[thesteve]

I've read through Ramsey's thoughts before, but I can't remember the specifics well enough to know what the advice would be on something like this...

I've been unemployed for the last few months, but will be taking on a full-time job right after New Year. As part of this, I will be cashing out my retirement from a previous job. This will allow me to pay off roughly half of one credit card or pay off about 40% of a car payment. I think if I apply the leftover money will we get from my wife's student loans/grants we can probably knock out (or at least be within a couple months of knocking out) one of these.

Now, what I remember from Ramsey was to eliminate the highest interest rate first. This is where it gets a little complicated for me. The CC has a rate of 6.99%. The car has a rate of 5.24% (I think). However, the minimum payments on the CC (because it's an indefinite loan) are about 1/3rd of the payments for the car.

So I guess my question is, should I try to pay off the loan with the higher rate first (the CC), or the loan with the higher minimum payment (car)? I am not sure if paying off the car loan faster will have any sort of positive effect on lowering the interest paid in the long run since it appears to be calculated into the original loan figure. That is something I need to take up with my bank.

[TheProdigalModern]

I believe the conventional wisdom is that one should pay off loans to hard assets (cars, house, etc.) first because you're always going to need them and because they can be taken away if you get behind on payments.

If I am not mistaken, I believe Mr. Ramsey advocates making a "heavy" payment on the item you can pay off first while making a "lighter" payment on the debt obligation that will take longer, and once the first obligation is paid off you roll over those payments to the second obligation, so if you are paying $300 a month on your car note and $250 on your credit cards, when the car is paid off you can put $550 forward on the credit card, which means that you're paying much more on the balance and much less on interest.

Also, if you can refinance the car before making a budget, that would be ideal. I was able to save several thousand dollars on interest by doing so; I got a bum deal on the initial financing, but the bank was able to reduce the interest by half.

[thesteve]

Originally Posted by TheProdigalModern

I believe the conventional wisdom is that one should pay off loans to hard assets (cars, house, etc.) first because you're always going to need them and because they can be taken away if you get behind on payments.

If I am not mistaken, I believe Mr. Ramsey advocates making a "heavy" payment on the item you can pay off first while making a "lighter" payment on the debt obligation that will take longer, and once the first obligation is paid off you roll over those payments to the second obligation, so if you are paying $300 a month on your car note and $250 on your credit cards, when the car is paid off you can put $550 forward on the credit card, which means that you're paying much more on the balance and much less on interest.

Also, if you can refinance the car before making a budget, that would be ideal. I was able to save several thousand dollars on interest by doing so; I got a bum deal on the initial financing, but the bank was able to reduce the interest by half.

Because our car loan is so low at this point, I don't think it qualifies for refinancing. It's definitely something I've thought about though.

Right now we're not in a situation where we're fighting to stay on top of payments or anything, we're just trying to figure out where to best place to apply the extra one-time income would be.

[beanbag]

if you are unsure, perhaps you should split it between loans.

i have heard that you should put extra money on the highest interest, and i have also heard you should pay down the smallest debt first. then you can apply that money to the new smallest debt and snowball the amount you put toward debt.

[thesteve]

Originally Posted by beanbag

if you are unsure, perhaps you should split it between loans.

i have heard that you should put extra money on the highest interest, and i have also heard you should pay down the smallest debt first. then you can apply that money to the new smallest debt and snowball the amount you put toward debt.

Yeah, that's the conundrum. The CC is the lower rate, but it's also the smaller of the two loans.

I definitely need to cruise over to my bank this week and talk to a loan specialist about how the car loan works. I can wander through my CC statement and make sense of it, but the auto loan stuff I don't have anywhere nearby.

[jeepnstein]

I'd say go after the CC first. My thinking is that the credit card companies can and will jack you around with an interest rate so you are playing with fire even having a balance. Been there, done that, and Lord willing next month I'll never have a credit card balance ever again. Since it's the lowest balance you're sticking with the Ramsey Way. With the car loan you have something tangible and with value to secure it. If things got really bad your could sell the car and eliminate that debt. That's not so easy with a credit card.

Don't over think this thing. Just knock out that credit card and then go to the next balance. Ramsey works if you let it. We did a Crown Financial Ministries seminar a few years back and it works pretty much the same way. I'd be even closer to being a free man if I would have listened to what they were saying. Debt is slavery.

Go from lowest to highest and resist the temptation to go any further in debt. Congratulations on the new job. That's truly a blessing given the state of affairs in the world right now.

