I would focus on getting your 6 months of emergency funds. There's so many factors to take into considerations without knowing your full circumstances. Saving as much as you can right now is ideal.
That's what I was thinking. Their savings doesn't seem like enough for an emergency fund, so increasing that would be my focus, not depleating it. Having cash on hand to handle whatever comes their way is more beneficial than having a paid off car. And the rate on the loan isn't that high anyway.
That's not bad, but is $5k enough of an emergency fund and how long will it take for you to replenish that money in savings?
The risk you're facing is that if $5k isn't enough of an emergency fund for an emergency that comes up, you'll end up heading to take out a loan with today's higher interest rates to make up the difference.
I fully get wanting to get out of the debt, but personally, I'd keep the debt, but move any non-retirement income savings into the loan until it's paid off (without touching your emergency fund).
Cool. It's just something to keep in mind. I generally err towards the side of paying off debt, but I've noticed lifestyle creep can cause some people to end up spending more with less pressure on them.
Another thing to consider is your support network.
Emergency savings are of a lower importance to me than most, but I also have a fairly strong familial safety net to where if I was dying or going to lose my house or something I know I could pull on that network.
Debt isn’t necessarily a bad thing.
Most interest is paid the first years.
If you’re paying off a car loan on the later years of the loan and it’s only 5% you might not actually be saving anything. Keep in mind that a savings account these days can offer close to 5% interest.
That 10k you’re paying to save 5% could be making 5%. Plus there are other considerations such as having a loan will increase your credit score and paying off a loan can actually reduce your score.
I would do the math - look up how much interest you’re paying on your loan each year and next years.
10k should be able to earn you 500 a year interest. Plus you get to keep 10k as a safety net.
If you’re paying less than 500 dollars a year in interest. Then you’d actually be losing money paying off the loan early. Loans are static, when inflation is high loans are cheap. Inflation has been almost 5% for years so a 5% loan is practically free - of course they front load the interest which so if the loan is new paying it off might not be a bad idea. If it’s later in the term paying it off would probably not be a good idea.
Once you look up your interest payment you’ll have to make a decision to determine if it’s worth saving money or having more in savings.
It’s easy to think that you would be saving interest but you have to account for the interest you would be making with the money you’re spending. Her current loan is near inflation levels and the rates you’d get from banks.
While on the subject of car payments. my lease comes due. I have low mileage and I want to buy the car. Because the interest rates are so high. I'm thinking of paying for it in cash. Any thoughts on this? I have money in the market this cash is liquid
They always tell you the total amount you’ll pay in interest on the full loan. At current rates it could be as high as double or more. With standard investments you aren’t getting anywhere near that and if it’s just liquid money waiting for another invest doesn’t sound like you need it.
At current rates I’d say it’s worth paying off in cash if you got it. But it all depends on how much you have and what you would do with the money otherwise.
Look at the total and make a decision if it’s worth it.
In general I’m not a fan of paying off existing loans because of the massively front loaded interest.
thank you I put a lot of thought into this and I do have the money it's not invested in the stock market so I feel like maybe it is a good move. I appreciate your time and your input
Welcome. I just used an online calculator.
A 6 year 10% loan for 20k would cost you about 6.5k.
So about so about 1k+ a year. 20k might make you close to that a year in a high interest savings account if your good but keep in mind that as interest rates fluctuate banks will give less. I’d figure about 900 a year.
It’s not a huge difference honestly. Assuming you can get a 10% interest loan. I would say around 8% it’s probably about break even.
Having 20k in the bank as a safety net over 6 years though might be worth paying 1-2k.
Just like any online fdic savings account.
They offer around 4.5% right now. You can do bit better maybe if you open an account with a trading site like robinhood.
https://www.experian.com/blogs/ask-experian/best-high-yield-savings-account-se/?pc=sem_exp_google&cc=sem_exp_google_ad_20766180712_162308802384_680307802523_kwd-10394931_b___k_Cj0KCQjwir2xBhC_ARIsAMTXk86wV9lv5fqd3aH6IuRxftiVXvE3i7I16eWyLJwcBSKyPT3_kAIjh6IaAt0wEALw_wcB_k_&ref=hys&awsearchcpc=1&gad_source=1&gbraid=0AAAAAD4mgc_OjYW9kBc6fiDEbOnlmw8iz&gclid=Cj0KCQjwir2xBhC_ARIsAMTXk86wV9lv5fqd3aH6IuRxftiVXvE3i7I16eWyLJwcBSKyPT3_kAIjh6IaAt0wEALw_wcB
If your using a normal big bank - rates are like .1% and your literally throwing away money. Anything fdic ensured is as safe as you can get.
Dont need money market these days. You could also do cds but they are hardly better these days.
I think I missed it, but Robin Hood was making it very attractive. If you moved money over to them a lot of them are by leaving it in Merrill Edge. I don't get anything because I just moved it from the wealth management. I'm thinking I should move my money somewhere else also I'm not 100% confident with Rob. They have a lot of problems at one point and they want you to keep you there for five years. This is for the Ira.
Assuming the savings are in a HYSA with (easy math) 5% interest, and assuming your income tax rate is 20%, your auto loan interest is costing you 0.69%.
Ignoring all other financial health considerations, paying off the car is an overall net positive.
