Need help...I may have ability to pay down debt!

[willowstudios]

Hi, I want to thank you for any help you might give me..

My main question is - what should I do with my finances? I've got an Auto Loan that is causing me at least $600/mo - (payments, insurance, high gas cost)

Should I pay off the Auto Loan and save myself $300/mo at least??

Credit cards and Auto loan etc

1st mortgage:
$115,000
6.3% fixed rate
$735/mo. payment

2nd mortgage:
$140,000
4.9% variable interest only for 9 more years
$300/mo. (was $780 last year!)

Citicards:
$8500 (maxed out)
7% for life of loan
$120/mo.

Bank of America:
$13.000 (maxed out)
6.9% until Feb 2010 and then 12% (if I'm never late)

Discover card:
$3700 ($2500 available credit)
6.9% until March 2010 and thereafter 12%
$80/mo.

Auto loan (loan requires $118/mo. auto insurance and has bad gas mileage)
$11,000 (4 years left on loan)
$280/mo.
8.49%

TOTAL cash available from emergency fund and cash savings - $15,000

TOTAL income is $2800/mo. (after taxes) and my TOTAL expenses total about $3000!


Thank you so much for any help!!!

Chris

[autoxer]

That's a lot of credit card debt! Are you in control of your spending? Is there other spending you can cut out to free up money for paying down those credit cards?

Is the truck worth more than the loan? Have you considered selling it and finding cheap transportation?

I think you need to take a better look at your expenses, to see what's a need and what's a want.

[jIM_Ohio]

Originally Posted by willowstudios

Hi, I want to thank you for any help you might give me..

My main question is - what should I do with my finances? I've got an Auto Loan that is causing me at least $600/mo - (payments, insurance, high gas cost)

Should I pay off the Auto Loan and save myself $300/mo at least??

Credit cards and Auto loan etc

1st mortgage:
$115,000
6.3% fixed rate
$735/mo. payment

2nd mortgage:
$140,000
4.9% variable interest only for 9 more years
$300/mo. (was $780 last year!)

Citicards:
$8500 (maxed out)
7% for life of loan
$120/mo.

Bank of America:
$13.000 (maxed out)
6.9% until Feb 2010 and then 12% (if I'm never late)

Discover card:
$3700 ($2500 available credit)
6.9% until March 2010 and thereafter 12%
$80/mo.

Auto loan (loan requires $118/mo. auto insurance and has bad gas mileage)
$11,000 (4 years left on loan)
$280/mo.
8.49%

TOTAL cash available from emergency fund and cash savings - $15,000

TOTAL income is $2800/mo. (after taxes) and my TOTAL expenses total about $3000!


Thank you so much for any help!!!

Chris

why pay off the car first?

I would take the $15k and pay off the citi and discover card, then take the $200/mo ($2400/year) and apply that towards the BOA card.

You should be sending at least 20% of your gross pay (which I estimate to be $12,000 year/ $1000/mo) to the debt on top of the minimum payments.

[willowstudios]

Hi, and thank you for replying.

Yes, I know it's a lot of credit card debt. I ran into major issues in the past year, so I had to use the credit cards. However, I have the cash to pay off the Auto Loan which would save me $300 extra a month. That would pay almost all of the credit card debt...plus, I'd have an additional $300 to throw at the credit cards too.

The main reason I'm thinking of paying off the Auto Loan is because I don't want to have it repo'ed if I can't make payments. I'm doing fine right now, but what if I lose my job? If I have credit card debt they can't take the vehicle while I recover and get a job. But, if I miss car payments...I risk losing the car!

It's more about transferring debt instead of paying it off..I should have a different title for this post.

[jIM_Ohio]

Originally Posted by willowstudios

Hi, and thank you for replying.

Yes, I know it's a lot of credit card debt. I ran into major issues in the past year, so I had to use the credit cards. However, I have the cash to pay off the Auto Loan which would save me $300 extra a month. That would pay almost all of the credit card debt...plus, I'd have an additional $300 to throw at the credit cards too.

The main reason I'm thinking of paying off the Auto Loan is because I don't want to have it repo'ed if I can't make payments. I'm doing fine right now, but what if I lose my job? If I have credit card debt they can't take the vehicle while I recover and get a job. But, if I miss car payments...I risk losing the car!

It's more about transferring debt instead of paying it off..I should have a different title for this post.

your not thinking of your money right.

