Emergency Fund or Car Loan

[TheHandmaidsVeil]

What would you do in this scenario? Over the past couple of months we've been able to save substantially more per month than we ever could in normal times.

By the end of the school year we'd have saved nearly £12k. Before we were able to start saving, I had to take out a bank loan for a car, this currently stands at £12k (I regret buying such an expensive one but too late now, lesson learned). Other than the £12k saved we have no emergency fund to speak of (thanks Covid) and once September hits we'll have unavoidable, substantial nursery/wraparound childcare fees for our 2 DC averaging £1k per month. It would take another 3/4 years to save into an emergency fund what we've managed to save in 8 months, as over this time we've had no childcare fees at all. Bank loan is £300 p/m over 3 1/2 years which is affordable for us.

Question is would you use the savings to pay off the car loan in full, knowing you've now got no debt aside from mortgage + student loans, or would you keep the savings for your emergency fund, knowing it gives you that extra security, you can keep adding to it every month and comfortably pay off the loan over the term at the same time?

I love the idea of not having the bank loan anymore but also think it would be very unwise to leave ourselves without an emergency fund that would take substantially longer to replenish while our DC are little and expensive!

Keep your savings!

Can you work out what 3 months emergency savings would be for your household, keep that and then pay the rest off the car?

Thank you for the responses. I had thought about paying a chunk of it off and keeping the rest. 3 months basic expenses would be around £6k but I think for my piece of mind I would love to have 6 months worth as a minimum.

Should add I've factored the bank loan into basic expenses whilst we have it

Maybe you could overpay the loan if you have money left over at the end of the month.

I would do a bit of each. Maybe 2/3 savings 1/3 loan overpayment?

If you’re within budget and can comfortably pay your loan back over the next few years then I’d be keeping the savings. You never know what can crop up and like you said expenses will increase this year for you, that £12k is better in your bank for the time being. If you’re not foreseeing any reason to improve a credit score (like a remortgage) where paying it off would be best then just let it run it’s course

Would depend on the interest rate on your loan for me

Yes, look at the interest rate for the loan. Also, are you allowed to pay a bit extra per month or is there a penalty?

Depends on interest on the loan. No point get poorer when you could have paid it off

Interest rate is 2.9%, so total interest will be just over £600. We would like to move house next year but I figured if we can still borrow as much as we need and our credit scores stay as they are (both excellent on Experian) I wouldn't worry too much about paying it all off, I don't fancy moving into a new house with no money behind us but 'debt free'. Over the past year we've had to replace a washing machine, dishwasher and microwave so I'm certain having no emergency fund would be a bad idea.

@HollowTalk no penalty for overpaying or paying in full early

If the total interest over the period of the loan is only £600 then I'd keep the savings.

Keep it as savings and keep the loan. At 2.9% that is not high, and whilst you won’t beat it in a savings account because rates are so low, an emergency fund can really save you from the shit, and life with 2 small DC can be unpredictable and expensive.

If you find you can unexpectedly save more, get a pay rise or need to pay off the loan for the house-move finances then you can do it at that point - it will be less by that point too.

You can also get to a certain point on the loan, pay off a chunk and then you could transfer it to a 0% credit card if you choose a ‘money transfer’ one.

But I would definitely keep the cash in liquid emergency fund for now.

Thank you for all the responses, interesting to hear other people's views. Think I'll keep it as an emergency fund and overpay the loan as and when I can.

I’ll definitely keep the emergency fund too in your shoes. The total interest on the loan is not a lot and it’s affordable. One thing you can do though is when September comes and you have those bills, you can pay the extras you have at the end of the month into the loan too so you pay it up quicker.
That way you have the savings and are working towards paying up the debt quickly too.

2.9% is fine. Keep the fund.