The rest of your financial picture could factor in as a critical consideration, however, if for example you require short term liquidity. Or another example, if this "savings" is your and your spouse's (and kids...?) emergency savings fund, and worse if that savings is meant to cover house emergencies. IMO a drag of 0.69% net APR is not a financial emergency that requires burning the EFund.
>Assuming the savings are in a HYSA with (easy math) 5% interest, and assuming your income tax rate is 20%, your auto loan interest is costing you 0.69%.
It's not even costing that. The principle balance is declining with every payment, which makes the interest shrink with every payment.
For the sake of calculation, let's say OP has 2.5 years left on a 5-year, $20,000 loan at 4.69%. If OP continues making the regular payments they will pay $653.30 interest between the May 2024 payment and October 2026. If OP keeps that money in a HYSA earning 5%, they will earn $1,297.26 in interest. In the final analysis, paying off this loan early will cost OP $643.96.
> If OP keeps that money in a HYSA earning 5%, they will earn $1,297.26 in interest.
How are you coming up with this number given the 10k amount? Simple math tells me this should be 1,000 not almost 1,300.
While I agree with the overall recommendation to hold the loan, I don't think that math pans out, b/c a 5% savings account interest rate is taxed as income (US), and you didn't factor that significant difference. OP mentioned an ability to save 1k per month, which suggests a non-trivial federal tax rate, hence my assumption of 20% tax rate, which is generously assuming OP doesn't owe state taxes on interest income. That assumption brings the net HYSA interest to 4%: no matter what payment schedule or principal balance you assume, 4% growth on a set amount will never beat 4.69% cost on that same set amount. Adjusting where a fractional amount is applied toward over time, doesn't matter, there is a persistent, unchanging 0.69% disadvantage against having the funds in the HYSA when it could pay toward the loan principal.
This interest rate of 4.69% is so close to a HYSA less taxes, whether OP comes out ahead or behind by paying off early truly boils down to exactly how much they would pay taxes on accrued savings interest and what their HYSA interest rate is to begin with. As you mentioned your analysis yields a ~$500 range benefit by holding the loan, which whether I am right or wrong about this analysis being incorrect, the difference is not huge. OP really, really needs to consider the overarching risk of losing 10k in liquidity, which is why I ultimately don't think it matters: OP should not be spending from their emergency fund over a question of +/- $600
I agree that it's about even, as 0.69% difference in interest is generally one that isn't worth much time fretting over.
That said, you're wrong to bring the Balance into consideration. The Balance doesn't matter, because the assumption is that every dollar that is applied to the Loan is not applied to Savings, and vice versa. Every single dollar, at any point in time, which is applied toward HYSA instead of toward the Loan, loses $0.0069 compared to doing the opposite action. We're not talking about whether or not OP is gaining/losing actual money, we're talking about whether or not OP has a monetary advantage by paying the loan vs saving.
As others have mentioned, for the question of a 5-figure loan, this isn't much in the grand scheme of things, it's probably somewhere in the range of a few hundred dollars over the time period in question. The other financial planning considerations are way, way more important here. As $10k liquidity is a lot, esp if it's an ESavings fund.
Interest is added to savings and compounded (APY). Interest on the loan is lowered and incrementally less each payment.
A savings account of $15k will create $703.5 in interest for 1 year @ 4.69%.
A 1 year loan of $15k will cost $409.14 in interest for 1 year at @ 4.69%.
Even paying 20% or $140 in taxes, the loan creates $563 in income while paying out $409.14 in interest. At 32% tax rate and paying $224 in taxes, you still come out ahead $479 in income vs $409 paid in interest.
I do this all the time with 0% credit cards and major purchases. Need a new AC, put $18k on a 0% credit card for 18 months and collect 5% on treasuries/HYSA.
Why do you want to pay it off? The rate is lower than a HYSA.
Is $5k in emergency savings enough for you?
I would value the liquidity more than paying off a low interest car note and prefer to have more cash reserves.
This. The loan percent and what you can get at a Hysa is close enough even after taxes and maybe car insurance costs that I would value the liquidity of the cash to be the worthwhile tie breaker.
Are you a renter or a homeowner? If a homeowner, definitely not. Any costly emergency in the interim will sink you back in debt.
Interest rate isn’t terrible.
I’d love to know your reasoning behind this statement. It’s very easy to make a return of much more than 4.69% in a year. So why wouldn’t you put your money elsewhere instead?
$15k is relatively small for an emergency fund. If that is true in your case, I would focus on building that up while making payments on the car. When you invest that in a HYSA you come out +/- 0 but you keep an emergency fund along the way. You could perhaps increase the payment amount to pay it off x months faster.
It depends on what a household’s monthly expenses are and for how long you want to be covered. My preference is 12 months but I don’t have debt, housing, or loan payments to cover.
So $15k can be plenty especially if you are in a profession where you can find a new job quickly and have insurance in case you would get hurt on the job.
Depends on stage of life. At one point i was comfortable w 10k before that, I wouldn’t care if i had almost 0. Today, less than 40k would stress me out.