You can sell the car if you lose your job and not lose so much money
but your credit is maxed, so if you lose your job you will have no source of getting access to money with credit maxed out.

Always pay off unsecured debt first. Are you paying 20% of gross pay to debts (not including mortgages)?

[ktmarvels]

Originally Posted by willowstudios

TOTAL cash available from emergency fund and cash savings - $15,000

TOTAL income is $2800/mo. (after taxes) and my TOTAL expenses total about $3000!

I think using some of that money to pay off debt will be good cause it can give you a little bit of breathing room, but I would look to see if there are other places you can cut too. Because right now even if you pay off your car, your income would still only just barely cover your expenses.

[willowstudios]

Actually, your point of "selling your car" won't work. I'm upside down on the load...which means I owe $6000 more than what it's worth! I can't sell it because the auto finance company won't let me.

My thought is to eliminate up to $300/month or more in payments from my vehicle (it's a large SUV). I'll have that saved, but I'll still have about $400/month in CC debt. The reason to pay off the car is to save about $200/month - which could be used to pay down the CC debt faster. Plus, the added benefit of owning the SUV outright and having the ability to sell it. I'd get a tiny economy car that's good on gas.

I'd be trading debts, but instead of a locked payment on the car I'll have a decreasing balance on all my CC over the next 12 months before the new rates kick in. I could pay off about $6000 in 12 months with the added savings from doing this debt shuffle.

Does that make any sense?

Thank you all again!

[jIM_Ohio]

You have already documented that you can barely meet bills on present take home, so if the car payment is removed, you don't really have "extra" to throw at cc.

I think you came here to justify your decision (pay off car) and not get objective advice. Because of this you are not reading posts objectively (I did not advise to sell the car). I advised that if you lost your job and you needed to clean up the budget, you could sell the car and not owe as much.

Pay off 2 of the 3 cc's, then work on paying off the third card, then work on paying off the car as the 4th item.

Reasons
1) the interest rate on car is fixed, where as variable rate debt should have a higher payoff priority
2) the interest on the cc's is about to increase unless you get balance to zero
3) if you lose your job, you will want your revolving credit lines to be available, not taken up.
4) the spending which created the cc debt is the root cause of the problem- solve the root cause and most other problems eventually go away on their own- in this case by the time the cc's are all at zero balance (probably in 18-24 months) the car will be close to paid off as well. The reverse is not true (if you paid off car now, in 3 years you would still have the cc debt at current payment levels- even the $300/mo extra does not pay them off in 3 years).

You need to put a date out there (like March 2011) and see which route gets you debt free by that date. You are looking at cash flow and not the fastest way out of debt. The debt is your problem, not the cash flow.

[arthurb999]

Refinance your car loan to a lower rate and longer term.
Find some 0% deals and transfer.

Get a 2nd job and attack the debt starting with the cc's then car then home equiy.

Or you could sell your car and house... rent and buy a $2000 car cash... pay off your CC's and start from scratch debt free.

[noppenbd]

You will not succeed unless you reduce expenses or increase income. It is that simple.

My biggest worry is the $140K 2nd mortgage with a variable rate. It could easily go back up to $780 payment or higher in the next couple of years.

I would also advise paying off all credit card debt first, before the vehicle. Mostly because if you pay the CC debt down your credit score will improve vastly, making it easier to refinance the massive 2nd mortgage. A better credit score may also reduce your auto insurance (the insurance companies use FICO to predict risk).

[ksluis62]

willowstudios, your plan sounds pretty reasonable to me, as long as you are committed to applying the freed up payments to the credit card debt. The unsecured debt hurts your credit more than secured debt, but mathematically, it makes more sense to pay down high interest debt first, which is your auto loan right now. Once your CC debt resets to 12%, hopefully the balances will be down $6k from where they are now. You'll have other options with a fully paid car, like selling it and/or downsizing if needed, or even taking out a loan against it if the rate makes sense. You might also get other low interest balance transfer offers between now and next Feb.

But I agree with noppenbd - that HELOC is your single biggest risk. Not this year, but some day, the payment will go back up, and the priciple will never go down with an interest only loan. Once your credit card payments are paid, you should continue the momentum and roll the extra payments into the HELOC to pay down principle.

