WWYD? Car payment question

[sunlover13]

We just bought a used truck. We are financing approx. $22,000 on it at 4.39% for 48 months. It comes out to roughly 2,500 interest over the 4 yrs.

We have the $ to pay it all off, but DH thinks we should keep the $ as an emergency fund in case something goes wrong w/ the house, etc. There are some other big things going on like we are having a baby and if we don't find daycare, I might not go back to work. We have $45,000 sitting in an ING. It has been earning about $40 per month over the last year w/ that balance in it. So, that comes to less than $2000 of interest earned in 48 months.

Our car payment is going to be around $500 per month.

The $45,000 is not the only savings we have. We have another $15,000 in a money market. So, closer to $60,000 in the emergency fund.

So, what would you do?

Pay off the loan or keep the emergency fund as is and make car payments & pay the interest.

 

[Cheshire Figment]

If your emergency fund will cover more than six months of expenses I think you should take the excess and pay off or down the truck.

 

[lovesmurfs]

Pay it off, and then put what you would have paid for the car note back in savings and rebuild it.

Worst case scenario and you have no more money coming in, a paid off car is one less bill you'd need to pay.

 

[QVCshopper]

Hmmmm... Do you have IRAs or savings for your kid's college? Honestly, I don't think $20K+ is enough for an emergency fund, unless you have some Roth IRAs backing it up. If you asked before buying the truck, I would have said to put more down in the first place to keep your monthly bill lower, especially with another baby.

Update: Seeing as you have Roth IRAs, I would pay it off. You can always access your initial investment in a true emergency.

 

[Swimalie]

Pay it off. We're in a similar situation as you financially and we're about to pay cash for a new car. The only difference is that I don't work, I stay at home with our 5 year old.

 

[tinatark]

I know Dave Ramsey wouldn't agree, thinks loan interest is evil, etc. Many of the responses you get will be based on his advice - I do agree with many of his principles, not all of them.

Can you afford to live comfortably including the car payment with your husband's income alone? If yes, I would leave it as is - once your income is gone, adding to the savings account will be next to impossible. The interest charges you will incur are quite low - only $500 more over 48 months than what you would earn in savings.

 

[ssawka]

I would take a hybrid approach. If you have more than 6 months of savings, set aside 6 months of savings and pay any excess towards the truck. Then whatever "extra" money you bring in put it towards the truck. This will enable you to pay off the truck early, but not expend your savings in the process. I understand the desire to get it paid off ASAP to avoid the interest, but if you expend all your savings in the process and then have an emergency, you will most likely incur some other kind of debt (Credit Card, HELOC, or Personal Loan) With the exception of a HELOC, other forms of debt are likely to have a higher interest rate than the 4.9% car loan. As for the HELOC, it all depends on if you are lucky enough to still have equity in your house.

 

[sunlover13]

Emergency fund is $60,000, not $15,000 to the poster above. Sorry,forget to quote it.

Could we live on my husband's income alone? Probably not which is why I plan on going back to work after the baby is born, but we need to find daycare. Actually, my plan is to go back 3 days a week instead of 5 days a week. It will be a cut in salary, but I will still have a salary coming in.

I'm going to talk to him about paying it off. I hate to think we are going to pay interest when we don't need to.

To the poster who asked, yes, we have Roth IRA's, 401K's, and college savings programs for both kids, even though we only have 1 kid right now.

So, financially, we are in very good shape right now. It is the unknowing future come January that we are unsure of........

Wish me luck in talking him into it.

Thanks for the advice about putting the $500 back into the ING monthly. We put extra $ in there every so often, but not on a regular basis.

We do put $ into our IRA's, college savings programs, and money market fund regularly though.

 

[DawnM]

I would pay it off, then use what you would have paid in car payments, including the $50/mo in interest, back into the savings account. Pay yourself that $2,500!

 

[smkiya]

Pay it off, and then put what you would have paid for the car note back in savings and rebuild it.

Worst case scenario and you have no more money coming in, a paid off car is one less bill you'd need to pay.

I agree with this. Why lose money in interest, regardless of the rate. $500/month is a lot of money. If you choose to be a stay at home mom, that's $500 less per month you will need. Until you make that decision you can put that $500 a month into an interest earning account. Even 1% gain is better than 4% loss.

 

[ICF]

What I would have done originally is take $11K or so out of savings/emergency fund and put that towards the car so that you financed only $11K. That would have made your monthly payments drop to a couple hundred $$s.

