Financial Planning for Generation X & Y Women
 
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Expert Q&A Archive

07/16/2008
Should I take my savings and pay off my car note?
Hi there! I have about $4500 in savings, and have almost no debts (I live rent-free as part of my job). The only debt I currently have is my car. I have about a year left to pay on it (about $4300). Should I take my savings and pay off my car; or should I keep paying off my car monthly and keep growing my savings?
Lynn Anne Gillen, CIMA :
expert info »
I would not advise taking your savings to pay off the car loan. You could stop or reduce your savings temporarily and pay extra each month on the car loan to pay it off in less than a year.

You should always keep a cushion of cash.
Dorothea Bernique:
expert info »
I do not think that you should ever completely deplete your savings. On average you should have 3 to 6 months of your annual salary put aside for emergencies. I suggest you keep paying on the car monthly; and [because you are] not paying rent, just make extra payments on the car to pay it off earlier.
Jeff Kyle:
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I believe that it is important to have an emergency cushion in savings. It seems you now have that. I think that as long as you are able to afford the monthly payments for the vehicle, you should keep paying and have the emergency cushion earning interest! It doesn't make sense to diminish all you have saved up just to pay off a relatively small debt, then have to start
saving it up again! Hope that helps - Jeff
DeAnna Klokkenga CFP :
expert info »
Is this the only savings you have? If the answer is yes, then you should not pay off the note. You need to make sure you secure an emergency fund at all times. If you have additional savings, pay your car loan off only if the interest [rate] you're paying on the note is higher than [the interest rate] your savings account is paying you. Remember, pay yourself first when it makes sense. If the interest in the savings account is higher, (maybe youre invested in short term CDs) then keep paying your monthly payment and do not accelerate.
Gary Silverman, CFP:
expert info »
If you have no other investments, my feeling is that you should keep paying off the car. With only a year left, your interest will be a small part of the payment. By having the money in hand you can fend off any emergencies, including the (hopefully improbable) loss of your job.
Sharon P. Hardy, CFE:
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The decision of what to do is dependent upon the current outstanding balance of the car loan and the related amount of interest that is attached to that balance until the car loan is fully paid off. The question then becomes, if the outstanding balance was paid off, and that same monthly car payment could now be available and used for investment purposes, would this then be a more prudent decision in the long run? The answer to that question hinges largely upon the person's financial goals and related investment strategy to achieve them.
Delores Lenzy - Jones, CPA, CIA:
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I would compare the interest expense savings from paying your car off vs. savings interest. I would select whichever is better.
Shauna L. Roberts:
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If that is the only debt that you have, and you are trying to establish credit, I would continue to make the payments, and continue to put money away if you can. The amount of interest that you would save by paying off the car loan with a year remaining is probably insignificant.
Susan Garcia:
expert info »
It is difficult, if not impossible, to answer your question without asking a few more questions, so here are some things to consider.

1. What is the current interest rate on your savings account?
2. Have you acquired this car with a promotional interest [rate] from the car manufacturer of 0%. If you have, it may not make sense to pay off the loan.
3. If the car loan is not interest free, how does the interest rate compare to the interest rate on your savings account? If the loan interest rate is higher than your savings account [interest rate], it may make sense to pay off the car loan. If the car loan [interest rate] is lower, depending on how much lower, it may make more sense to not pay it off.
4. In either case, you need to consider your emergency reserve fund. It is recommended that an individual have the equivalent of 3-6 months income reserved for emergencies. Do you have an emergency reserve fund in addition to your savings account? If not, do you have a way to access cash if you have an emergency? Will there be a cost for accessing those monies if you need them?
Elizabeth Rusnak:
expert info »
It's recommended that you always have a savings account. This covers the cost for any emergency needs that can (and do) arise in life. By having a savings account available, you're less likely to rely on credit card debt for those emergency needs. Unless the interest rate on your car loan is exorbitant, keep your savings account and continue making regular and timely payments on your car loan.
Elizabeth Goldsmith:
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Hi. I would pay off the car and be debt free. And, then start building the savings. Right now you can't get much interest on a savings account, and your loan has a higher interest rate than what you can make on a savings account. As a long-term goal you want to save 3 to 6 months of take home pay as an emergency fund in case you lose your job or there is another financial crisis.
Rosemary Ervin, CPA:
expert info »
You should always keep a minimum of three months income liquid for emergencies. How much is the car loan interest [rate]? What are you earning on your savings? If the interest rate on the payment is less than the income you are earning on your savings, then it makes sense to pay off
the auto loan.

Hint: when the loan is paid off, continue to set aside whatever your monthly payment was, say $350, until your savings account is replenished. Then, when the savings are replenished, consider setting aside monthly car payments so that when you need a replacement car, you will have a down payment. If you are making a monthly payment, continue to make it, only it will be to yourself rather than the finance company. Earn it before you spend it...........Good luck!
Joan Koonce, Ph.D:
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The answer to your question depends on the interest rate on your car loan and the interest rate earned on your savings. If the interest being earned on the money you have saved is greater than the interest rate on your car loan, then it makes sense to let your money continue earning interest. If not, it makes sense to pay off your car loan. One other issue to take into consideration is taxes. If the interest earned on your savings is taxable, then your after-tax rate of return is less than your actual interest rate.
Rebecca Schreiber CFP:
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Why let it be everything or nothing? Use half the money to pay off your car, and still hold on to half. The reason is that you still need some emergency money even if you are itching to get rid of your car payment. This method offers the greatest gratification. Earmark half of your savings for paying off the car and when your balance is down to $2250, knock off the whole balance. This way you can hold onto your cash a little while longer and still enjoy paying it off.

Thank you for the opportunity to answer the question. Best wishes.
Connie K. Marmet:
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What interest rate are you paying on your car? If it is significantly higher than the rate you are earning on your investments, you may want to consider paying off the loan. On the other hand, you have established a good pattern of savings, and it doesn't sound like the payment is causing you financial difficulty. If you do choose to pay off the car, are you willing to replenish your savings by putting the amount of the car payment back into your savings account?
Suzanne Kincaid:
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It depends on how long you have left on your contract and the interest you are being charged. With most car loans the interest is mostly paid during the first part of the contract. I would have to know what the savings in interest would be if paid off early. Most likely it would be better to pay it off unless the $4,500 savings was earning a high interest rate return
 

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