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A year and a half ago I took out a Career Development Loan(£7000, 9.9% interest). Which is currently around £4900 now. I have been saving for no particular reason, and I now have over £5000 in savings that is just sitting there. So I was thinking of paying my loan off in full. This would bring my savings down to about £0.

During the pandemic 2 people have just been made redundant from my company, there is only about 10 of us. I have just been brought back from furlough and they have said there are no plans for further redundancies. But being the Junior, if anyone else was to be made redundant it would probably be me.

Should I pay all my loan off in full, or keep a bit of an emergency fund?

Loan: £4900,

Savings: £5000,

Monthly Loan Payment: £247

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    TEN percent interest? Pay it off today. With the 250- a month you'll have saved a NEW three thousand in just a year. You're young, there's little need for an emergency fund. – Fattie Jul 30 '20 at 0:15
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    @Fattie They are only paying ~£40/month of interests currently. Paying off today will spare less than £500 in the coming year. – Didier L Jul 30 '20 at 11:38
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    @Fattie Agree with "debt is cancer". But, the OP seems to be at a non-negligible risk of losing their job. Even if they have a credit card to e.g. buy food or pay for repairs if they lose their income next month, how do you propose they cover their rent/mortgage and bills if they get rid of all their emergency fund? (Keep in mind most credit cards in the UK are at least 15-20% interest and much more for cash withdrawals, and nearly all overdrafts are 40% interest). – penelope Jul 30 '20 at 12:40
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    Lady P, as mentioned in my answer, I do think critical factors are (i) there's no greater job security than being a programmer presently (ii) OP is a young 'un with no responsibilities (iii) even if remarkably it came down to missing a month's rent, one can easy "get away with that" in corona times. moreover for me, if (incredibly) OP was kicked out of their flat and had nothing to eat, for me that is a bagatelle compared to the living hell of debt-mentality OP is currently suffering. I've had nothing to eat / sleep in a couple times and it never hurt me. But: debt-life is no-life :O – Fattie Jul 30 '20 at 12:46
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    @Fattie Sorry, I didn't go digging through OPs network profile to check whether she's a programmer, just responded to the question as asked (recent lay-offs, small company, they said they wouldn't but she thinks she might be next). I got myself into a situation where "I had to get away with it" a few times a couple of years back, and I would not risk putting myself in that situation. You seem to be happy to accept that kind of a risk and think it's no big deal - so I guess that's the part that comes down to how much you're personally risk averse. – penelope Jul 31 '20 at 9:53

12 Answers 12

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What nobody else mentioned yet is what you could do from now on. If you consider your current savings enough of an emergency fund, you can look into regularly overpaying your loan from now on.

How much you keep in an emergency fund is your own personal choice. Typical advice is 3-6 months full expenses (rent/mortgage, bills and necessities such as food), depending on how you estimate your current situation, risks, economy. If you are budgeting well, this should be much less than 3-6 months of salary. (Depending on your location in the UK, your current savings might be considered to cover 3-4 months expenses).

You say you are able to save, so you are obviously living within your budget. If (or when) you are satisfied with the size of your emergency fund, any money you save over that amount can go towards overpaying the loan instead of towards savings, possibly as regular monthly payments instead of a lump sum. If you think you are already over your target emergency fund, overpay the difference. This way, you minimise the risk while still gaining something from it. Specifically -- the something you gain will be the equivalent to saving your overpayments into a savings account with an interest rate 9.9% (the loan interest rate).

In the meantime, while most savings rates in the UK are currently quite bad, look into parking your savings into an easy access account which currently has the highest interest rates, as this will effectively offset your interest rate from the loan (if you owe £5k at 10% interest and own £5k at 1% interest, you effectively owe £5k at 9% interest).