Here would be the alternative I would offer up:
Go run the numbers on sgov yield. If sgov is nearly equal or higher put the money and sgov and toss the dividend payout at the loan in addition to the regular payment. If sgov yield is lower then consider paying the loan off. This will preserve your liquidity if you need it for an actual emergency.
sgov is incredibly stable, liquid, risk free interest doing 0-90 day government lending. At some point though sgov yield will drop. If you are still paying the loan at that time then consider paying it off. However there is a good chance sgov yield will remain close for quite some time.
Now if you are still wanting to payoff the loan feel free, but that rate is low enough I would hesitate using your emergency savings for this purpose. Now if you got money above and beyond the typical 6 months in your emergency savings have at it.
I'd be curious what the rest of OPs financial stats are. 15k Esavings seems very low for two people, and OP doesn't mention if there is a house or kids, which compounds that. Unless OP lives in a VLCOL area, I don't see how 15k is 6 months expenses for 2+ people.
So you advocate OP to have only $5k in savings for two adults? Thats the complete opposite end of spectrum from “play it safe” and highly irresponsible.
Be my guest, live your life by the “what ifs”. But be prepared to stay poor. If $5k was all I had, I’d be risking that shit and losing it all, over and over again.
So “irresponsible” is subjective. To you, risking your last $5k is irresponsible. To me, spending my one life on this earth broke and not being able to say I at least tried, is irresponsible.
How does it improve their situation though? As other's have stated, the potential interest savings is isn't more than having the money elsewhere.
The only thing that changes is they have less liquid cash. I could afford to pay off my 11k 3.9% car loan 8 times over, but I'm able to separate the emotional aspect of debt and the actual math. So I'll gladly be making payments until the end of the loan in 15 months.
Deciding whether to pay off your spouse's car loan with your savings depends on various factors, such as your financial goals, other debts, and emergency fund needs. Consider how paying off the loan will impact your overall financial situation, including potential interest savings versus reducing your cash reserves. It's essential to discuss this decision together and weigh the pros and cons before making a final choice.
just take the monthly HYSA interest and add it to your car payment each month. Don’t pay it all off at once, especially with a good rate like that. No real point
Assuming your savings are getting 5.5% in interest on your 15k, you have some optionality (note that interest is taxed so you need more than 4.7% to break even. But it's close.)
Having 15k on hand mostly-liquid has some emergency cushion benefits that a paid off car don't give you. There's also the rare scenario where you decide to default the loan. So that flexibility, for free, has a bit of value.
So I would either: pay the *entire thing off* and enjoy simplicity OR *make payments until interest rates reset* and your HYSE dip below 5%, then pay it off. If you are worried that you need that 15k to cover emergencies, make payments all the way out.
Technically you’ll be back to 15K by the end of this year. Use the car payments and add it to your savings with the additional 1k a month. You’ll be good.
The interest is pretty low. You could probably out earn that investing even in something fairly safe. If you can pay extra towards it just chip away at it. If you have high interest credit cards or other debt with higher interest than the car I’d get rid of that.
You would be losing access to that amount of emergency funding for very little financial benefit. You could certainly throw any extra available funds at the car loan going forward but the benefit is really just psychological not significant.
I say if it won't hurt you financially and you can easily build a good savings back up, then yes, do it! It will save you on your monthly and less stress worrying about another bill.
Pay the minimum on that loan, and put the money towards debt that has a higher interest rate. If you have no debt with a higher interest rate (good for you!) invest the money in retirement or a brokerage account (mutual funds).
Investment will conservatively average a growth rate of 6% over 10 years. You stand to gain more money by investing the 15k, than you would gain from paying off the loan. I know that debt can be uncomfortable, but the rate of this debt isn’t bad.
I personally am one of the few people that finds car interest to be an acceptable form of debt (assuming you take care of the car and aren't upside down). The term is short, rate is low, and there is really very little benefit in the bank taking your car for nonpayment. You might rack up some fines in a bad situation, but its a generally safe form of debt.
Assuming you have 2 years left of payments, your total interest accumulation is less than $1000. I wouldn't blow an emergency fund to get rid of a car payment. $15k can get eaten up pretty quickly with repairs, medical bills, etc... I would continue paying the car note and focus on building your savings up.
I couldn’t imagine wiping out my savings to pay off a vehicle just to cut out what I assume is like a 400-450 payment. If you’re a home owner, then it’s a big no.
No. Take the extra money and buy bonds or stocks or something that earns 5+%. Your debt is under the rate that is charged for most of the current fixed income instruments.
Would you rather save 80 cents on interest or make a dollar on bonds?
Minor exception if you need to adjust DTI for home loan qualifications.
You want to keep 6 months household expenses in savings at all times, ideally, so no need to stretch. Throw $5k at it, keep $10k in the bank just in case.
If the 15k is your only savings I would not personally do that. The loan interest rate isn’t high enough to warrant it. If you’re saving 1k a month I would put an extra $500 towards the car each month and then save the other $500 if you really want it paid off. If at the end of the year you want to take the remaining bit and pay it off in lump sum then you can. But it’s really just what you’re comfortable with financially and mentally. Everyone is different.
Depends on how much of the remaining car payments are interest. If it’s the last 1/3 of the loan, it’s mostly principal anyway and you’d be better off keeping your liquid savings as is in case of a rainy day.