[redbaron]

Ramsey's thing is always pay off the items from smallest balance to largest, so you're eliminating one and rolling that payment into the next. While you can prove that you can save a few dollars mathematically by going via interest rate, most people actually save more by doing it his way because you get gung ho once you actually see progress.

I'm guessing if you're like most people, order should be CC, Car, student loans, house (assuming you own a house). For what it's worth, he does say that the debt payment happens after you take care of food, shelter, electricity/water/heat.

If you go on his site he's got the basics of his plan outlayed, and you can get his book for like $10 most of the time, it's worth reading.

[thesteve]

Thanks guys. My wife says I'm definitely over thinking it and that the CC makes the most sense.

[JBend8]

Yeah, we did the Ramsey thing too and he said although not NECESSARILY the fastest way, but the best way for psychological reasons is to simply tackle them by size from smallest to largest. So take the minimum payments on all and what you have left to pay towards one pay towards the smallest.

[JBend8]

Oh sorry and forgot to add from personal experience paying off a bunch of different school loans between my wife and I, it definitely is freeing to get one out of the way regardless of size so I definitely recommend it!

[bravesfan007]

As a resident accountant, I would also recommend taking care of the credit card first. That balance will continue for nearly forever if you let it. At least with the car loan, there is light at the end of the tunnel if you pay only the minimum payment.

[Epaphras]

Originally Posted by thesteve

I've been unemployed for the last few months, but will be taking on a full-time job right after New Year. As part of this, I will be cashing out my retirement from a previous job. This will allow me to pay off roughly half of one credit card or pay off about 40% of a car payment. I think if I apply the leftover money will we get from my wife's student loans/grants we can probably knock out (or at least be within a couple months of knocking out) one of these.

I'm a Ramsey-ite myself. We paid off all our debt just before our son was born last month. It's an amazing feeling. Now we're working on building up our emergency fund and starting to save for a down-payment on a house! We want to have enough by next spring (2013).

Did I read the bolded part correctly that you are going to use leftover student loan disbursement money to pay off other debt? If so, is it too late to simply take less out for the student loan in the first place? You are essentially borrowing money to pay off other borrowed money by doing that.

If it's too late to stop the disbursement, then I suppose applying it to better debt is a better use of the money than spending it.

Now, what I remember from Ramsey was to eliminate the highest interest rate first. This is where it gets a little complicated for me. The CC has a rate of 6.99%. The car has a rate of 5.24% (I think). However, the minimum payments on the CC (because it's an indefinite loan) are about 1/3rd of the payments for the car.

Actually, he advises to pay off the debts in the order of their balance, from smallest to largest. The amount more you might pay in interest that way is negligible, but you really do get so fired up paying off the smallest debt that on paper, it dosen't make sense but it works in the real world in terms of giving you a clear goal, traction, and a relatively quick reward feeback system.

So I guess my question is, should I try to pay off the loan with the higher rate first (the CC), or the loan with the higher minimum payment (car)? I am not sure if paying off the car loan faster will have any sort of positive effect on lowering the interest paid in the long run since it appears to be calculated into the original loan figure. That is something I need to take up with my bank.

Which loan is bigger? If the car payment is bigger, pay the mimimum on that and throw all extra money at the credit card until it's paid off, then throw that plus the old minimum payment on the credit card, to the car.

A couple questions to ask yourself about the car:
- Do you even want the car? If you could go back, would you buy that car for that much money at that interest rate? If not, sell the car.
- Is the total value of the car -- and all vehicles you have -- more than 50% of your income? If so, sell the car immediately.
- If you do want the car and it's not more than half your income, can you pay it off in less than 18 months using the snowball method? If not, sell the car.
- Do you owe more on the car than it would sell for (private sale)? If so, and you don't want or can't afford the car according to the above, can you get a note for the difference from your local bank or credit union, and pay that debt? So if you already owe say $16,000 and it could only sell for $11,000, you would get a personal note for $5,000, pay off the car loan with the $5,000 plus the sale of the car, then pay off the $5,000 note (it's debt you already owe, not new debt). If you can't get a note for the difference for whatever reason, then you are stuck with the car until you either pay it down enough to the value you could sell it for, or until you pay it off and own it outright.

Hope this helps.

[thesteve]

We needed the student loan disbursement in order to pay for part of tuition + child care, however there is still a large remaining portion. As far as I could tell from the financial aid program, the loan is an all or nothing set up. I could be mistaken, but will not have a chance to look at it again until the next award comes out for the fall semester.