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    Depending on how the loan is structured, making extra payments or larger payments may not reduce the amount you pay overall. – Mark Ransom Jul 30 '20 at 18:35
  • Usually I see two different kinds of emergency funds. The first is about $1,000 while the second is 3-6 months expenses. This is from reddit.com/r/personalfinance/wiki/commontopics i.imgur.com/lSoUQr2.png – MiniRagnarok Jul 30 '20 at 20:07
  • This would defiantly be my accepted answer, I have not though about doing it this way. But I asked my bank I am only allowed to do a full or partial settlement. – Georgia Jul 31 '20 at 7:35
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    Hm, okay, you're not allowed to set up regular monthly overpayments. But, when you say "partial settlement", that basically comes down to overpaying a lump sum at a certain point in time, no? How often are you allowed to do that? If it's relatively hustle-free (or you decide it is worth the bother) and you're allowed to do it relatively frequently, paying a lump sum in every few months (3,4?) would make it similar to overpaying monthly. – penelope Jul 31 '20 at 9:45
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    @Georgia Get a loan on better terms and pay this one off in full. Make sure you can overpay on the new loan you get out. You could save £500 over the rest of the life of the loan. – user100489 Jul 31 '20 at 13:22
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It sounds like you have some very real income risk, so I would not drain my savings completely just to get rid of the loan. I don't know how long £5000 would last you if you lost your job, or how long it would take to find a new job (even one way below your skills) to know how long the fund needs to last, but you could use some of it just to reduce the amount of interest you're paying.

Or look at it this way - that loan is currently costing you £40 per month. If you paid half of it, it reduces the interest to £20 per month. It's not killing you financially, and you seem to be on track to pay it off in less than 2 years given the current payment amount, so I would be inclined to hold it at least until the job risk has subsided. As long as you're not planning on borrowing more money you should be fine.

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    My knee jerk reaction would be to pay off 1/2 of the loan, but I can't argue with your math. It makes a lot more sense to keep the savings. I actually had a similar situation recently where I did pay off half the remaining balance on my car and every so often wish I hadn't, but I don't really regret it, either. Then again, my cash reserve was larger and my loan much smaller. Also, my loan lets me skip payments, since I'm technically ahead, so that can work in my favor while paying less interest. Hard Q to answer and a good A to go with it. – computercarguy Jul 29 '20 at 15:41
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    "If you paid half of it, it reduces the interest to £20 per month" - is that accurate? With typical amortization schedules, the interest is front loaded. I would expect that by paying off half of the loan, you would reduce the interest per month to less than half of what it currently is. – Aaron Cicali Jul 29 '20 at 20:45
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    @AaronCicali No, the front loading is an artifact of the reducing principal. Each period you pay the principal balance times the periodic interest rate (e.g. the annual rate / 12 for a monthly payment). If you pay off half the remaining balance in one month, then the amount of interest paid the next month is half of what it was the prior month. The loan just gets paid off quicker (assuming the same monthly payment going forward. – D Stanley Jul 29 '20 at 21:31
  • With typical amortization schedules, the interest is front loaded. - is this even a thing? I keep seeing it mentioned, but I've never seen it actually happen. What I have seen is interest calculated in advance, so it appears this way, but everything gets re-calculated when you make an additional payment. – ThomasRedstone Jul 30 '20 at 14:33
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    @DStanley I once had a loan from a car dealer that wasn't quite interest-first, but it did have an arbitrary amortization schedule that was more to their benefit than the usual pay the monthly interest then reduce the remaining principle. As soon as I figured it out I got a conventional bank loan and paid it off immediately, because the effects got worse the longer I had the loan. Probably only had it 2 months. – Mark Ransom Jul 30 '20 at 18:43
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"Emergency funds aren't important", eh? Let's try that on for size.

Emergency funds were all the rage during the 2008-09 recession. Suze Orman, for instance, wouldn't shut up about them. In fact, she upgraded them from "3-6 month" to "6-8 month". She's probably right; millions would have had an easier time weathering that recession if they'd had money back.

But then, we had a 10 year boom... the economy has been doing great. The idea of an emergency fund just became sort-of quaint. A notion for the ought's.

I know, we have a few doomsday preppers who are fretting about some sort of oil crash, economic meltdown, out of control pandemic, or whatever, it's always something with them. They can hoard MREs and have an emergency fund if they really want to.

But it sounds like you didn't resolve to create an emergency fund, you just happened to not spend all your money. If emergency funds are not your thing, don't bother. 10 years of strong economy, the Brexit dividend coming in the pipeline... future's bright. What could possibly happen?

Does that actually make sense? Or does it sound like we're deluding ourselves?

No, it really doesn't make sense.

Keep an emergency fund.

Make it bigger than that. There'll be a time in the future when you'll glad you did.