You could then always pay more each month over that to pay it off sooner depending on your other life situations.

 

[bumbershoot]

I would pay it off, then use what you would have paid in car payments, including the $50/mo in interest, back into the savings account. Pay yourself that $2,500!

Agreed. 100%.


Then you're paying NO interest, and slowly earning back the 22K's amount of interest in the savings account. vs paying interest and earning interest, and coming out negative $500 in 2 years.

 

[Kathi OD]

In today's economy you need more than 6 months expenses in your emergency fund. Anyone who thinks otherwise is fooling themselves. Many people who suddenly find themselves out of work, are out for a year or more.

Not knowing your entire financial situation, I'd pay off the truck. That will still give you 38,000 in the emergency fund. As another PP suggested, take what you would pay on the loan and put that amount back into the emergency fund.

Hopefully, you won't have to worry about relying on that emergency fund any time in the near future.

 

[Microcell]

OP is this your first baby? I know plenty of kids go to daycare, and I fully intended to do the same when I had my first. Then she came and I couldn't let her go! You might want to consider the "falling in love" syndrome some of us get into. If it is your second, third then you already know what you can live with.

I also would want to avoid paying the interest when you have $60,000 in the bank and pay the car payment back to savings, even if I did struggle with and ultimately decide to stay home with my child. One less payment to bog things down.

I am working hard to get out of debt 12 years after bringing my girl into the world because of the choice I made to stay home. I thought it meant living on credit. Hindsight is 20/20 and I know now that I could have budgeted better and that no, if we couldn't afford it, she didn't need Ice Skating lessons at 3!

Now I did not say this to instigate a stay at home vs daycare war, I just wanted OP to consider that, because I had no idea I would feel as strongly as I did about wanting to be at home with my kids until pretty late in the pregnancy game.

Good luck on your decision!

 

[cm8]

In today's economy you need more than 6 months expenses in your emergency fund. Anyone who thinks otherwise is fooling themselves. Many people who suddenly find themselves out of work, are out for a year or more.

Not knowing your entire financial situation, I'd pay off the truck. That will still give you 38,000 in the emergency fund. As another PP suggested, take what you would pay on the loan and put that amount back into the emergency fund.

Hopefully, you won't have to worry about relying on that emergency fund any time in the near future.

:

 

[disneychrista]

Pay it off, and then put what you would have paid for the car note back in savings and rebuild it.

I agree!

You are losing 500 if you don't.

 

[jodifla]

We just bought a used truck. We are financing approx. $22,000 on it at 4.39% for 48 months. It comes out to roughly 2,500 interest over the 4 yrs.

We have the $ to pay it all off, but DH thinks we should keep the $ as an emergency fund in case something goes wrong w/ the house, etc. There are some other big things going on like we are having a baby and if we don't find daycare, I might not go back to work. We have $45,000 sitting in an ING. It has been earning about $40 per month over the last year w/ that balance in it. So, that comes to less than $2000 of interest earned in 48 months.

Our car payment is going to be around $500 per month.

The $45,000 is not the only savings we have. We have another $15,000 in a money market. So, closer to $60,000 in the emergency fund.

So, what would you do?

Pay off the loan or keep the emergency fund as is and make car payments & pay the interest.

These days, I'd keep the cash on hand. That's low loan rate.

 

[jodifla]

Isn't $32,000 enough cushion in the bank? That is what we would have left if we paid the loan off now in full. We would have approx. 6 months of our emergency fund left.

There are people in our neck of the woods who've had no work for almost 5 years. So no, I wouldn't count on it being enough.

 

[gina2000]

"You can live in your car but you can't drive your house....."

I'd pay off half the loan up front. This way you don't deplete your cash cushion (which is a decent amount of $$$ but not enough should you lose your job for any extended period of time.)

I'd also make extra payments if your situation allows for it.

We have paid cash for our last few cars but we are very mindful of the fact that money is quickly depleted for medical benefits (COBRA) and living expenses should job loss become an issue. I'd rather have $$$ to pay a mortgage and risk having a car repoed than lose the house.

 

[purplegirl247]

I don't know if you have another car payment or if you even need an excellent credit score at the moment, but I just paid my car off last month and my credit score promptly dropped 25 points (we hadn't changed anything else at all, even by a penny). I was shocked. Just something to consider...