Use savings to pay off car loan?

Dear Terry,
I recently bought a new car. I did not do all my homework beforehand and now I have a big payment each month. What's done is done. The interest rate on the loan is 7.99 percent for 60 months.

I have money set aside in a savings account that I could use to pay the car off. The savings rate is 5.18 percent. Is it worth keeping the savings and paying the loan each month from that account? Or should I pay the loan off now? We do not have the cash flow coming in to cover the payments otherwise. I am so upset with myself for not reading more before the purchase. Please help!
-- Kim

Dear Kim,
The interest rate on your loan is not out of line for a 60-month term, but the larger issue is that you cannot cover the payments from your monthly income. You don't say whether paying off the car will empty your savings account, which could be a factor. You never want to leave yourself without financial reserves, but if you can pay off the car in one swipe, do it. You'll save money in the long run. And next time, don't sign on for a loan you can't cover.

Here are this week's reader questions:
Car's onboard data system could haunt you
Do the same dealer fees apply when buying or leasing?
Should I use my savings to pay off my car loan?
Is it better to pay cash or finance a new car?

If you have a question for Terry, e-mail him at Driving for Dollars.


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