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    Well for starters, inflation could wipe out your emergency fund. Arguably we've already had stealth inflation in the form of the stock market recovery when one maybe wasn't really warranted, as well as strange record home price appreciation and resilience in the auto market. – Michael Jul 29 '20 at 0:34
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    I'm interpreting this answer as "you should keep an emergency fund", but that hinges on my interpretation of sarcasm. :) – Gordon Gustafson Jul 29 '20 at 2:19
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    The internet does not lend itself well to sarcasm... – Stephan Kolassa Jul 29 '20 at 7:55
  • With corporate buybacks and other things artificially inflating stock prices for the past 2-3 years, there's a real concern that there will be another drop in the stock market (after what already happened with Covid-19 scares). And because sarcasm isn't evident until the end, as well as people not understanding sarcasm, and most of this answer doesn't read like sarcasm, as well as people believing WTF-ever they want when something isn't stated plainly and simply, I'm going to have to DV. – computercarguy Jul 29 '20 at 15:58
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    @Harper-ReinstateMonica, yes, that makes it much better. I've reversed my DV to an UV. Thank you! – computercarguy Jul 29 '20 at 16:16
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Can you refinance? As others have said, you're on a high interest rate. If you've still got a job and a sympathetic bank you should be able to work out a new loan at a better rate. If you can consolidate a few other things as well, such as a credit card, you'll do well.

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It is better to have a healthy amount of savings than no debt.

Let's suppose you paid off that loan right now, but something bad happened tomorrow that required you to spend £1000. Instead of being able to pull that money out of savings, you would have to take out a personal loan (or put it on a credit card) at a higher interest rate than the existing loan and worse effect on your credit.

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    If the employment situation was healthier than it is now, the OP could risk paying 1/2 the loan, but I agree that having a large emergency fund is worth it, especially right now. – computercarguy Jul 29 '20 at 15:52
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Salient details to your situation:

  • Based on your currency use you are using you are based in the UK
  • You rent, in the centre of the city, so your rent is "quite high"
  • You don't own a car, and most things you need are within walking distance

There are a few more things to take into account:

  • Under normal circumstances in the UK, if you are made redundant, then you are entitled to redundancy pay from your company. How much that pay is depends on how long you have been employed. From Friday, this redundancy pay will be based on your "normal" salary as opposed to your "furloughed" salary.
    • You have mentioned in the comments that you have only worked for this company for 1.5 years, so you won't qualify for redundancy pay for another 6 months.
  • If you get made redundant, you will be entitled (in most cases) to claim unemployment benefits, which will supplement the risk of being unemployed (either Universal Credit or Job Seekers Allowance usually)
  • 10% interest is a high rate of interest, and you are paying ~£500/yr at the moment to service that loan, which is 10% of your current savings
  • Being in the UK and in gainful employment, you will have being paying (or have paid on your behalf) National Insurance. As a result you will have access to free healthcare (in most cases) from the NHS. This means (that unlike other countries), any medical emergency will be covered by the NHS directly.
  • If you pay off your loan now, you can use the £247 that was going towards the loan to augment your current savings. So if you were saving £100/month previously, you can now save £347/month after paying off the loan.
  • If you are sick, and unable to work, you are entitled to sick pay as a result of UK employment law and cannot get fired for being genuinely ill
  • If your employer becomes insolvent the National Insurance fund is setup to help in this situation. See this page for more information.

The types of emergencies you will need your fund to cover:

  1. Rent (though a successful universal credit application usually includes this)
  2. Food
  3. Utilities

Really the question you need to ask yourself, is how much do I need to cover myself before an application for something like Universal Credit activates the social safety net for you.

The question you are really asking is "what is the risk that I get in trouble in the time between paying off the loan, and having sufficient savings built up".

Taking all of this into account, the risk of paying off your loan now and needing your emergency fund in the interim is small. Even if you do the UK has a sufficient social safety net for those who do become unemployed that your risk of not being able to meet your needs in the short term is low. Being entitled to a redundancy payout would obviously make this more comfortable, so there is an alternative strategy that allows you to keep some of your savings to cover against a short term emergency (ie making sure you have a roof over your head and have food on your plate prior to something like Universal Credit kicking in).

A potential way to reduce the risk of needing an emergency fund even further, would be to pay off half the loan now, build some of your savings up for the next six months, and then once the two year redundancy pay time frame kicks in pay off the rest of the loan. Doing it that way means you have saved ~£375 in interest over keeping the loan without paying it off (£250 by paying off half now, £125 by paying off the rest in 6 months time). Then drastically increase your savings using the £274 that was going towards the loan, and instead will be going into your savings.

