Pay off 8.4% personal loan or keep building emergency fund?

[urghay]

We owe 6k to a 8.4% personal loan. Now we have 6k in a HYSA yielding 5%. My salary is ok and we should be able to accrue this amount of savings in 4-5 months.

We reworked our budget and clearly have been living above our means. Should be better going forward.

Anyway, the main question is do I keep on building my emergency fund or go ahead and get rid of this personal loan. We pay 1 k a month to the loan.

Thanks in advance.

 

[coveybed]

@urghay Get rid of the loan, 8.4% interest is costing you more than anything you have that’s accruing interest in savings. Then you have an extra $1k a month to put in your HYSA

 

[fisho]

@urghay $1,000 in a small emergency fund

Pay off all non-mortgage debt

3-6 month expenses in a large emergency fund

Invest

 

[uras]

@urghay Pay off all but keep 1k cash. If that means that 1 k stays on the loan for a month.

 

[tdsamuel]

@urghay If you have a way to borrow quickly for an emergency (such as via a credit card although hopefully better), I would pay it off. Otherwise, you need to keep some of it available. If you choose the forma and use something high interest, I would have a plan ready to go to convert it quickly to a low interest loan until you can pay it off.

 

[spikeone66]

@urghay It really depends on a lot of factors.

How big is the loan? How long do you anticipate your emergency fund will last as it currently is? How stable is your career? Do you have a dual income household? If so, are the incomes relatively equal to one another?

 

[urghay]

@spikeone66 My wife stays at home with kids. My job security is very high and salary will go up 5-6 times in a little over a year. My emergency fund will last and only go up. Barring the totally unexpected but even then we could use a card and pay it off before it accrues interest. The original amount of the personal loan was 30 k. We owe 6k

 

[spikeone66]

@urghay If you owe 6k and anticipate that you could pay it off within 6 months without touching your current emergency fund, I'd pay it off over the course of those 6 months. Yes it will cost more than paying it off, because the interest rate on the loan exceeds the bank interest rate... But you have a single income household. In the event that you lose your job (even if this is exceedingly unlikely) it would be bad to be without cash on hand and need to put it on a credit card, which would have much higher interest rates.

But this is subjective. It's not just about the simple math of it, it's about tolerance for risk. If you said you had dual income and they were roughly equal, my answer might be different.

 

[urghay]

@spikeone66 I think you’re right. We can probably pay it off within 3-4 months and not touch our savings.