Pay of credit line/debt with savings… or not…

Hello,

Dilemma in short, My wife and I have 25k in debt ((on a 200k line of credit, guaranteed about 2 or so points over prime forever) at about 7% interest. We also have about 40k in savings at 5% interst max.. We are both used to having a 3-6 month cushion in the bank. We pay the loan down as much as we can each month but It still seems we’re paying a elluva lot of interest

My rational side say’s pay the loan off all or in part with savings (?); use aour monthly payment allotment to build up our savings again and, in a real pinch, hit up the line of credit line. My wife is very leery of having our nominal savings depleted. (Until 3 year neither of us have had a line of credit). But the most rudimentary math says we’d be way ahead by paying it off. (Aprox. Math says were losing 2 %)


Other extraneous details, pertinent or not; our line of credit has no collateral backing it. Our So. Cal. house and 3 cars are completely paid for. I have about 7 k in the stock market. We have an impeccable credit rating. We also have no revolving credit card balance.

We’re both in our mid 40’s with a healthy 3 yr. old .I’m self employed (boom and bust). My wife works part time at my families’ biz. -And last but not least, grandma has established a college fund for our son.

We live a modest lifestyle but are comfortable. I have high hopes for the future of my biz, but who knows. My wife has very marketable skills.

So the question is:

1) Is there any reason at all for not to pay of our debt with are savings (given our healthy line of credit at it’s reasonable rate for that rainy day (?))

2) If we were to pay the whole loan of, would we essentially close our credit line?

3) Any merit to paying most of it off while keeping a modest balance?

4) Should the for mentioned be the right strategy, should we pay of al the debt, then borrow once a month and pay it of in full every month?

5) Are there some tax disincentives for doing any of this?

6) Are we likely to get hit with some early payment fee (anything standard)


For me I just hate having the debt hanging over us like a cloud, effectively loosing money every month (gain 5% on savings and pay 7% on the loan), just for the piece of mind of having savings, who needs it if you have a good credit line? (we dip into it for a month once in awhile)

All educated advice is appreciated!! I must be missing something.

Thanks in advance

Croak

I completely understand your wife's point of view. Your job means a shaky paycheck, and she's underemployed by working part time. That savings is a huge cushion, a bulwark between her and her severe fear of losing everything. There's no dollar figure, no balancing of interest rates, that will convince her that depleting that savings is a wise idea.

What I don't understand is why you can't pay the credit cards with your income. Have a paid-for house and paid-for three cars, but can't pay more on the credit card? If your two incomes is sufficient to manage that debt, then she needs to move up to full time, and you need to get a part time job around the times when you're free from the business. If you have no other debt, you should be able to put massive amounts of money on those credit cards, and pay it off quickly.

1 -- All else being equal, I would probably pay off that debt with the savings, and re-build the savings. You must realize, however, that this might drive your wife to divorce court. Some things are more precious than 2%-math -- peace of mind against the Big Bad Wolf is one of them. Perhaps you can meet her halfway -- use HALF your savings of $40k to pay off $20k of your $25k debt, and promise to eliminate the remaining $5k before Christmas.

2 -- If it's credit cards, no, you would not close the credit line, unless it were a condition of your credit account (which would be odd if it were).

3 -- None whatsoever. Why continue to pay someone else to hold money for you? If you can pay it off, pay it off. After you pay it off, pay it off in full every month.

4 -- Not as some sort of strategy, no. Use it for ordinary purchases you would rather put on the card than pay cash for, but pay it off at the end of the month because it makes sense to do that, rather than carry a balance.

5 -- No. Interest on credit cards is no longer tax deductible, so there's no TAX RELATED advantage to either paying it off in full, or continuing monthly payments.

6 -- Nothing of that sort is standard. Consult your original documents to see if you have some wacky credit card company!

Hello,

Thanks for your reply & advice. A few points; This a line of credit, no cards, just enough checks to spend yourself into bankruptcy at 7 %. As to the marriage …it’s strong, I just need to be persuasive. I was really just hoping to have thread of resounding “pay of the debt!” replies to back me up.

To me, if we can keep are line of credit having paid off the balance, why not pay it off? For that rainy day? then we use the credit line. (I guess I’ll have to read our agreement to find out if there is a minimal balance required to keep our interest terms). I think your right though, maybe a compromise would be a fair start.

I just don’t see any reason at all for carrying a balance if we can pay it off with the knowledge that we can always hit up the credit line if we need to. I mean to me we’re financing a measly savings account with a pricier loan. False security.

Anyway, thanks again for your input.

Croak

I was in the process of posting a response yesterday, but the entire thing deleted while my daughter was talking to me about her potty training successes ('control V' instead of 'control C' can really mess up a paragraph).

Paying off a 7% debt with 5% savings makes perfect sense if the loan interest is not tax-deductible.



An important question is have you been contributing to your IRAs? Depending on your entire financial picture, IRA contributions would most likely be more substantial than either solution.



Maybe paying off $5k towards the loan every 2 months or so would help you pay off that debt within a year while not depleting your emergency savings all at once. That way, you could pay of the entire debt within a year while your increased, available income could be used to bolster your savings.