It is also worth consulting this flowchart from r/UKpersonalfinance (and their associated wiki) which is tailored specifically to the UK: enter image description here

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  • This assumes that any emergency is going to be months or years in the future, rather than in the next few months, which could happen with Covid-19 still around. We don't know how the OP's company is doing, as they could be on the brink of bankruptcy or on the brink of getting financial help. I've lived +15 years where a 20% reduction in pay would mean I'd be further behind on bills. At times, I was another $200 negative each month for bills. There's still plenty of non-medical emergencies that can make this answer a really bad situation. – computercarguy Jul 30 '20 at 22:34
  • @computercarguy no it doesn't assume that at all. It says that it is a calculated risk to do so. Additionally (on the redundancy pay point), the UK government has a fund (the aforementioned National Insurance) that covers redundancy pay, owed holiday pay, outstanding wages and any notice pay that would be required. – illustro Jul 30 '20 at 22:47
  • The UK social safety net does not work at all like how the equivalent US system does. The unemployment payment in the UK is setup on the assumption that some percentage of the population will be unemployed at any given time, and that they will need to be supported by society. That includes things like free medical care. – illustro Jul 30 '20 at 22:52
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    The beauty of the social safety net in the UK is that I don't need to know the situation of the OPs company to know what supports and entitlements they will have and will get in the event they are made unemployed. Redundancy payments in the UK are a statutory requirement, not an optional payment by the company (they can optionally choose to increase the payment, but there is a minimum they must pay) – illustro Jul 30 '20 at 22:57
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    It's unfortunate people are voting down an excellent answer because they don't agree. This question is a "What is your judgement?" question. By all means vote down answers that are just crap, but you don't vote down on this site because you are on one or the other side of a "What is your judgement?" question. – Fattie Jul 31 '20 at 16:58
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I'm guilty of posting a comment as an answer, so:

TEN percent interest? Pay it off today.

  1. With the 250- a month you'll have saved a NEW three thousand in just a year.

  2. You're young, there's little/no need for an emergency fund.

  3. Something tells me this is software industry. If so, if you do get laid off, if you can't find a new contract (as a junior) in the current market, there will never in the whole 30 yrs ahead in your career, be an easier time to pick up another contract. You have to be realistic, in "the whole world" you're the individual who can worry least about "losing a job."

Debt is evil. (Note that this was just "jet ski debt" - not debt for generating-cashflow business assets.) If tyhe whole experience makes you never again use debt - that will be a huge life win.

The situation would be toitally different if

  • Had four kids
  • In a dangerous insecure industry
  • Aged frail health

In the current actual situation, get rid of the loan, and never get another. Good luck!

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    I agree that the OP should pay off the loan. It’s madness to think that a debt like this should be kept to maintain an “emergency fund”. The OP doesn’t have an emergency fund, they have a debt obligation! – ARich Jul 30 '20 at 17:40
  • Very well said. – Fattie Jul 30 '20 at 17:52
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    Debt is not evil. It can be used for a variety of good uses. It's just many people use it for frivolous things, getting them into bad situations. Been there, done that. And being young isn't a cure for unemployment. Young people need to eat, have clothes, a roof over their head, and transportation just like "old" people. I was laid off many times because I was the least senior/experienced person, so youth is all too often used against people. And it's never easy to "pick up a contract". Been there, done that, too. You are making a lot of bad and dangerous assumptions in this Answer. – computercarguy Jul 30 '20 at 21:38
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    @computercarguy illustro's answer has some good detail to ponder – Fattie Jul 30 '20 at 22:01
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    @Fattie, actually, I didn't like his Answer, either. Too many assumptions, most of them being that emergencies aren't near future. The whole nature of an emergency is that you never know when it's going to happen. If the transmission goes out on the car, that's ~2k the OP won't have if they pay off the car. An accident, employment disappearing, and more are still major problems. And a 20% pay reduction doesn't mean your bills get reduced by 20%. I've been "another -$200 a month" because of bills even when working, so "redundancy pay" wouldn't have cut it either. – computercarguy Jul 30 '20 at 22:41
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This comes down to whether you'd be able to reinstate your loan, or get a new loan, in the event of an emergency.

If getting a new loan in the event of an emergency is not an option, then absolutely, you'll need some emergency funds. Figure out how much you actually need, and pay the rest into the loan.

If you know you'll easily be able to get a new loan, then pay off your entire loan straight away. The ability to get a loan is just as useful as actual emergency funds.

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If you want to keep a reserve of cash and to be able to overpay from hereon in as suggested by @penelope, then, you could take out a different loan on much better terms and use that to pay off the Career Development loan with the exhorbitant 9.9%. By doing this, as recommended by Martin Lewis, you could save several hundred pounds in interest over the course of the loan.