Right now, the amount on the CC and car are probably about the same. In fact, the car payment might be lower by a couple hundred bucks. The interest rate on the car is a re-financed rate. The original rate was about 12%. The loan is small enough now that the bank will not refinance again.

Do I want the car? It sure makes life a lot simpler.
Is the value higher than 50% of my income...annually? I don't think so, at least not before taxes.
I think the car is scheduled to be paid off in the 18-22 month range. A rough calculation is saying 19 months, but that's not factoring interest, which may increase it by a month or two.
I do not believe that the value of the vehicle is lower than the remainder on the loan.

To clarify something from earlier, in case I didn't mention it, the car payment doesn't have a higher minimum because it's more debt or a higher rate, but because it's a time-limited loan.

[Epaphras]

Originally Posted by thesteve

Do I want the car? It sure makes life a lot simpler.

All I meant was, Do you want this specific car? In other words, to accelerate your debt payoff, what is preventing you from selling this car, paying off the loan, and buying a $1,000-$2,000 beater to get yourself to and from work or your wife to and from school?

I have found that there are very few instances why someone needs a specific vehicle. If it's a pickup and you're a contractor, that makes sense. If you are in Alaska or somewhere remote and you need a 4x4, fine.

But I would challenge you to consider if you really need that specific car with that large payment. Is that specific car worth paying extra on for 19 months?

Could you sell the car, pay off the loan, and buy a beater with cash with the difference?

I actually called the show and got through about 2 years ago. My wife and I were driving one paid-for car, but I got a new job and we couldn't make it work with her taking me to and from every day, so we needed a second vehicle fast. We only had $900. I ran through all the scenarios, and Dave challenged me with the following (which I did):
- Buy a car on Craigslist for the $900 you have. You only need it to run for 2-3 months.
- Save up as much as you can in those 2-3 months.
- After 3 months, sell or scrap the car, take that money and combine it with your savings, and buy another (better) car with cash.
- Continue to save while you drive the newer car. If it dies in 6 months, scrap what you can and upgrade again.

The car I bought had a ton of miles on it and was ugly as sin, but what do you expect for $900? We saved ourselves a car payment every month, I only had to put $100 worth of tie-rod work into it, and it ended up lasting me 9 months, before I got my grandpa's 10 year-old car with 55,000 miles (yeah) for free when he went into assisted living. I scrapped the car for $300 and we took that plus the car payment we had been saving ourselves and put it on my wife's student loan.

Moral of the story: you aren't married to a car. We as Americans attach much more permanence to vehicles than they warrant.

Bottom line: If selling this car and driving a beater for a few months before saving enough to buy a better used car that you own outright, will save you having to throw a ton of money at paying off your current car for 19 months, isn't that worth it?

One might say that a beater might need more repairs. To that I say:
- If you bought the car for $900, make that your "lifetime deductible" for repairs on the car. If you do $500 of work and then a month later another $600 bill comes, that's when you scrap the car and move on. For you the number might be half the value. Whatever it is, you can choose when to bail and you're out only the original cost of the car and any sunk repairs. How does that compare to the car payments and interest you would be paying during the same amount of time?
- Add up your total car payments, interest, and anticipated repairs on your financed car for the 19 months you will be paying off the loan. Do you really think you will sink that much in repairs in a series of cheaper cars in those 19 months? Chances are you won't, so it's actually much cheaper to drive paid-for cars that may or may not be money holes. As long as the total repairs don't exceed what you'd otherwise be paying in payments and interest (and repairs), it's a good deal.
- The insurance would be cheaper on a beater because you probably wouldn't have comprehesive and collision coverage. Just sayin.

[thesteve]

Hmm...a lot to think about.

I don't know how much more than the loan we could get for the vehicle. I was thinking loan +$2-3K, but now that I look at craigslist, I'm not as certain.

My wife's big concern is moving from a vehicle that is reliable to a vehicle of unknown reliability. Because we're in the middle of a school semester, having the vehicle she would be driving break down would be a massive inconvenience. Given the traffic flow in San Diego, being in a single vehicle situation would have me dropping my wife and kid off at school an hour before my daughter's day care opens up in order to make it to work on time.

That all being said, this is a lot to think about and it might be something we could feasibly attempt come the summer when my wife and daughter won't need to go anywhere during the day.