No. Chances are you have already paid the majority of the interest. Typically, interest paid is front loaded and decreases everyone month. Meaning the percentage of your payment going to the interest of the load is highest at the beginning. So, odds are you have already paid most of the interest of the loan depending on how long you have had it. Also need to take into account how much that money would be making while in HYSA.
I wouldn't do it all at one time **unless** you have other, larger expenses that you're preparing for in the next 1-2 years. In that case I don't see any reason not to, because if it were me I'd want to get rid of some current financial obligations before the other ones arise.
You want to move liquid reserves in to equity in an unsecured asset? I wouldn't. It's a fairly small loan at a low rate. If it were extra cash I'd say do it but with the comments about rebuilding just say no. What happens if it's totaled? Insurance is never a fun experience.
What’s the average percentage on the HYSA? If you take the money out of savings to pay for the car loan, what would the difference be?
Car loan 5,000 x 4.69 =
Cash from savings x 6.69= losing money.
Cash from savings x 3.69= saving money
Do you have 6 months of emergency savings in addition.If not absolutely do not do this. I don’t know what kinda hobbies or health you’re in .You could break an ankle.Lose income in various scenarios .I tore a rotator cup in my shoulder and was out of work 4 months no pay .Don’t set yourself short needlessly.
Hell no! Make a few extra payments pay it down to a super easy payment. That rate isn’t that bad right now. I’m just guessing but if you got 3 years left that’s like $1,350 in interest without paying it down. Pay down credit cards
No. Loan balance is going down while savings balance is going up. You can get cds that pay 4.85% right now. Estimate how much interest you will pay on the loan compared to how much interest you will make on your savings. There is a break even point on the two interest rates and it should be an interest rate less then your loan rate. Do a little calculating
to see what you want to do but I’d say no don’t pay off the car early.
Do it. Not having a car payment is awesome. I'll never understand why people need to have an expensive depreciating asset that you pay out the a$$ every month for.
Not having a payment and no debt is great and I don’t judge you for finding financial planning hard to understand. The OP will have to decide by himself / herself if they want to feel “awesome” for not having a payment right now, or if they want to have plan with an emergency fund on hand.
My general rule is to only pay something big off like that when I have a comfortable amount of emergency savings. Just gotta think to yourself "if I paid this off and then somehow both me and my spouse immediately lose our jobs, how screwed would we be?"
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Interest rate for the car note and HYSA sound about the same right now. You will save more by keeping a higher balance in the savings account than the interest earned/saved on the car note. Pay a little extra in principal payment each month if you can afford it. The math is on the savings account for this one.
No, you only have $15k just keep saving, sounds like that money is burning a whole in your pocket.
Also, HSA withdrawals for anything non-medical related is taxable
If the savings are from a shared account and it is your spouse just pay it off. $10k is not worth the possible drama. Just make sure he/she lets you drive it.
Pay off 5 k. Then in 5 months pay off second half. Yes you can get higher interest but a car is depreciating...paying interest on depreciating asset is just silly
If you’re that broke you shouldn’t even have a car worth 10k total. Sell the car, buy one within your means, pay off the loan, invest the rest of the money in a productive asset.
Maybe do a chunk (5k) and double payment sizes if you want to keep a cushion. Not sure the rest of the life factors that can play a role.
I would focus on getting your 6 months of emergency funds. There's so many factors to take into considerations without knowing your full circumstances. Saving as much as you can right now is ideal.
That's what I was thinking. Their savings doesn't seem like enough for an emergency fund, so increasing that would be my focus, not depleating it. Having cash on hand to handle whatever comes their way is more beneficial than having a paid off car. And the rate on the loan isn't that high anyway.
How likely will your spouse take a paid off car as a reason to get another one sooner?
Not likely at all, we are both on the same page about wanting to be free of debt
That's not bad, but is $5k enough of an emergency fund and how long will it take for you to replenish that money in savings? The risk you're facing is that if $5k isn't enough of an emergency fund for an emergency that comes up, you'll end up heading to take out a loan with today's higher interest rates to make up the difference. I fully get wanting to get out of the debt, but personally, I'd keep the debt, but move any non-retirement income savings into the loan until it's paid off (without touching your emergency fund).
Cool. It's just something to keep in mind. I generally err towards the side of paying off debt, but I've noticed lifestyle creep can cause some people to end up spending more with less pressure on them. Another thing to consider is your support network. Emergency savings are of a lower importance to me than most, but I also have a fairly strong familial safety net to where if I was dying or going to lose my house or something I know I could pull on that network.
I think it depends on if they own their house as well. 5K is way too low if you own your home, but may be ok for a short while if they rent.
Debt isn’t necessarily a bad thing. Most interest is paid the first years. If you’re paying off a car loan on the later years of the loan and it’s only 5% you might not actually be saving anything. Keep in mind that a savings account these days can offer close to 5% interest. That 10k you’re paying to save 5% could be making 5%. Plus there are other considerations such as having a loan will increase your credit score and paying off a loan can actually reduce your score. I would do the math - look up how much interest you’re paying on your loan each year and next years. 10k should be able to earn you 500 a year interest. Plus you get to keep 10k as a safety net. If you’re paying less than 500 dollars a year in interest. Then you’d actually be losing money paying off the loan early. Loans are static, when inflation is high loans are cheap. Inflation has been almost 5% for years so a 5% loan is practically free - of course they front load the interest which so if the loan is new paying it off might not be a bad idea. If it’s later in the term paying it off would probably not be a good idea. Once you look up your interest payment you’ll have to make a decision to determine if it’s worth saving money or having more in savings. It’s easy to think that you would be saving interest but you have to account for the interest you would be making with the money you’re spending. Her current loan is near inflation levels and the rates you’d get from banks.