[noppenbd]

Originally Posted by ksluis62

willowstudios, your plan sounds pretty reasonable to me, as long as you are committed to applying the freed up payments to the credit card debt. The unsecured debt hurts your credit more than secured debt, but mathematically, it makes more sense to pay down high interest debt first, which is your auto loan right now. Once your CC debt resets to 12%, hopefully the balances will be down $6k from where they are now. You'll have other options with a fully paid car, like selling it and/or downsizing if needed, or even taking out a loan against it if the rate makes sense. You might also get other low interest balance transfer offers between now and next Feb.

I disagree with this approach. CC companies are changing terms on people all over the place. Auto loans are fixed. The CCs are time bombs. If he pays off the car and the CC companies decide to change the terms he is screwed. For instance Chase is currently tripling minimum payments on some cards, or eliminating low fixed APRs on some cards. It's also unlikely he'll get BT offers with that level of debt (very high credit utilization ratio).

[ksluis62]

You're right, there is risk in CC term changes. That risk is probably higher for subprime consumers, though, and this doesn't appear to be the case here, given the stated rates. I'm speculating a bit here, would need confirmation from willow on credit rating, other assets, etc. Willow has been able to save $15k, another hint of a prime rate consumer.

All CC term changes I've seen personally, and heard people describe, allow an opt out, in which case current terms apply until the debt is paid off. Please correct me if I'm wrong. This would cap the rate at 12%. And willow has the car free and clear, providing flexibility for selling or refinancing. It probably makes sense to actually run the numbers assuming this worst case rate scenario. My hunch would be that my recommendation is mathematically slightly worse, but not a huge difference.

I think the HELOC is the much higher risk here.

[noppenbd]

Saving $15K with 2 maxed out credit cards totaling $21K in debt does not strike me as responsible use of credit. I would guess credit score is marginal at best. Chase claims it is targeting customers with high balances who have not made much progress paying it down over the last 2 years. AFAIK it has nothing to do with credit score, although who knows.

Best strategy of all might be to keep the cash as a cushion and pay down the loans as agreed. Then if the CC companies change the conditions he can pay them down at that point. In this economy cash is king (hard to borrow without stellar credit), and losing some money on interest might be more desirable than facing a sudden cash crunch.

Of course nothing will work if expenses exceed income. And what happens when interest rates go up in a year or two, with a floating HELOC? Payment goes back up to $700 and expenses >> income. OP needs to post detailed budget for us to pick apart.

[ksluis62]

I ran the numbers on DueMinder to see which course makes more sense mathematically: Pay off $11,000 car debt versus pay down $11,000 in credit card debt. With that particular mix of intro rates, and a commitment to pay $740 per month (current minimums plus car payment), there is no real difference in pay off time. 3 years, 3 months for both plans. This assumes Chris sticks to the plan in both cases.

You can see the payoff schedules in my blog here: A Tale of Two Plans

After seeing this, I'd have to lean towards recommending pay off of the credit card debt first, as there's no compelling reason to go against the traditional recommendation to pay off unsecured debt before secured.

noppenbd, you make a good point about cash. It definitely makes sense to preserve cash in these uncertain times.

[Til_Debt_Do_Us_Part]

Nice info!

[Runaway Finances]

This is more than which debt to pay off first. Man, you have a spending problem. You say you had some major financial issues come up that caused you to have to create the credit card debt. From my experience, I find that people spend too much on discretionary expenses and leave themselves short of money to pay their fixed expenses. They justify going into debt because they say "I had to pay my car payment, etc." If you don't correct the spending patterns that got you into this position then you will be back in his position within the year if you pay down debt with your savings now.

I am of the camp that you need to get out of some of your debt by selling off the assets that are associated with the debt. You may have to write a check because you are upside down, but then you won't have that debt and hopefully you buy something you can really afford. There are some really inexpensive cars out there. The problem is many Americans want something nicer than they can afford.

You have a $255,000 mortgage and you make less than $50,000/yr (gross). That's crazy in my book. You have a car loan that is 1/4 of your income! And to top it off you have credit card debt that is more than 1/2 your income. I truly do not mean to be critical as much as I'm trying to verbally shake you into the reality of your situation. BIG changes need to take place in your life and those changes need to start YESTERDAY.

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[Granite]

i would refi the house to a 5.5% or lower total rate

i would pay the cc's which are over the credit limit b.c. the cc companies are going to raise your rates (you are over credit limit)

use your 15 K to pay off debt (personally I would pay cc rather than car) and then refi your house so you only have one pmt that is fixed

you will need to increase your income or take in a roommate. google frugal living and start studying !