Borrwed money for a car - but I have savings!

[Toefur]

I realise this may not have been the best financial decision. I have $25,000 in the bank, and I finally caved in decided to buy a car. I didn't want to, but it will make life much easier. The car cost $12,500. I took out a loan for it.

I hate the pressure of owing money, though through saving I can have it paid off within a year. But is there any sense in maintaining this loan at all, since I could pay it off right now, and not pay any of the interest as well.

But on the other hand, having a significant chunk of money in the bank makes me feel comfortable, and secure in my situation in life.

Should I just stop being so tight with my money, and pay the loan off?

[Angela]

Compare the interest you're earning on the money in the bank. If it's higher than the interest you're paying on the loan (probably not!), then keep the loan.

If you're paying more interest on the loan than you're earning, and you don't have a higher source of interest, then pay off the loan.

[coollikeme]

You don't want to deplete your saving account all at once.

[SomeRandomGuy]

I would suggest using your savings to pay off the car loan. After paying off the loan you should be left with $12,500 in savings, which should be sufficient for covering most unexpected expenses you may incur. It sounds as though you could replenish your savings in a year, which should put you farther ahead financially than if you keep the car loan for that period. I used the following assumptions to do some quick calculations:

Savings Interest Rate = 2.5%
Loan Interest Rate = 5%
Monthly Income Available for paying off loan or replenishing Savings = $1,070.09

Based on the assumptions above, if you Pay off your loan in 1 year, and let your $25,000 grow you should have $25,632.21 at the end of the year.

If you paid off your car loan today and replenished your savings at the rate of $1070.09 (the monthly amount that would have been required to pay off your car loan in 1 year) then you should have $25,805.35 at the end up the year.

That is a difference of $173.14, which may not seem like very much. It would, however, be a decent return for basically doing nothing. I suppose the decision comes down to if making an extra $173.14 over 1 year outweighs any worry that cutting your savings in half might put you through.

Obviously If your savings or loan interest rates are higher the difference would be more. Also, this assumes that each month you put the same amount of money into savings that you would have put towards paying off your car loan. I can see where being motivated to put the money into savings might be more difficult than being motivated to pay off a car loan. If that is the case for you, perhaps keeping the car loan makes more sense.

I threw those numbers together quickly, so if anyone notices any mistakes please feel free to correct me.

[steve0617]

Originally Posted by Toefur

...I hate the pressure of owing money... having a significant chunk of money in the bank makes me feel comfortable, and secure in my situation in life.

Which weighs on you more? You don't really 'owe' the money as you have the financial cushion to cover it with one check if you choose. Owing (in my opinion) is only when you have no money and you're depending on cash flow to cover the expense each month.

So, which is more important to you? Cash in the bank to allow you to feel secure? Or the idea that you have a paid off hard asset?

Me personally I'd rather keep savings liquid to me in case I really need it in the event of unforeseen consequences. I'll choose taking on some reasonable debt to ensure a safety net. Cash available to me immediately matters to me more than a hard asset that I could convert to cash if needed, but would be a hassle.

[Marth]

agree with angela. I recommend you read Jim Cramer's book: Get rich, stay rich I'd suggest you put 60% of your remaining savings in investing, pay off the loan in full, & max out your 401k. Your savings just dying in the bank. Maybe 2 months emergency income max

[LarryStrawson]

Hi

I would second Angela's position. Whatever ways earns you more interest. The other benefit of the loan is building your credit rating. Payments made on time every month will increase your credit score and your borrowing capabilities.

[Jim11]

Not really much to consider. Just pay off the loan unless it has some ridiculously low interest rate (such as 2%).

If you ever actually need another loan you can easily just get one. If you have a car that is fully paid off you have collateral right there.

[Brutha]

It really a question of interest.
If the loan has more interest than your money on the bank gives you, you should pay it off.

[norbert]

Instead of paying the loan, I'd use the $12,500 to set up multiple passive income streams which cover the monthly payments AND a lot more on an ongoing basis perhaps until the end of your life.

[Faron]

Hey toefur, congrats on the car BTW

In order to solve your problems, you have to look at 2 main things:

1) How much interest are you paying on the loan? If you are paying a significant amount 5%+ then it is in your best interest to pay the car off. Act as if you didn't pay it off and put the "would be" payments back into your savings account.

2) Asess your situation and determine how much you need to have incase of an emergency. A good rule of thumb is having enough money to last you 6 months without an income. Having $25 000 dollars saved is amazing but having it all sit in a high interest savings account is not the best alternative for you.

If you feel you need to have $25 000 at your side at all times incase of an emergency, then pay off the car in installments. The way I see it is: you have $25 000 in a savings account, we should be asking you for financial advice

Best of Luck,

faron