Pay off debt with emergency fund?

GixxerDan

Hi all,

Question around debt repayment- I currently have a personal loan of circa £5k left at APR of 5.68% with payments running until Mar'26. I have roughly the same emergency fund in a high interest savings account paying 5.2%. My question is, should I use all of this or most to pay off my personal loan? This will be my last bit of debt (I have a 0% credit card which will be paid off next month). For what I'd be gaining in interest (0.48 %pts difference) is it worth leaving myself exposed in the short term by having little to no emergency fund left but with no loan left to pay or just let it ride? Thank you.

jt1413

How much do you put towards the loan per month at the moment? 

If I were you I'd pay off the loan with the emergency fund, and then use the money you currently pay on the loan back into an emergency fund to build it back up. 

At the moment, your paying more in interest on that debt than you're earning in interest on the savings, and strictly speaking you don't have any savings as you have the debt. It will be a much better mental win if you can be debt free and building up savings. And if you do need rainy day money before you've adequately built savings, there's the option to utilise some credit, and then funnel your monthly payments back into paying it off again. 

GixxerDan

jt1413 said:

How much do you put towards the loan per month at the moment? 

If I were you I'd pay off the loan with the emergency fund, and then use the money you currently pay on the loan back into an emergency fund to build it back up. 

At the moment, your paying more in interest on that debt than you're earning in interest on the savings, and strictly speaking you don't have any savings as you have the debt. It will be a much better mental win if you can be debt free and building up savings. And if you do need rainy day money before you've adequately built savings, there's the option to utilise some credit, and then funnel your monthly payments back into paying it off again. 

Thanks for your reply. Currently pay £242 a month. I do have a credit card with a decent amount available on it. I guess the worry is if I ended up having to utilise it for something major and then instead of paying 5.68% I'm then paying say 20% because I don't have that money to fall back on. I get your point regarding the difference between debt and savings and something I did think myself. However, the difference doesn't work out much in monetary terms over the course of 12m.

jt1413

GixxerDan said:

jt1413 said:

How much do you put towards the loan per month at the moment? 

If I were you I'd pay off the loan with the emergency fund, and then use the money you currently pay on the loan back into an emergency fund to build it back up. 

At the moment, your paying more in interest on that debt than you're earning in interest on the savings, and strictly speaking you don't have any savings as you have the debt. It will be a much better mental win if you can be debt free and building up savings. And if you do need rainy day money before you've adequately built savings, there's the option to utilise some credit, and then funnel your monthly payments back into paying it off again. 

Thanks for your reply. Currently pay £242 a month. I do have a credit card with a decent amount available on it. I guess the worry is if I ended up having to utilise it for something major and then instead of paying 5.68% I'm then paying say 20% because I don't have that money to fall back on. I get your point regarding the difference between debt and savings and something I did think myself. However, the difference doesn't work out much in monetary terms over the course of 12m.

I guess it's all dependent on how comfortable you'd feel with the idea of having no liquid emergency fund. 

Are you are eligible for any 0% credit cards or can the loan can be balance transferred to a 0% card? This might be a good option, either if you are able to transfer it, or if not, you could pay it off and any future emergencies can be put on 0% card so no interest is accrued while building back up a savings pot. 

GixxerDan

jt1413 said:

GixxerDan said:

jt1413 said:

How much do you put towards the loan per month at the moment? 

If I were you I'd pay off the loan with the emergency fund, and then use the money you currently pay on the loan back into an emergency fund to build it back up. 

At the moment, your paying more in interest on that debt than you're earning in interest on the savings, and strictly speaking you don't have any savings as you have the debt. It will be a much better mental win if you can be debt free and building up savings. And if you do need rainy day money before you've adequately built savings, there's the option to utilise some credit, and then funnel your monthly payments back into paying it off again. 

Thanks for your reply. Currently pay £242 a month. I do have a credit card with a decent amount available on it. I guess the worry is if I ended up having to utilise it for something major and then instead of paying 5.68% I'm then paying say 20% because I don't have that money to fall back on. I get your point regarding the difference between debt and savings and something I did think myself. However, the difference doesn't work out much in monetary terms over the course of 12m.

I guess it's all dependent on how comfortable you'd feel with the idea of having no liquid emergency fund. 

Are you are eligible for any 0% credit cards or can the loan can be balance transferred to a 0% card? This might be a good option, either if you are able to transfer it, or if not, you could pay it off and any future emergencies can be put on 0% card so no interest is accrued while building back up a savings pot. 

I do. I currently have one with circa 18m left at 0% so that is a possibility. It's maths vs emotion I think. Mathematically you're right, emotionally I need to decide how comfortable I am having little to no emergency fund for a few months 

kempiejon

Half and half? Would your loan company take a overpayments? Then at the same rates you'd be debt free earlier.

backinbusiness

kempiejon said:

Half and half? Would your loan company take a overpayments? Then at the same rates you'd be debt free earlier.

I'm a big fan of half and half with decisions such as this - then you've kept your options open.

BiB x 

Andyjflet

Keep £1000 emergency fund and throw the rest at the loan, then working quickly to clear the rest ASAP. 

Philliggi

Im in a similar position regards payment amount, length of loan and total loan left, but ive chosen to live life without an emergency fund to massively over pay the loan. 

The way i see it, mental health is just as important as financial health in circumstances like this. Id much rather live without the debt and without an emergency fund, than live with both. 

If you pay off the loan in full, you would have a £1000 nest egg saved within 4 months if you redirected your monthly payment. 

If your not fully comfortable living without an emergency fund which your post seems to suggest. Hold onto £1000 and the remainder of the loan is gone in 4 months. 

Disclaimer: i know the following isnt the best way to manage money, but it works for me. 

I live life without a fund, and if i do get an unexpected bill, ill pay it out of my month to month budget, and cut the cloth to avoid dropping into the overdraft. If i do need to drop into it i do everything i possibly can to get out of it as quickly as possible. 

My personal view is credit cards make credit too easy to access. An overdraft is scarier given the interest and im much much less likely to dip into it at the drop of a hat. 

I actually have access to £14,000 in overdrafts, over multiple accounts, just in case, but currently ive  used none of it. I dont honestly think i could say the same if i had access to £14000 on credit cards. 

Ask yourself, realistically, how likely is it you would need access to £5000 all at once in an emergency?