Opinions Wanted

[ITJack]

A few months ago I was in an accident that depleted my savings entirely. I only had about $3000 in there and I'm living paycheck to paycheck so it wasn't growing at all. Recently I received a settlement check in the amount of $8000. My initial reaction was to just put that money into savings, but that wouldn't solve the problem of savings growth.

Unfortunately, my main financial burden is a monthly car payment for $450. The car is a remnant from a failed marriage. The interest rate is zero percent, but I've still got four years of payments left. I would sell it, but I'm upside-down by several thousand dollars and it's depreciating as fast as I'm paying it off.

So my thinking is that instead of putting this $8000 into savings, I could use it to pay down the car enough to break even and sell it. Then I could buy a cheaper car with a lower payment (maybe $150-200) and use the extra $250 a month to build savings. It would take me a year to rebuild that $3000 but at least then I could keep building my savings after that.

What's your opinion? Should I put the $8000 back into savings and keep making giant car payments? Or should I pay down the car and get a cheaper car and rebuild my savings slowly?

[disneysteve]

What is the car's current resale value?
How much do you owe?

[EconoMutt]

How secure is your job?
Do you have an Emergency fund?

[ferriwinkle]

I would suggest leaving some or most of it for an emergency fund. what if something happens, you wouldn't want to go further into debt,would you? you could get a second job, sidejob, or sell stuff you don't want or need to help pay off that car. Find out exactly how much you can sell the car for to see if it's worth it to pay down (and still have some savings left), but replacing a loan with another loan should be avoided if at all possible. Could you get rid of it and buy a cheap junky car to get you by till you can save up to buy a nicer one?? what other debts do you have??

[disneysteve]

replacing a loan with another loan should be avoided if at all possible. Could you get rid of it and buy a cheap junky car to get you by till you can save up to buy a nicer one??

I totally agree and was going to suggest the same once I saw the numbers. Trading one loan for another loan isn't a great solution. If possible, sell the car, use some of the $8,000 to cover the difference between what you get and what you owe. Leave $1,000 for an EF and use the rest to buy your next car with cash. If there is enough money to do that, you are all set.

[jpg7n16]

1) Sell car
2) Use $8k to clear up any difference between proceeds from sale and remaining loan amount (hopefully covers)
3) Use remaining of $8k, to buy $1-3k car - finance the difference if needed
4) Save any remaining funds from the $8k to start rebuilding EF
5) Evaluate the rest of your budget


Delaying selling the car will not stop it from continuing to go down in value, and it won't lower the amount you owe to the bank either. So best to do what it takes to get your cashflow back under control.

If $450/month is killing you, you don't need a $10k car. (5.5% $200/month for 5years = $10,470 loan). Start thinking $5k and below.

It's a temporary car, not the car you will have for the rest of your life.

[jIM_Ohio]

A few months ago I was in an accident that depleted my savings entirely. I only had about $3000 in there and I'm living paycheck to paycheck so it wasn't growing at all. Recently I received a settlement check in the amount of $8000. My initial reaction was to just put that money into savings, but that wouldn't solve the problem of savings growth.

Unfortunately, my main financial burden is a monthly car payment for $450. The car is a remnant from a failed marriage. The interest rate is zero percent, but I've still got four years of payments left. I would sell it, but I'm upside-down by several thousand dollars and it's depreciating as fast as I'm paying it off.

So my thinking is that instead of putting this $8000 into savings, I could use it to pay down the car enough to break even and sell it. Then I could buy a cheaper car with a lower payment (maybe $150-200) and use the extra $250 a month to build savings. It would take me a year to rebuild that $3000 but at least then I could keep building my savings after that.

What's your opinion? Should I put the $8000 back into savings and keep making giant car payments? Or should I pay down the car and get a cheaper car and rebuild my savings slowly?

The car depreciating is not the problem.

You have a debt which will cost you about $21,000 to pay off.

choices
1) you could take the 8k, pay down the debt 8k and in 29 months have the car paid off
2) you could sell the car, pay off the loan, then drive a cheaper car while you build up savings.
3) if 3k savings is your goal, put 3k of the 8k payment into the bank... then use 5k to pay down the car.

If living "paycheck to paycheck" is a problem, I would suggest posting a complete budget and analyzing all expenses, not just one car payment.

For example you mentioned you just got divorced, it is very possible there are other expenses you don't realize are causing you to live pay check to pay check. Take a step back and analyze the big picture.

I would bank the 8k, analyze the budget and look for cash flow before liquidating the car.

[tripods68]

As Jim pointed out,

"2) you could sell the car, pay off the loan, then drive a cheaper car while you build up savings."


That's what I would probably do if i was in your shoes.