMoney // July 25, 2007 at 7:10 AM  

    > Patrick - That is an idea I had not considered before. Thanks.
    >lowman25 - Thanks for your idea of reading the car loan language. I'd rather not have to rely on credit in the event of an emergency.

  5. Anonymous // July 26, 2007 at 6:27 PM  

    Is the car loan your highest interest rate? If it is, then pay it off. If it is not, you need to pay off the stuff that is frist. For example, if you have a credit card with a 12% interest rate, it needs to be paid off... work your way down the interest rate list.... Keep enough cash on hand for 30 days of living and some credit cards without a balance for emergencies. You should be set.

  6. SingleGuyMoney // July 26, 2007 at 6:31 PM  

    Anonymous - The car loan is my highest rate debt at 8.43%. As far as keeping only 30 days cash, I think that would be a risk I am not willing to take. If I have a major emergency, I want to pay cash only and not use any credit. My highest rate on my credit card is 2.99% fixed for life.

  7. lowman25 // July 26, 2007 at 10:16 PM  

    Not to sound antagonistic, could you please explain to us why you want so much cash on hand? Is your job really that unstable? Do you not have equity in your home that you could tap into in the event of an emergency? I understand that you've had problems with credit cards in the past, but it appears you've learned your lesson. It sounds as if you are putting too much emotion into your financial decisions.

    Try looking at it this way, if you could go back and tell your 20 year old self what not to do, what would you say? Try to act like you're 40, and imagine what advice you'd give to your 30 year old you.

  8. SingleGuyMoney // July 26, 2007 at 10:29 PM  

    Lowman 25 - For some crazy reason, having alot of cash on hand makes me feel more comfortable. Luckily, my job is pretty stable. For example, if I had the amount of debt I have with no cash, I probably would worry myself crazy. As far as home equity, I have about 10k in my primary home but i am upside down in my rental property.

    The advice of my 40 yr old self giving my 30 yr old self is a great example and I had never thought about it like that.

  9. lowman25 // July 30, 2007 at 2:50 AM  

    You said, "if I had the amount of debt I have with no cash, I probably would worry myself crazy". But if you reduced your cash, wouldn't you pay down your debt? Sure you'd have less cash on hand, but you'd also have less debt.

    So why do it? I've yet to see a 'regular guy' like us consistently make more in their investments (especially conservative ones like moneymarket accounts) than it costs them in debt interest. You are essentially borrowing $27k from yourself at 8.43% and loaning it to your bank at 5.05% (where the governement can tax your profits). That's over $900 a year excluding taxes!

    If you make $66k a year, your take home pay can't be more than $48k. Assuming you live below your means, 6 months of living expenses, at a maximum, is $24k. Take everything above that and pay down your debt with the highest interest. Your job is secure, you would be left with a nice cushion (which you could probably rebuild quickly if it took a hit in an emergency), and you'd help your net worth grow. You did a post on your list of vices...at $75+ a month, might want to add 'hoarding cash' as one of them..............

  10. SingleGuyMoney // July 30, 2007 at 5:49 AM  

    lowman 25 - You have a great point. Please remember though, I have a rental property so I need to keep alot more cash on hand to make sure I can cover unexpected vacancies, emergency repairs, etc.

    And yes, I should have added hoarding cash as one of my vices!!! I didn't even think about that one.