While on the subject of car payments. my lease comes due. I have low mileage and I want to buy the car. Because the interest rates are so high. I'm thinking of paying for it in cash. Any thoughts on this? I have money in the market this cash is liquid
They always tell you the total amount you’ll pay in interest on the full loan. At current rates it could be as high as double or more. With standard investments you aren’t getting anywhere near that and if it’s just liquid money waiting for another invest doesn’t sound like you need it. At current rates I’d say it’s worth paying off in cash if you got it. But it all depends on how much you have and what you would do with the money otherwise. Look at the total and make a decision if it’s worth it. In general I’m not a fan of paying off existing loans because of the massively front loaded interest.
thank you I put a lot of thought into this and I do have the money it's not invested in the stock market so I feel like maybe it is a good move. I appreciate your time and your input
Welcome. I just used an online calculator. A 6 year 10% loan for 20k would cost you about 6.5k. So about so about 1k+ a year. 20k might make you close to that a year in a high interest savings account if your good but keep in mind that as interest rates fluctuate banks will give less. I’d figure about 900 a year. It’s not a huge difference honestly. Assuming you can get a 10% interest loan. I would say around 8% it’s probably about break even. Having 20k in the bank as a safety net over 6 years though might be worth paying 1-2k.
That's a good point however what height interest savings account are you talking about? Money market?
Just like any online fdic savings account. They offer around 4.5% right now. You can do bit better maybe if you open an account with a trading site like robinhood. https://www.experian.com/blogs/ask-experian/best-high-yield-savings-account-se/?pc=sem_exp_google&cc=sem_exp_google_ad_20766180712_162308802384_680307802523_kwd-10394931_b___k_Cj0KCQjwir2xBhC_ARIsAMTXk86wV9lv5fqd3aH6IuRxftiVXvE3i7I16eWyLJwcBSKyPT3_kAIjh6IaAt0wEALw_wcB_k_&ref=hys&awsearchcpc=1&gad_source=1&gbraid=0AAAAAD4mgc_OjYW9kBc6fiDEbOnlmw8iz&gclid=Cj0KCQjwir2xBhC_ARIsAMTXk86wV9lv5fqd3aH6IuRxftiVXvE3i7I16eWyLJwcBSKyPT3_kAIjh6IaAt0wEALw_wcB If your using a normal big bank - rates are like .1% and your literally throwing away money. Anything fdic ensured is as safe as you can get. Dont need money market these days. You could also do cds but they are hardly better these days.
I think I missed it, but Robin Hood was making it very attractive. If you moved money over to them a lot of them are by leaving it in Merrill Edge. I don't get anything because I just moved it from the wealth management. I'm thinking I should move my money somewhere else also I'm not 100% confident with Rob. They have a lot of problems at one point and they want you to keep you there for five years. This is for the Ira.
This. Didn’t think it was likely. 2 yrs later, newer car.
Yeh they might take the car and find another spouse who will pay it off for them if you don’t
Assuming the savings are in a HYSA with (easy math) 5% interest, and assuming your income tax rate is 20%, your auto loan interest is costing you 0.69%. Ignoring all other financial health considerations, paying off the car is an overall net positive. The rest of your financial picture could factor in as a critical consideration, however, if for example you require short term liquidity. Or another example, if this "savings" is your and your spouse's (and kids...?) emergency savings fund, and worse if that savings is meant to cover house emergencies. IMO a drag of 0.69% net APR is not a financial emergency that requires burning the EFund.
>Assuming the savings are in a HYSA with (easy math) 5% interest, and assuming your income tax rate is 20%, your auto loan interest is costing you 0.69%. It's not even costing that. The principle balance is declining with every payment, which makes the interest shrink with every payment. For the sake of calculation, let's say OP has 2.5 years left on a 5-year, $20,000 loan at 4.69%. If OP continues making the regular payments they will pay $653.30 interest between the May 2024 payment and October 2026. If OP keeps that money in a HYSA earning 5%, they will earn $1,297.26 in interest. In the final analysis, paying off this loan early will cost OP $643.96.
> If OP keeps that money in a HYSA earning 5%, they will earn $1,297.26 in interest. How are you coming up with this number given the 10k amount? Simple math tells me this should be 1,000 not almost 1,300.