Of course, you could also adjust the amount you want to keep in savings and the amount you want outstanding on the loan as you see fit (So, for example, you could pay some of the CDL off in cash and the rest with the new loan on better terms).

Here's Lewis's calculation on how much that could save you assuming you keep the loan at £5,000:

enter image description here

Of course, this does not include any further savings you might make from being able to make overpayments on the new loan.


Refs: https://www.moneysavingexpert.com/students/career-development-loans/ Accessed 31/07/2020

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In my opinion this comes down to a math problem. How much are your bills and how long will it be until you can find a job if you lost your today? How much income would you have in the interim through unemployment insurance (or whatever they call it in your locale)?

That should give you a number. Keep that amount in savings, maybe 10% more, and use the rest to pay the loan.

Then do somethings in the meantime. Can you work a second job? Cut your expenses. Use a every bit you can find to pay down the loan.

Currently you face an income risk and an expense risk exasperated by this loan. If this job lasts another 6 months or so, you could be rid of this loan. Also that second job can help bridge the gap until you get a new job or even become the new job.

This is a problem best solved by working hard.

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    With the OP actually having a savings, it says they are living within their current means, so generally that means they don't need a 2nd job. Working an 2nd job can easily and quickly wear a person out so they aren't as effective at their days job, risking their day job, which is currently paying them enough. To start a 2nd job just to pay off a small loan is a huge risk of burnout, exhaustion, and therefore doesn't have a reasonable ROI. If it was 20k or more, then sure, but not 5k. – computercarguy Jul 29 '20 at 15:47
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You should evaluate you monthly expenses if you were to loose your job with no emergency fund. Could you pick up the slack with another non-career job if you had to?

How confidant are you about getting a career job in your field right now if you had to?

You should also keep in mind that being junior doesn't necessarily make you a target for a layoff, in fact it could protect you. When layoffs occur salaries are evaluated. In some, not all, the higher salaries are evaluated first. You could be adding lots of value at your current salary.

I recommend paying off the loan and then double your effort to build back your emergency fund and squeeze every dollar you can into it. 10% Interest is rough but in the worse case you get caught without a emergency fund you might have to work a less paying job, run a tight budget and scale back your lifestyle for a bit.

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You do not, never ever, touch your emergency funds. 6 months full costs is the minimum you have to have - crap hits the fan. sometimes, and you may be left with unexpected costs. Even if you are not let go, some emergency of some kind may require you to dig into reserves.

This is not about money - this is about safety. And you seriously said that you may be let off - so this makes it even more important to keep emergency funds. Unless you have assets against which you can borrow, fast (i.e. a large stock portfolio that you can get a loan against) it is essential to have a certain amount as a safety net.

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    The first sentence of this makes no sense. Of course you touch your emergency funds. You touch them in an emergency. – Chris Cooper Jul 29 '20 at 8:21
  • "a large stock portfolio" only works if you have significantly more than 5k, more like +100k, and in today's stock market, that's a lot like gambling at a casino. IE: a bad risk. And some experts say to have up to 12 months in savings, which of course you "touch" because of an emergency. That's exactly what it's there for. – computercarguy Jul 29 '20 at 15:51
  • Not really. If you have half a million in assents and need money for a normal lifestyle for a couple of months there is no risks. Yes, stocks may fall -but not by 90%. I mostly bring that up because i.e. it is HARD to get money for a house even if you own it full - it needs some paperwork, appraisal, approvals, etc., while a security colalteralized credit line is paid out same day with no questions asked. And significantly cheaper in most cases AND without long term obligation (i.e. you can pay it back any day), compared to a mortgage. – TomTom Jul 29 '20 at 17:00
  • With enough assets (Which you have over time unless you are and STAY broke) the risk is very low to get called on. My emergency funds exist in in this form. And I normally live from my investments so - yeah. Happy casino time. VERY happy casino time. – TomTom Jul 29 '20 at 17:01
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    @TomTom, if the OP had half a million in assets, they wouldn't be worried about a 5k car loan. Evidently you've had a lot more time to gather that wealth than the OP does, so that "advice" still isn't relevant to the Q. And I lived for nearly 15 years (as a computer tech) with less than $300 in my bank at any time due to poorly paying jobs and high bills, so it's all too easy to be and stay broke. Don't assume everyone has your same good luck and longevity. – computercarguy Jul 30 '20 at 21:45

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