Lump sum: pay off debt or keep

I have a lump sum from a redundancy payment of around 60k. I have a new loan of 17k at. 6% ish rate that will cost about 8-900 this year alone.
I am planning on taking about a year break from working and possibly only working part-time for a while after that so need the cash to supplement income.
I have dependants so roughly 4-5k worth of monthly outgoings that I'm trying to reduce as much as I can (but realistically will remain around 3.5-4k.

It bugs me to be paying so much interest to the bank, but is it smarter to keep the cash available?

I probably wouldn't be able to get a loan out again if needed now I'm out of work I imagine.

TIA

Depends on your need for liquidity.

You're planning live off your lump sum for the next year; you estimate up to 4k/month. So that's 48k right there that you need to put aside.

That leaves 12k out of your 60k. You could use that to reduce your loan to 5k; you'd save about €60/month in interest. But then you'd deplete your savings completly after 12 months; you'd have to resume at least part-time work and you'd have to do that on a scale that would net you at least 4k/month to maintain your not-very-lavish lifestyle.

Mabye you're comfortable with those constraints, in which case reducing your debt is the rational way to spend the 4k.

You could, of course, hedge your bets; spend half of the 12k on reducing your loan (saving about €30/month in interest) and put the other half by as a cushion so that in 12 months time you'd have the option of living in frugal idleness for a few more weeks, or of taking a part-time gig that paid a bit less than 4k/month and relying on your savings to bridge the gap.

What are the monthly repayments on the loan?

I don't know your circumstances but taking a year off isn't going to give you much a buffer. I was similar in the amount of redundancy I got a few years back. I went and got a job asap. Took approx 6 weeks that money has come in very handy doing projects in the house like 2 bathroom complete refurb, money towards replacing car, solar panels etc.

Think about the time you are taking off and also it can sometimes be difficult getting back into the workplace after a time out of work

Usually there is a long timeframe between redundancy announcements and handing over of redundancy payment. The loan seems to have been taken out during this period ? If so why didnt you wait till you had the actual cash to purchase?

Very expensive way to spent 60k, a year will fly in and you will need to spend at least 3 or 4 months of it looking for and getting a new job!

Parazard2 said:

I have a lump sum from a redundancy payment of around 60k. I have a new loan of 17k at. 6% ish rate that will cost about 8-900 this year alone.
I am planning on taking about a year break from working and possibly only working part-time for a while after that so need the cash to supplement income.
I have dependants so roughly 4-5k worth of monthly outgoings that I'm trying to reduce as much as I can (but realistically will remain around 3.5-4k.

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ClubMan said:

What are the monthly repayments on the loan?

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Let's assume €17K over 3 years at 6.5%. That's c. €520 p.m. in capital plus interest payments.

Let's assume that your normal monthly outgoings are €4.5K. With loan repayments say a round €5K.

So you have two options (well, partially reducing the loan introduces other options):

1. Keep the loan: €60K / €5K = funds for 12 months
2. Clear the loan: (€60K - €17K) = €43K / €4.5K = funding for c. 9 months

Thank you everyone. Apologies I realized I left a couple of key details out.

- Monthly repayments for the loan are 355 (3 years term). The expensive bit is now and partial repayments will only reduce the end of it, for which the interest isn't that much. So in my mind it's either pay it off or it won't make that much a difference?
- I will have income of about 1.5k monthly from other sources and the redundancy would complement that so would need to use 2-2.5k monthly from that pot
- I had just got the loan out days before being told my job was at risk. I was changing from monthly repayments of 640 to a longer term loan to make these more manageable
- I absolutely want/need to prioritize a break from work for my well-being

Options: would either of these be better options than the all or nothing of paying off in full v not at all?

Option a: put a big chunk into a savings account to buffer some of the cost of the loan with smaller interest earned in it. So keeping the liquidity while reducing the cost of the loan this way.

Option b: ask family for 10k and repay them with a much smaller nominal interest+ throw 7k at the loan

If these are better options, which one is best?

Thank you so much. My brain struggles with numbers

Parazard2 said:

- Monthly repayments for the loan are 355 (3 years term).

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Are you sure?
€17K @ 6% over 3 years should be more like €530 p.m. capital + interest repayments by my calculations...

Parazard2 said:

- I will have income of about 1.5k monthly from other sources and the redundancy would complement that so would need to use 2-2.5k monthly from that pot

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I can't understand why people often do this. Ask one question only the subsequently add further relevant info that changes the parameters of the problem.