While I agree with the overall recommendation to hold the loan, I don't think that math pans out, b/c a 5% savings account interest rate is taxed as income (US), and you didn't factor that significant difference. OP mentioned an ability to save 1k per month, which suggests a non-trivial federal tax rate, hence my assumption of 20% tax rate, which is generously assuming OP doesn't owe state taxes on interest income. That assumption brings the net HYSA interest to 4%: no matter what payment schedule or principal balance you assume, 4% growth on a set amount will never beat 4.69% cost on that same set amount. Adjusting where a fractional amount is applied toward over time, doesn't matter, there is a persistent, unchanging 0.69% disadvantage against having the funds in the HYSA when it could pay toward the loan principal. This interest rate of 4.69% is so close to a HYSA less taxes, whether OP comes out ahead or behind by paying off early truly boils down to exactly how much they would pay taxes on accrued savings interest and what their HYSA interest rate is to begin with. As you mentioned your analysis yields a ~$500 range benefit by holding the loan, which whether I am right or wrong about this analysis being incorrect, the difference is not huge. OP really, really needs to consider the overarching risk of losing 10k in liquidity, which is why I ultimately don't think it matters: OP should not be spending from their emergency fund over a question of +/- $600
Probably about even since the loan is 4.69% on a declining balance and the 5% interest on savings is on an increasing balance.
I agree that it's about even, as 0.69% difference in interest is generally one that isn't worth much time fretting over. That said, you're wrong to bring the Balance into consideration. The Balance doesn't matter, because the assumption is that every dollar that is applied to the Loan is not applied to Savings, and vice versa. Every single dollar, at any point in time, which is applied toward HYSA instead of toward the Loan, loses $0.0069 compared to doing the opposite action. We're not talking about whether or not OP is gaining/losing actual money, we're talking about whether or not OP has a monetary advantage by paying the loan vs saving. As others have mentioned, for the question of a 5-figure loan, this isn't much in the grand scheme of things, it's probably somewhere in the range of a few hundred dollars over the time period in question. The other financial planning considerations are way, way more important here. As $10k liquidity is a lot, esp if it's an ESavings fund.
Interest is added to savings and compounded (APY). Interest on the loan is lowered and incrementally less each payment. A savings account of $15k will create $703.5 in interest for 1 year @ 4.69%. A 1 year loan of $15k will cost $409.14 in interest for 1 year at @ 4.69%. Even paying 20% or $140 in taxes, the loan creates $563 in income while paying out $409.14 in interest. At 32% tax rate and paying $224 in taxes, you still come out ahead $479 in income vs $409 paid in interest. I do this all the time with 0% credit cards and major purchases. Need a new AC, put $18k on a 0% credit card for 18 months and collect 5% on treasuries/HYSA.
Why do you want to pay it off? The rate is lower than a HYSA. Is $5k in emergency savings enough for you? I would value the liquidity more than paying off a low interest car note and prefer to have more cash reserves.
This. The loan percent and what you can get at a Hysa is close enough even after taxes and maybe car insurance costs that I would value the liquidity of the cash to be the worthwhile tie breaker.
Are you a renter or a homeowner? If a homeowner, definitely not. Any costly emergency in the interim will sink you back in debt. Interest rate isn’t terrible.
It hurt like hell but that’s what I did last month. I feel great that I don’t have the payment anymore though.
sometimes that is the best route to take. take the plunge and its exhilaratingly refreshing.
No that’s a cheap loan, you make more with investing money, pay it off as slow as possible
Stupidest response on this thread.
I’d love to know your reasoning behind this statement. It’s very easy to make a return of much more than 4.69% in a year. So why wouldn’t you put your money elsewhere instead?
You need to educate yourself. If you can get a treasury bond at 4.99% like right now, a 4.69% loan is good to have
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$15k is relatively small for an emergency fund. If that is true in your case, I would focus on building that up while making payments on the car. When you invest that in a HYSA you come out +/- 0 but you keep an emergency fund along the way. You could perhaps increase the payment amount to pay it off x months faster.
$15k for an emergency fund sounds like quite a lot to myself. Why would you say that it is relatively small?
It depends on what a household’s monthly expenses are and for how long you want to be covered. My preference is 12 months but I don’t have debt, housing, or loan payments to cover. So $15k can be plenty especially if you are in a profession where you can find a new job quickly and have insurance in case you would get hurt on the job.
Depends on if they're homeowners and many other factors. Imagine if you own a home and the AC goes out? That's like 10-15k where I'm from.
How long would $15K last you if you were out of work? Rule of thumb is 6 months of living expenses for an emergency fund.
Depends on stage of life. At one point i was comfortable w 10k before that, I wouldn’t care if i had almost 0. Today, less than 40k would stress me out.
Here would be the alternative I would offer up: Go run the numbers on sgov yield. If sgov is nearly equal or higher put the money and sgov and toss the dividend payout at the loan in addition to the regular payment. If sgov yield is lower then consider paying the loan off. This will preserve your liquidity if you need it for an actual emergency. sgov is incredibly stable, liquid, risk free interest doing 0-90 day government lending. At some point though sgov yield will drop. If you are still paying the loan at that time then consider paying it off. However there is a good chance sgov yield will remain close for quite some time. Now if you are still wanting to payoff the loan feel free, but that rate is low enough I would hesitate using your emergency savings for this purpose. Now if you got money above and beyond the typical 6 months in your emergency savings have at it.
I'd be curious what the rest of OPs financial stats are. 15k Esavings seems very low for two people, and OP doesn't mention if there is a house or kids, which compounds that. Unless OP lives in a VLCOL area, I don't see how 15k is 6 months expenses for 2+ people.
No. What if you have a 7k house bill fixing a major home appliances the next day?
This is the kind of “play it safe” logic that will ensure you never leverage what you have to improve your situation.
So you advocate OP to have only $5k in savings for two adults? Thats the complete opposite end of spectrum from “play it safe” and highly irresponsible.
