Author Topic: Pay off Car Loan or have the Security of Cash?  (Read 4441 times)

jess

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Pay off Car Loan or have the Security of Cash?
« on: April 30, 2013, 07:22:48 PM »
We owe a little less than $4,000 on our 2006 Scion XB (mileage around 70,000). We have about $5,400 cash in the bank.

A LITTLE BIT OF BACKGROUND: I AM 30 & NOT YET RETIRED! ACK!  I am also married with 2 kids. We are both employed, but work hourly. Make about $40,000 yearly together. I had a baby last fall, followed by some health problems, so I do have quite a few medical bills (despite health insurance). We spend ~$4,600 on "Health" in the last year (medical bills, insurance) & I still owe more (not sure the exact total of medical bills owed). We also owe on our house ($42,000) & have student loans (my husband's, in IBR right now). As far as the car goes, the monthly payment is $230. I usually pay $300/month.

MY DILEMMA: Having cash in the bank is a huge safety net for us, but I also want to *crush* our debt and begin saving & investing.

MY QUESTION: How much of a cushion is reasonable? Is $5,000 too big of an emergency fund? Too much to just have chillin' in the checking account (2.5% interest to us every month)?

(Unfortunately, as of right now, we do not save that much every month. A very small amount.)

DK

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Re: Pay off Car Loan or have the Security of Cash?
« Reply #1 on: April 30, 2013, 08:35:37 PM »
Where are you getting 2.5% interest on a checking account?

I think to get the best advice, give all the loan amounts and interest rates, and a rough idea of how much you spend in a month, and people will be able to help out more.

Personally I think that's a bit much to have in the bank with an auto loan out...but after paying off the car that will only leave you with about 1K and +$300 month coming in to try to build it back up...with the little info presented, I'd wait a few months to knock down the loan amount a bit more, then pay it off so you will still have a bit of a emergency fund afterwards.

daverobev

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Re: Pay off Car Loan or have the Security of Cash?
« Reply #2 on: April 30, 2013, 09:04:37 PM »
Can you get a line of credit? If so, and probably even if not, I'd just kill the debt..

Stachsquatch

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Re: Pay off Car Loan or have the Security of Cash?
« Reply #3 on: April 30, 2013, 09:13:43 PM »
I would kill off that car debt. You'll be able to more rapidly accumulate a new emergency fund and you'd still have over a grand in the bank.

jess

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Re: Pay off Car Loan or have the Security of Cash?
« Reply #4 on: April 30, 2013, 09:30:05 PM »
Okay, we owe less than $4,000 on car. The car loan interest rate is 5%.
Owe $42,000 on house. (We are about to refi, not sure what our new interest rate will be. Our credit is not that great, but not terrible. Maybe we should ask for $4,000 more for the car?? I don't know if we'd qualify or not. I would think so just because of the amount of improvements we've done to the house.)
Hubs owes ~$55,000 on student loans (in IBR Plan) (Interest rate 2.39%, according to my hubs)

We have $5,400 cash. The 2.5% interest rate for checking is at our local credit union.
We have a very low-limit credit card. Only goes up to $300. We rarely use it, always pay it off.

According to Mint.com, over the last 6 months our monthly income has averaged $3,757. Our monthly spending has averaged $3,581.

I know we could trim some expenses, especially once we're not doing house renovations/repairs so often. (Although, maybe that day never comes in 80 year old homes?) We also have a not-running 1996 Mercedes that we could sell & I'm sure some other things too.

bdc

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Re: Pay off Car Loan or have the Security of Cash?
« Reply #5 on: April 30, 2013, 09:36:53 PM »
Keep the money.  (a) You need it for emergencies; you apparently have almost no credit and almost no assets. (b) You might need to put it into your refinance to qualify for a better mortgage.

Another Reader

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Re: Pay off Car Loan or have the Security of Cash?
« Reply #6 on: April 30, 2013, 09:57:16 PM »
You have outstanding medical bills of unknown amounts.  In your shoes, I would put money aside for those and see if you can negotiate them down because of your financial circumstances.

What is the purpose of refinancing?  Will you lower the rate/payment?  I would never tack a car loan balance onto a mortgage - you will be paying for that car for 30 years.

Until the medical bill issue is completely known, I would continue to pay down the car as scheduled and save money.  Do a re-fi if it will reduce your rate and payment.  Then work on ways to raise your income.  Can your husband take on a side job?  Can either of you get extra hours?  "Crushing" your debt when it includes $55k in student loans, medical bills, and a car payment is not going to happen on your current income.  Yes, cut your spending, but you guys really need to increase your income.

AllChoptUp

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Re: Pay off Car Loan or have the Security of Cash?
« Reply #7 on: May 01, 2013, 09:46:03 AM »
Definitely refi if it lowers payments and interest rate.  Pay off the car with savings.  Cancel cable, switch to pre-paid cell phones, all that great MMM stuff to improve savings.  Sell the Mercedes and anything else you don't need.

I agree with Another Reader - income is far too low.  If your hubby has $55K in education loans then he has a college degree and should try to get something (anything) paying a reasonable salary.  Do you also pay for childcare?  If yes then it's too much :).  Stay home while hubby works for a while.  Maybe take on another child or two to supplement income (in-home daycare).

Other suggestions:  Stop improving the house beyond basics to maintain safety/basic systems.  Do everything you can to improve your health and avoid those bills. 

Of course these are just ideas...best of luck to you.

Spork

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Re: Pay off Car Loan or have the Security of Cash?
« Reply #8 on: May 01, 2013, 10:12:36 AM »
Personally, I don't like the idea of debt when it comes to depreciating assets.  (I don't really like debt at all, but that's sort of a different topic.)  My opinion is that if you can't buy a car with cash, you can't afford the car.... but ... it's too late for that.

The first question I'd have is: is there any penalty (explicit or implicit) in paying it off?  Some loans (especially in the auto industry) are structured with prepayment penalties or they've structured the loan such that there is an equal amount of interest spread out to each payment.  If you have such a loan -- where there is no advantage of pre-payment -- I'd just sigh and keep writing a monthly check.  Otherwise, I'd pay it off (or pay at least one extra large chunk).

MY QUESTION: How much of a cushion is reasonable? Is $5,000 too big of an emergency fund? Too much to just have chillin' in the checking account (2.5% interest to us every month)?

You'll get differing opinions here, but I'd say $5k is probably way too low of an emergency fund.  I keep 18 months expenses.  It doesn't have to be in a checking account... but somewhere (relatively) stable.  (And some folks will think I am a total looney for keeping that much for emergencies... It boils down to what makes you sleep at night.)