Just got a sign-on bonus from my new job, and I’m grateful. After taxes, it’s a little over $4k. The first part is coming this month, and I plan to use some for property taxes, leaving around $2500. Here’s the question… should I use that to pay down my car loan (currently $4313 left, and my monthly payment is $320) or put it into my high-yield savings?
Paying off the car would free up that $320 a month, which could go to other debts. But, I’m also thinking about saving for a potential mortgage refinance if rates drop since ours is at 6.99%.
With my husband’s recent job change, his income is lower and varies month to month. We’re tightening up on spending, and I’m also picking up two part-time gigs soon to help. We have a $2k buffer in checking for emergencies but nothing in an actual savings account.
Any thoughts? I’m open to more ideas and just want to make a smart choice here.
Since your husband’s income is a bit unpredictable right now, I’d suggest putting the bonus into your high-yield savings. Keeping that money available is smart until things are more stable.
This comes down to math. If the car loan rate is higher than what you’d get in high-yield savings, it’s better to pay down the car. For example, if your car loan is 15% interest, that’s costing you $600 a year on a $4k balance. If your high-yield savings earns 4%, that’s $160 a year before taxes. So, if borrowing costs more than saving earns, paying off the loan is a better move.
@Oaklan
Luckily, my car loan isn’t that high, so it’s not drastic, but I get what you’re saying. With some extra income coming in, maybe it’s better to just knock it down.
@Oaklan
That’s what I figured too, assuming the car loan is close to 6.99% APR. If you pay off the car early, you free up that payment and can save more or tackle other bills.
Tavi said: @Oaklan
That’s what I figured too, assuming the car loan is close to 6.99% APR. If you pay off the car early, you free up that payment and can save more or tackle other bills.
6.99% APR might be the mortgage rate, not the car loan. Car loans at 6.99% aren’t super common these days.
If you apply $2500 to your car principal, that would bring the balance down to $1813. With an estimated 6.99% APR, you’d only have about $175 in interest left to pay. By paying down the car, you could free up that $320 a month sooner, which you could then split between savings and other bills.
Maybe put some away for a rainy day. This past year hit us hard with unexpected car repairs, home plumbing issues, and medical bills. Our savings got us through, and now we’re slowly rebuilding. If you want to pay some on the car, go for it, but maybe hold some back. You never know when you’ll need it.