Parazard2 said:

If these are better options, which one is best?

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It's simple to crunch the numbers of the different scenarios to figure out which is best from a purely financial point of view. I'm not going to bother in case even more information follows that would render such an effort pointless.

I'm sorry, you're absolutely right I should have been more thorough with the relevant information I shared.
I'll just speak for myself but I seriously struggle to select all the relevant info and work out the calculations for different scenarios, hence why I am here looking for help I guess.
Rest assured that your input has been helpful and is very much valued and appreciated. I'm sorry if I made you feel like I was wasting your time. For what it's worth it was definitely not waste.

Best of luck. I wouldn't personally loan money off family but I think your approach to looking for info / seeking guidance is a good one.

Best of luck with the redundancy ensure you get tax advice and then also avail of appropriate job seekers / welfare after. The change after redundancy can be a tough transition

Parazard2 said:

'll just speak for myself but I seriously struggle to select all the relevant info and work out the calculations for different scenarios, hence why I am here looking for help I guess.

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There is no right or wrong answer. Selecting one option (e.g. paying off loan early) saves you interest but gives you less of a buffer. It depends on which is more important to you. Don't get stuck in the calculations. Keep it simple. Just figure out would you rather have, say roughly €1k in interest saved or roughly 3 months more of a buffer.

I personally would pay off the loan as I see that as wasted money but its a personal choice. I would keep the family loan option as a last resort and I would review things after 6 months. That is a reasonably long time and you may feel refreshed by then. Don't forget about any Social Welfare entitlements that you may have and also consider the impact of any gap on your PRSI Stamps.

Yes exactly thank you, I agree.
So would putting a chunk of the lump sum into a savings account for say a year make any sense to buffer the cost of the loan but keep both options open aka I could then decide to pay off the loan but the cost of interest would not be 1k, rather 500, which I could live more easily with?

Again, its a personal decision. You may think that you're getting deposit interest at approx. 3% and that would cover half the interest cost of the 6% loan but rates are subject to DIRT / deposit interest tax unless otherwise stated so you actually only end up with approx. 2%. For me, its not worth the hassle.
If you could live with interest of 500 then maybe pay off the bulk of the loan e.g. €12k and hedge your bets.

Thank you so much. I just thought of an option c but I don't know if it makes any sense.
It's because if I pay a big chunk of the existing loan it will only shorten it, which will not cut the cost of the initial period.

Option c: given I'm technically still employed (on notice) would it make sense to pay off the existing loan and get out a smaller one for 10k? Wild the interest in payments in year 1 and 2 likely be smaller than 80-90 pm?

Parazard2 said:

Wild the interest in payments in year 1 and 2 likely be smaller than 80-90 pm?

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As I said before, all of these scenarios can easily be modelled using a calculator like the one that I linked earlier.

I think you are thinking about this all wrong. The loan (and its interest) are secondary to what you are trying to achieve which is taking 9-12 months out of the workforce and resume part time after that.


From your previous thread, you have earning capacity of ~€100k, how likely is it that you will get something like that part time? Especially as a new hire? You need to be realistic about the type of job you will return to which is full time at €100k or maybe part time at a more junior level.

What do you think is achievable salary wise for a part time role?

And your spending still seems to be a problem from your previous thread. You can't do everything all at once so it is unrealistic to expect that you continue spending up to €4k per month while unemployed and eventually working part time. You really need to use your time off to get your spending under control and down to or below €3 - 3.5k for everything

As for the loan itself, paying the interest on it for 1 year is fairly minor in the overall scheme of things so if it helps to achieve the above then just keep it as is. If after 6 or 9 months you have clarity on your plans for employment and your spending is under control, then just clear it in full.

You also need to plan out your income for the next 12 months to see what your cashflow looks like. Will you be entitled to the new higher rate of jobseekers benefit? Are there add ons for having 2 dependents? Have you secured maintenance from your ex? Do you have any other income sources? Include the child benefit payment

You will probably find that your €60k is only dwindling by €1-2k per month when you work everything out.

In a nutshell, give it 3 months:
- get your spending under control
- understand your income while unemployed
- decide if you can stay out of work for the full 12 months
- decide when you need to start job hunting
- clear the loan as soon as you are comfortable with all of the above or once you have started a new job