Payoff our car?

[troyw]

Here's the situation...

My wife is pregnant with our first child due in July. We have around 22K in savings right now (emergency fund) and I have the "itch" to payoff my car (payment is $400 per month). We owe $10,800.00 on the loan and her car is paid for. Would you do it? My hesitation is due to pregnancy...I would have already done if not for that.

[bjl584]

What does 22K represent to you in terms of monthly expenses? If 22K is 3 to 6 months worth of expenses, then I would be hesitant to draw down my savings to pay the car off. However, if 22K represents 1 year worth of expenses, then I would definitely pay the car off knowing that even by doing so I would still be left with over 6 months worth of an emergency fund.

[jpg7n16]

You know, it doesn't have to be all or nothing. Why not pay off half the car? Or even 1/3?

That would cut your interest by 33-50%, and would let more of each payment go to principal each month, reducing the remaining balance that much faster with each monthly payment. And you'd still have 17-19k in cash.



Unless your car loan is at 0%, in which case I wouldn't even bother paying it off early. Ever. - but with a $400/month payment, I doubt that's the case.

[KaleighMaeA]

I would agree with the above post, but also I would consider if she is due in July you would have five months that you could put the $400 you were paying on the car into your EF. That would be an extra 2k you could add in there. So I guess I would think it's a good idea since you are paying interest on your car if 11k + the 2k you could add in five months = $13,200 is at least a 4 month EF fund.

[MonkeyMama]

Personally, I would keep the cash. Pregnancy means too many expensive things can go wrong (disability, medical bills, a sudden wish to stay home, on and on and on).

If the pregnancy, birth, and post baby work plans all go well, then pay off the car. I'd probably wait a year.

[troyw]

What does 22K represent to you in terms of monthly expenses? If 22K is 3 to 6 months worth of expenses, then I would be hesitant to draw down my savings to pay the car off. However, if 22K represents 1 year worth of expenses, then I would definitely pay the car off knowing that even by doing so I would still be left with over 6 months worth of an emergency fund.

7-8 months worth of expenses.

[troyw]

You know, it doesn't have to be all or nothing. Why not pay off half the car? Or even 1/3?

That would cut your interest by 33-50%, and would let more of each payment go to principal each month, reducing the remaining balance that much faster with each monthly payment. And you'd still have 17-19k in cash.



Unless your car loan is at 0%, in which case I wouldn't even bother paying it off early. Ever. - but with a $400/month payment, I doubt that's the case.

Would you have to refi the loan in order for the reduced interest to take effect?

[troyw]

I would agree with the above post, but also I would consider if she is due in July you would have five months that you could put the $400 you were paying on the car into your EF. That would be an extra 2k you could add in there. So I guess I would think it's a good idea since you are paying interest on your car if 11k + the 2k you could add in five months = $13,200 is at least a 4 month EF fund.

We are currently saving $400 per month in our car replacement fund...our plan was to apply that $400 plus the money we gain from not having a payment to the emergency fund.

[troyw]

Personally, I would keep the cash. Pregnancy means too many expensive things can go wrong (disability, medical bills, a sudden wish to stay home, on and on and on).

If the pregnancy, birth, and post baby work plans all go well, then pay off the car. I'd probably wait a year.

The reasons mentioned above are why we have not pulled the trigger yet.

[jpg7n16]

Would you have to refi the loan in order for the reduced interest to take effect?

I'm sorry, I could have worded that better.

Right now you're getting charged say 6% interest on a $10,800 loan. 6% * 10,800 = $648/year

But if you paid off half the balance, you'd still be getting charged 6% but only on a $5400 loan. 6% * 5,400 = $324/year

So you effectively cut the amount paid to interest in half.


I didn't mean it come across as though they'd reduce your rate. The rate stays the same, but the interest costs are cut in half, because the balance is cut in half.

[littleroc02us]

I would say that since you have 7-8 months saved, I would pay off the car which leaves around 11k. You would be able to build the EF back up to 13k or so by the time the babies born. The thing that I would keep in mind is do you want to have any kind of payment on a car when you have the additional expense of a baby. You will be able to breathe easier knowing you have 13k in an EF account and no debt. Plus each month after you will be able to build the EF back up to the 7-8 month fund.

[troyw]

I would say that since you have 7-8 months saved, I would pay off the car which leaves around 11k. You would be able to build the EF back up to 13k or so by the time the babies born. The thing that I would keep in mind is do you want to have any kind of payment on a car when you have the additional expense of a baby. You will be able to breathe easier knowing you have 13k in an EF account and no debt. Plus each month after you will be able to build the EF back up to the 7-8 month fund.

I like your thinking! The presence of a car payment is too much worry for us. We definitely want it gone!

[Hector]

I won’t touch 8 months of EF if my wife is pregnant.

Seems like you are worried a lot about that 10k car loan. Of course you should because your total expense for 8 month is around 22k and you car loan is 10k. Why did you need to buy that expensive car in the first place? Our monthly expense is a bit more than 4k and we(me and my wife) paid around 5k for each car. Are you getting what am I saying? Why would you save 400 a month for your car replacement fund? What is your next car going to be? How much would it cost? Didn’t you learn the lesson of driving the car till it is in working condition and buy next car (used cheap one) with the cash?

[KaleighMaeA]

I don't know, maybe I have a lot to learn but it seems like a lot of people here are against having a 10k car. 10k for a car really is not that outlandish. My brother in law just bought a car for 3.5k that has over 200k miles on it. He's already had about $800 dollars in expenses associated with the car. That's $4,300 dollars he's already sunk into this vehicle and with mileage that high there are bound to be more problems.

I'm not saying there aren't 3-5k good reliable vehicles out there, but at the same time most cars I see in my area in that price range are not what I would consider to be reliable or a good investment. I personally don't want to have my car in the shop when I'm trying to get to work and my husband is driving 96 miles a day for work.

I guess to me a vehicle in a city without really good public transportation is a necessity in order to be at work every day on time. From what I can see 10k sure doesn't get you a fancy car everyone is going to droll over, a lot of times that's close to the price range needed to get something that you trust will carry you though from the next 5 years or so.

[jpg7n16]

I don't know, maybe I have a lot to learn but it seems like a lot of people here are against having a 10k car. 10k for a car really is not that outlandish.

I think that might be a misconception about the advice given out. Several times, someone is struggling with debt and is looking for any way to make it each month - but doesn't even consider downgrading in car. So I've seen many people (myself included) advise some posters to sell the $10k car and get a $5k one. Cuts the car payment way down, cuts the debt owed way down, and helps them find a little relief while struggling to get out of the debt.

I think once someone's financial picture is in decent shape, there's no real need for a car that is worth more than 30% of your annual income. Meaning that as long as you make over $33.3k I have no problem with you owning a $10k car.


Although there are some people on here who are against a $10k car - just because. I don't really get that side and don't agree with them. Most of the posters aren't like that.