An old question but should I pay loan with savings

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Freemo

Guest
Age: 31
Spouse’s/Partner's age: 31

Annual gross income from employment or profession: 41,600, state agency (this will go back to 53,000 when my paternity leave runs out)
Annual gross income of spouse:33,000, private

Type of employment: e.g. Civil Servant, self-employed

In general are you:

(b) saving?

Rough estimate of value of home Bought for 255k in 2003 so hopefully it is still worth that at least.
Amount outstanding on your mortgage: 186,239
What interest rate are you paying? 2.5%

Other borrowings – car loans/personal loans etc
13,590 - Car Loan @ 4%
4,000 - revenue is owed this @5%(partner owned his own business when he lived abroad, he has being pating off a tax bill since january. Roughly 4,000 left give or take due to curency changes day to day)

Do you pay off your full credit card balance each month? Yes


Savings and investments:
19,940

Do you have a pension scheme? I do, partner doesn't

Do you own any investment or other property? My property mentioned above is rented out. It is in dublin. Paymets are currently 786 but I pay 1600 pm. I get 1000 pm rent. We live outside dublin to be near partners job and also to avail of free childcare from family. It means i have to commute 90 mile round trip to work.Also our rent is just 700pm

Ages of children: 6 months

Life insurance: Yes, 52pm


What specific question do you have or what issues are of concern to you?
Should I pay off car loan or should we continue saving. I have always paid loans of very quickly in the past but in these uncertain times I wonder should I hold on to my savings. We're getting 3.47% on first 10k of savings and 1.75 thereafter. When i make decision I will shop around for better rates. We survived on a small car for years but now with me commuting I decided to buy a good car that was diesel. The diesel is alot cheaper but I have to say it nearly killed me to borrow the money. What do you think?

And also should I stop paying the extra off mortgage and put it into savings? I've always paid extra so I'm used to doing without the money
 
How safe are your jobs? I would keep an emergency fund (say 6 months money to top up unemployment benefit if one of you becomes unemployed) and then, if the interest rate on the loan is less than the rate you get from deposit (not forgetting DIRT), then pay off the loan.

So, in your shoes I would pay off the car loan. But, and this is the important bit, I would then divert the same monthly amount you were paying on the loan to your savings. Then you are replenishing your savings without losing money every month.

Your mortgage interest is low and you still get tax relief on it so it is less advantageous to pay off the mortgage is you can get a better return elsewhere. The trick is to save the money and not spend it. Set up a direct debit to go out on the 1st of the month.
 
Thanks Diezet. I might put some of that in place. Just curious, do you think 10k in savings is enough to keep as an emergency fund for now?
 
I agree with Diziet. I would pay off the car loan and revenue immeadiately. That still leaves you with €2,500 in savings. I would then divert the money being paid to the loan into savings, as well as reducing the mortgage over payment by €600 and divert that into savings also. Your savings would be back up in a very short space of time. You could also choose to pay a lump sum of the mortgage from the rebuilt up savings..

Realistically, with you working in the civil service, how likely are you to have an emergency (such as loss of work) that will require a slush fund of €10K ready and available?
 
Freemo said:
Thanks Diezet. I might put some of that in place. Just curious, do you think 10k in savings is enough to keep as an emergency fund for now?
Click to expand...

10K seems a little high. Do you have a household budget, so that you know exactly how much money you need per month? This should include annual costs such as TV license, NCT, car tax etc divided by 12. Put everything in. The add ESB, gas, childcare, food, entertainment, holiday fund etc. If you are like me, you will initially be shocked and depressed :).

Then see how much of this can be pared down in case of one of you becoming unemployed. Childcare, for example will probably be reduced, holiday fund can go, food expenses trimmed a little etc. Deduct the money you will have coming in (not forgetting unemployment benefit) and here is your worst case scenario. You may well be able to survive without dipping into savings. If you do, then if say you need €500 extra a month, then 3000 will last 6 months. If you were realistic in putting all foreseeable expenses in, then this will be what you will need. Maybe add another 2000 or so in case of an expensive emergency like a new boiler.

Sort out your own calculations on a spreadsheet, then see how quickly your savings are built back up when you divert the loan repayments to savings. There are several regular saver accounts with very good interest rates. But it is madness to pay a large car loan while you have ample savings sitting there. Just don't spend the loan repayments! Save them instead.
 
Just to confirm Freemo, there is no penalty to paying off the car loan early? I am assuming there isn't but just to make sure.

As a rough calculation, you are bringing in between the two of you 74600 pa (gross?). 10k is nearly a seventh of this which makes it under 2 months gross income. However your employment is probably relatively secure so you could afford to risk reducing your savings temporarily to pay off loans and then rebuild them
 
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