How to be smart financially with an unexpected cash - pay off debt or invest or something else?!

ESG3121

hi - looking for help... ive recently came into a cash lump sum of substantial amounts, well to me anyway!  Ive taken financial advise locally and now ever more confused..
Do i pay off car loan £18,000 to which i would need to pay £10,000 anyway in 3 years time to keep the car which i will!  Pay off a kitchen loan of £10,000 which has 3 years left, or pay off some of my mortgage ??  Or do none of these and invest the cash?!  of option 4 do some debt pay off and invest the rest - there isnt enough to cover everything so how do i do this in a smart way!  Please help! Thanks

Alexland

What are the interest rates on the loans and are there any early repayment penalties?

Do you already have a cash buffer in the event your regular income stops or need to make exceptional expenditure?

Are you making good use of any pension options you may have?

ESG3121

hi Alexland thank you!  
interest rate of car is 6.83% ending 2024 with £11,000 final payment and kitchen is 9.27% ending 2024 both have early repayment but not a huge amount.  I have a small cash buffer which would keep us going 6 months if one lost a job for example and or could use if something went wrong to replace etc.  I have no pension apart from state! im just about to enter into a pension scheme starting next month but starting late as currently 45 years old! Really appreciate any advise! 

Brie

based on the interest you quote I'd say pay off the kitchen loan first and then whack some on the car loan if there's anything left.  That will save you most in the long run. 

And then I'd look at why you have 6 months of savings when you have a car loan at nearly 7%.   If that would get rid of the loan then I'd do that and put the money you're not then paying to loans back into your buffer account.  Or against the mortgage. 

But that's me - I'd rather have no savings but pay less interest.

kuratowski

In that situation and those interest rates, I think I would pay off the loans (but not the mortgage) and then divert the monthly payments you're currently making on the debts into additional pension contributions in future.

bostonerimus

At those rates pay off the debt asap. Guaranteed returns of almost 7% and more are impossible to find today.

Alexland

As above those interest rates are really high so if there are no significant early repayment penalties then it would be good to get that debt cleared. Good job on joining the pension never too late but ensure you are making the most of the opportunity getting maximum employer matching and you may wish to make an even higher level of contribution to catchup and be tax efficient.

grumiofoundation

ESG3121 said:

hi Alexland thank you!  
interest rate of car is 6.83% ending 2024 with £11,000 final payment and kitchen is 9.27% ending 2024 both have early repayment but not a huge amount.  I have a small cash buffer which would keep us going 6 months if one lost a job for example and or could use if something went wrong to replace etc.  I have no pension apart from state! im just about to enter into a pension scheme starting next month but starting late as currently 45 years old! Really appreciate any advise! 

In your position I would certainly pay off the high interest (car and kitchen debt)

With no pension provision I would prioritise first that over paying off the mortgage. Depending on how much is left after paying off the debt you can pay a lump sum into pension (amount depends on salary) and/or you can use the savings from not paying debt to contribute monthly.

Are you an employee? If so join the workplace pension scheme immediately as you are missing out on free employer cash. 

theoretica

As others have said, get rid of the interest rates on the loans first, but then make sure the payments you save yourself from the cash flow go to something intentional and don't just get spent randomly.  You don't have enough to pay the debt off and invest all in one big lump, but paying the debt off will then give you leeway in your budget to invest in a pension or elsewhere as a regular thing.

Albermarle

 im just about to enter into a pension scheme starting next month but starting late as currently 45 years old! Really appreciate any advise! 

Once you have followed the advice above about paying off your loans , and started a new job/pension scheme, then feel free to come back if you have any questions about the pension. For example , the best way to make extra contributions and how the pension should be invested .
Starting at 45 is pretty late so you need to add as much as you can sensibly afford.

Alexland

Also if there are 2 of you sharing a mortgage you might want to consider life, critical illness and personal accident insurance incase one of you becomes unable to work. There are often good cashback offers on insurance and some employers can offer attractive group rates so it's worth shopping around. Provided the mortgage is affordable then there's not much point paying it back early (unless you can get onto a better interest rate from an improved LTV) as over the long term the tax and growth advantages of a well invested pension should outweigh the mortgage interest rate.