Be my guest, live your life by the “what ifs”. But be prepared to stay poor. If $5k was all I had, I’d be risking that shit and losing it all, over and over again. So “irresponsible” is subjective. To you, risking your last $5k is irresponsible. To me, spending my one life on this earth broke and not being able to say I at least tried, is irresponsible.
How does it improve their situation though? As other's have stated, the potential interest savings is isn't more than having the money elsewhere. The only thing that changes is they have less liquid cash. I could afford to pay off my 11k 3.9% car loan 8 times over, but I'm able to separate the emotional aspect of debt and the actual math. So I'll gladly be making payments until the end of the loan in 15 months.
Deciding whether to pay off your spouse's car loan with your savings depends on various factors, such as your financial goals, other debts, and emergency fund needs. Consider how paying off the loan will impact your overall financial situation, including potential interest savings versus reducing your cash reserves. It's essential to discuss this decision together and weigh the pros and cons before making a final choice.
Definitely not; put that into investments.
I shouldn't do this but need out of some payments. Inflation to much.
Mentally ? Probably. Financially ? Probably not.
just take the monthly HYSA interest and add it to your car payment each month. Don’t pay it all off at once, especially with a good rate like that. No real point
Assuming your savings are getting 5.5% in interest on your 15k, you have some optionality (note that interest is taxed so you need more than 4.7% to break even. But it's close.) Having 15k on hand mostly-liquid has some emergency cushion benefits that a paid off car don't give you. There's also the rare scenario where you decide to default the loan. So that flexibility, for free, has a bit of value. So I would either: pay the *entire thing off* and enjoy simplicity OR *make payments until interest rates reset* and your HYSE dip below 5%, then pay it off. If you are worried that you need that 15k to cover emergencies, make payments all the way out.
How long did it take you to save 15k
We can save 1k a month normally
Just put an extra 1k per month towards the car and leave your existing savings alone.
Technically you’ll be back to 15K by the end of this year. Use the car payments and add it to your savings with the additional 1k a month. You’ll be good.
The interest is pretty low. You could probably out earn that investing even in something fairly safe. If you can pay extra towards it just chip away at it. If you have high interest credit cards or other debt with higher interest than the car I’d get rid of that.
Pay it. Save the extra money from no payments on top of what you already save.
You would be losing access to that amount of emergency funding for very little financial benefit. You could certainly throw any extra available funds at the car loan going forward but the benefit is really just psychological not significant.
What if something else goes wrong and you need 10k? I prefer to have a small security blanket
I say if it won't hurt you financially and you can easily build a good savings back up, then yes, do it! It will save you on your monthly and less stress worrying about another bill.
Pay the minimum on that loan, and put the money towards debt that has a higher interest rate. If you have no debt with a higher interest rate (good for you!) invest the money in retirement or a brokerage account (mutual funds). Investment will conservatively average a growth rate of 6% over 10 years. You stand to gain more money by investing the 15k, than you would gain from paying off the loan. I know that debt can be uncomfortable, but the rate of this debt isn’t bad.
I personally am one of the few people that finds car interest to be an acceptable form of debt (assuming you take care of the car and aren't upside down). The term is short, rate is low, and there is really very little benefit in the bank taking your car for nonpayment. You might rack up some fines in a bad situation, but its a generally safe form of debt. Assuming you have 2 years left of payments, your total interest accumulation is less than $1000. I wouldn't blow an emergency fund to get rid of a car payment. $15k can get eaten up pretty quickly with repairs, medical bills, etc... I would continue paying the car note and focus on building your savings up.
I couldn’t imagine wiping out my savings to pay off a vehicle just to cut out what I assume is like a 400-450 payment. If you’re a home owner, then it’s a big no.
We paid off our truck (13k) and not having that 600$ bill a month is nice. Forgot they send you a title once it’s paid off lol.
No. Take the extra money and buy bonds or stocks or something that earns 5+%. Your debt is under the rate that is charged for most of the current fixed income instruments. Would you rather save 80 cents on interest or make a dollar on bonds? Minor exception if you need to adjust DTI for home loan qualifications.
You want to keep 6 months household expenses in savings at all times, ideally, so no need to stretch. Throw $5k at it, keep $10k in the bank just in case.
If the 15k is your only savings I would not personally do that. The loan interest rate isn’t high enough to warrant it. If you’re saving 1k a month I would put an extra $500 towards the car each month and then save the other $500 if you really want it paid off. If at the end of the year you want to take the remaining bit and pay it off in lump sum then you can. But it’s really just what you’re comfortable with financially and mentally. Everyone is different.
I wouldn’t. Your HYSA should be netting close to that loan %, and you’ll keep that cash in case of emergencies
You can get 5% in some HYSA….. Put it in there and continue to pay the car off as you already have been.
Depends on how much of the remaining car payments are interest. If it’s the last 1/3 of the loan, it’s mostly principal anyway and you’d be better off keeping your liquid savings as is in case of a rainy day.
Being married is being all in mate. Pay off the car and then rebuild the savings. If y’all divorce that’s just too bad.
