Job Security v. Payoff Car

[MtnGal]

Hi all,

I'm fairly new around here and thought I'd ask for some advice. Luckily my parents had good money practices and taught me well. I have never had student or credit card debt and about two years ago started buckling down and saving. However, last January I bought my Subaru Outback with a loan. Stupid stupid loan. The car I am very happy with as it fit my requirements of AWD with decent gas mileage, good reliability and a warranty. My last car - a 2001 Jetta - did not cut it for where I live and had had numerous expensive issues well beyond my very limited capabilities.

So here is the issue. My company went up for sale a few months ago and a decision could be made this month, next month or in another 3-6 months. Because of this, my job security is unknown and a job change could require a significant move.

Should I pay off my loan with cash on hand or continue paying down as much as possible a month until there is more news on the job front?

Currently, I have 12k left on the car at 2.9% (until finding this blog last month I wasn't super aggressive with paying this off). I have 15k in my emergency stash (7k in savings). I also am on track to max out my 401k at the end of the year. As I see it, I have three options.

A) Continue paying an extra 500-900 a month on the loan until I know more about my job/have a new one.

B) Turn down my 401k contributions to the match amount and put the extra 600/month after tax towards the loan

C) Pay off the remaining part of the loan, hope I don't get laid off soon and rely on credit cards beyond the 3k if I do.

I would prefer to hold onto the car for the next 10-15-20 years or however long it will run. Advice?

[dragoncar]

I like liquidity, so I'd keep the loan

[icefr]

I like option A. If it turns out your job is secure, you can always pay back the rest of the loan with your savings. 2.9% also isn't the end of the world and you are attacking it vigorously. I also like leaving the 401(k) contributions where they are since you may not get that opportunity back if you lose your job.

That said, we also don't know if 15k = 1 month's expenses or 15 months' expenses.

C) Pay off the remaining part of the loan, hope I don't get laid off soon and rely on credit cards beyond the 3k if I do.

"rely on credit cards" sounds pretty sketch to me.

[smedleyb]

Get rid of the loan, now.

[Dynasty]

Since your employment security is up in the air right now, it seems like the best idea would be to keep as much as your cash as liquid as possible.

I'd be more concerned with having lots of cash on hand to be able to support living expenses, including paying off a 2.9% 12k loan balance.

If your job turns out to be secure, spend your extra money on maxing out your 401K. Your future self will prefer that. You'll never get that tax benefit from a paid off car. 

Then pay your car off and drive it for the next 15 or 20 years.

And avoid VWs like the plague.

[sibamor]

I agree with all the comments to keep your assets liquid for the next few months.

[thurston howell iv]

I like the idea of liquidity also but my thinking would be to sell the car to be rid of the loan and buy a cheaper car (ie: under $5k). You can find used outbacks in this price range. Save the rest of your cash and sock away as much as you can to weather the potential storm.

[Arbor33]

I'd figure out your monthly expenses before you make any decisions.

In what little job experience I have, I've noticed it takes about 1.5-2 months, on average, for a company to make a hiring decision. That is, from the point of application to sitting at a desk. There's obviously plenty of variables at play there, but my point is this. You need to be able to get by should you find yourself looking for a new job. Focus on that.

It may be in your best interest to actually start applying to jobs right now. If you find your current job is secure, you can always say no. There's no harm in that. Who knows? You may even end up finding a better job.

As most others are saying, I support the liquidity philosophy that's being mentioned here. Definitely don't pay off the 2.9% loan to end up having debt on a credit card that could be 10x that interest!

[dizzean]

In times of instability in your job you won't regret having a good chunk of change to fall back on if things go south.

However, selling your car and buying a reliable used car is a really good idea.

[Spork]

I was just about to suggest what dizzean said:

option D: sell the car and buy one you can afford.  (My humble opinion is that if you can't pay cash for a car, you can't afford it.)

Depending on price, this could give you both liquidity and less liability and less outlay on a monthly payment.

[MtnGal]

Thanks! As much as I'd love to have the loan gone tomorrow, I'll be keeping my 8 months expenses liquid, paying down the loan quickly and continuing to look for jobs.

And avoid VWs like the plague.

Completely agree with this.

[Left]

Keep the car for now, but I wouldn't pay back the loan aggressively. At 2.9% with $12k left on it, you'd be paying about $350 to the loan interest. That isn't "too much" so I'd make the normal payments but not add more to it. And redirect the extra $500-900 into a high interest savings to build a bigger buffer. The interest that you build will cut down on the extra cost of the loan interest later as well. And if you need money later you can always sell the car then, it won't depreciate that much in a few months time. You may find a job that pays the same/more/keep current job and not have to worry about this.

edit: depending on your job, you may find a new one quickly. I mean as bad as the economy is, it isn't like there aren't any jobs, if you don't try to "settle" on one that fits your current job title. I mean I waited tables to tide over for a while before and on tips alone I was making pretty good money. Sure it wasn't as cushy as a "real" job but it did it's job to tide me over. So if being jobless is a concern, it might be a misplaced one if you look outside what you are comfortable with/and willing to take a temporary pay cut.

edit: you didn't mention it, but depending on how much your rent/mortgage is, that might be a bigger concern than a car loan. Since a monthly payment is a monthly payment, loan or other wise. And having the extra money saved up instead of going to pay off loan would help keep a roof over you in the worst case and you are jobless for a while.

But keep the 401k as it is, don't touch that and keep making payments into it. The money will be there if you REALLY need it, but until you are swimming over the waterfall (and not just heading towards it), I'd suggest not touching the 401k.

[dragoncar]

I'll note that I once paid off a 2.8% car loan (just cause I didn't like it "hanging over my head") and regretted it later when my checking account was yielding 5%.