Question: Should I pay off a low-interest loan or save for an emergency?

Like homeowners, car owners are taking advantage of low interest rates to refinance high-cost auto loans.

I recently paid off my car, then it was totaled. Bought a new used car with a very low interest rate for 48 months. I could pay off this loan early, but I wonder if I should save the extra money for a rainy day or put it in my 403(b) account. My only other installment loan is a 15 year mortgage, also with a very low interest rate. Thanks.

Response:

Oh to be torn between low-cost, secured loans and saving money.  You, my friend, are in a good spot.  But, not in a great spot!

Though your debt is fairly low level and low-interest, the fact that you don't have cash savings is a big concern.  Start there.  It's vital to save up some emergency money so you don't end up paying higher interest on the debt you'd have to take on to pay the bills.  Add up your expenses for a month--vital living expenses such as your mortgage, your car loan, utilities, etc.  Work to save up at least three to six months of expenses and keep them in an interest-earning, no-fee savings account (shop for free here:  www.Bankrate.com).  If you've got more folks who depend on you paying the bills, such as spouse, children or aging parents, save up even more cash.  However, make sure to keep on saving regularly in your 403b as well.  Once your cash is saved up, then head all those funds toward your car loan.  Something tells me you'll get there quickly!  Vroom.

 

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