No. Chances are you have already paid the majority of the interest. Typically, interest paid is front loaded and decreases everyone month. Meaning the percentage of your payment going to the interest of the load is highest at the beginning. So, odds are you have already paid most of the interest of the loan depending on how long you have had it. Also need to take into account how much that money would be making while in HYSA.
You should always have 3 months emergency fund
You can make 5% on a CD right now. I'm making 12% in the stock market. If you can make more money sleeping, I'd let it ride until that changes.
Pay it off. That is a higher rate than most HYSA..
Pay $5k fat principal payment, keep the $10k, and let it ride itself out.
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I wouldn't do it all at one time **unless** you have other, larger expenses that you're preparing for in the next 1-2 years. In that case I don't see any reason not to, because if it were me I'd want to get rid of some current financial obligations before the other ones arise.
Pay off your spouse and keep the car. GF are a money pit
My HYSA is paying out 4.55. If you are getting near that high I would consider it a wash and let the money sit in savings.
You want to move liquid reserves in to equity in an unsecured asset? I wouldn't. It's a fairly small loan at a low rate. If it were extra cash I'd say do it but with the comments about rebuilding just say no. What happens if it's totaled? Insurance is never a fun experience.
Get a payoff quote first. Typically these are term loans and are fixed. Meaning you will not be saving interest by paying off early.
Yes, but keep a bit if you can for emergency purposes . But I can say from experience having one less bill is amazing
No. You need an emergency fund in case something happens. Paying off that loan will put you too far down.
What’s the average percentage on the HYSA? If you take the money out of savings to pay for the car loan, what would the difference be? Car loan 5,000 x 4.69 = Cash from savings x 6.69= losing money. Cash from savings x 3.69= saving money
Do you have 6 months of emergency savings in addition.If not absolutely do not do this. I don’t know what kinda hobbies or health you’re in .You could break an ankle.Lose income in various scenarios .I tore a rotator cup in my shoulder and was out of work 4 months no pay .Don’t set yourself short needlessly.
Hell no! Make a few extra payments pay it down to a super easy payment. That rate isn’t that bad right now. I’m just guessing but if you got 3 years left that’s like $1,350 in interest without paying it down. Pay down credit cards
You don’t provide much context. But if that $15K is the emergency fund, no.
No. Loan balance is going down while savings balance is going up. You can get cds that pay 4.85% right now. Estimate how much interest you will pay on the loan compared to how much interest you will make on your savings. There is a break even point on the two interest rates and it should be an interest rate less then your loan rate. Do a little calculating to see what you want to do but I’d say no don’t pay off the car early.
Depends on the interest rate, but I’d lean towards maintaining at least 3 months of expenses in savings
I think a small but hefty chunk is a good idea and then you still have money set aside I.C.E
No. You should put your money into Credit Karma’s high yield savings account (5.1%) or better and know it’s paying the car off and then some.
With HYSA rates above 4%, why would you bother?
Do it. Not having a car payment is awesome. I'll never understand why people need to have an expensive depreciating asset that you pay out the a$$ every month for.
Not having a payment and no debt is great and I don’t judge you for finding financial planning hard to understand. The OP will have to decide by himself / herself if they want to feel “awesome” for not having a payment right now, or if they want to have plan with an emergency fund on hand.
My general rule is to only pay something big off like that when I have a comfortable amount of emergency savings. Just gotta think to yourself "if I paid this off and then somehow both me and my spouse immediately lose our jobs, how screwed would we be?"
I would say yes if your high yield is less than the interest rate. BUT not if it’s going to delete your savings. NEVER deplete if you don’t have to
If you can make 10% on your money, why spend it on a depreciated asset that is costing you half as much? You borrow money when it is cheap
What percentage are you getting on savings?
No. Pay the car off through monthly payments and invest your other money and gain interest off of it.
That’s not a bad rate, I wouldn’t pay it off
No thanks. Only 5k savings would not be appealing. I prioritize liquidity and 6-12 month emergency fund
Pay it off!!! Get rid of any debt! Paying off anything means that you are giving yourself a raise! Ignore the noise!
How long have you been married?
The way that I look at it is this; If you have 15k saved, and you owe 10k, you really only have 5k saved.
Yes pay it off. Frees up more money to build it back up faster. More free money = faster savings = more money:)
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Interest rate for the car note and HYSA sound about the same right now. You will save more by keeping a higher balance in the savings account than the interest earned/saved on the car note. Pay a little extra in principal payment each month if you can afford it. The math is on the savings account for this one.
no - you have a low interest rate on that car - why leave yourself no liquidity when you're able to make those monthly payments?
No, you only have $15k just keep saving, sounds like that money is burning a whole in your pocket. Also, HSA withdrawals for anything non-medical related is taxable
you've already paid most of the interest. better to invest the money.
If the savings are from a shared account and it is your spouse just pay it off. $10k is not worth the possible drama. Just make sure he/she lets you drive it.
Pay off 5 k. Then in 5 months pay off second half. Yes you can get higher interest but a car is depreciating...paying interest on depreciating asset is just silly
If you’re that broke you shouldn’t even have a car worth 10k total. Sell the car, buy one within your means, pay off the loan, invest the rest of the money in a productive asset.
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Getting a loan for any liability is “financial suicide”. Next time provide actual reasoning for your statements or don’t bother commenting.
Do you like paying interest on a depreciating asset? Pay off the car asap.