feedback wanted: big loan or car loan first?

Gruntina · #1 (**permalink**) 07-18-2006, 06:45 PM

1. Big Loan: $14,000.00 @ 9% flat interest (This one started at $65,000.00!!)
2. Car Loan: $4,566.21 @ 3.95% interest

Currently I aim to pay extras towards the loan with the highest interest and have been. I have been able to save at least an extra $1000.00 a month to put towards on top of either of the debts above each month.

Now I am thinking of paying off the car in 3 months to simplify my finances and make it seems more motivating to save even more each month for the bigger debts.

Is this a bad idea since the interest rates has a 5% differences?

Broken Arrow · #2 (**permalink**) 07-18-2006, 07:13 PM

Uh oh. Let me put on my flame-retardant debate suit on.

Thanks.

The short and simple answer is, IF you desire to save more money in the long run, even if it means to "suffer" the sense of crushing debt longer, then the answer is to pay off the loan with the highest interest first. IF you value simplifying your debts and need motivational boosts to keep yourself going more than you need to save more money in the long run, then pay off the smallest balance first.

Gruntina · #3 (**permalink**) 07-18-2006, 07:34 PM

Thanks Broken Arrow.... I sort of knew that was going to be the answer but somehow I don’t feel so alone when conveying thoughts in my head. This question I have to admit is more emotional than physical.

I guess now for me it’s more of a matter which of the two is my desire. I really do not know yet at this time since I have been paying these debts for a while now and I am getting closer to the end. It seems that the closer to the end of paying off debts, the harder it gets. Both of these debts are associated with an extremely bad memory and I just can't wait to be done with it so I can "mentally" move on and part from my old life. I feel to be physically done with paying finances on these two I will be financially free but also feel like I can fully be in my new good life without knowing subconsciously I am still paying off the consequences of a very bad life event.

poundwise · #4 (**permalink**) 07-19-2006, 05:16 AM

How much are the monthly payments on each?

disneysteve · #5 (**permalink**) 07-19-2006, 06:34 AM

Quote:

Originally Posted by Broken Arrow

The short and simple answer is, IF you desire to save more money in the long run, even if it means to "suffer" the sense of crushing debt longer, then the answer is to pay off the loan with the highest interest first. IF you value simplifying your debts and need motivational boosts to keep yourself going more than you need to save more money in the long run, then pay off the smallest balance first.

No flames here (not sure why anyone would debate this response). You are absolutely right.

There is frequently emotion tied up with our finances. I chose to repay my student loans way early (13 years ahead of schedule) because I hated having them and not pre-paying would have meant I would still have had my own student loans when my child was in college. It wasn't the best financial decision because the interest rate was very low, but it was the bets decision for me at the time.

In your case, I don't think taking 3 months to repay the car loan and being done with it would cost you that much in interest on the big loan. I'd have no problem doing that to simplify things and feel better about your situation.

PrincessPerky · #6 (**permalink**) 07-19-2006, 07:30 AM

It is only three months...

I think paying it off in threee months would be a huge feather in your cap, and might help pay off the other sooner...I am all for feathers in caps!

sakigt · #7 (**permalink**) 07-19-2006, 08:11 AM

Personally paying off the car loan would tempt me to spend that extra $1000.

Stay scared. Pay off the big debt first. It will be easier to explain a <$5000 car loan than a $9,000 unsecured debt

Just think! Nine months from now and that debt will be gone! Keep it up!

Ima saver · #8 (**permalink**) 07-19-2006, 03:31 PM

If the smaller loan is making you feel bad, I would pay it off in 3 months. You won't lose much. I have two loans with each having a similar balance. One bothers me a lot, one does not bother me at all. One is on a car, the other on land. The one on the land is the one that bothers me and motivates me to pay more.
I don't know why. iI guess because I have always had car loans, so it is a way of life for me. However, I am working on that and have started a car fund.

Bookie · #9 (**permalink**) 07-19-2006, 03:58 PM

I think both Princess Perky and Ima make valid points. The psychology of debt reduction can be as important as the dollars and cents.

autoxer · #10 (**permalink**) 07-19-2006, 04:43 PM

If you post your minimum payments and the max you can use towards debt each month, then I'll run the calculations to compare how much interest you will pay in different scenarios.

PrincessPerky · #11 (**permalink**) 07-20-2006, 06:28 AM

Quote:

Originally Posted by sakigt

Personally paying off the car loan would tempt me to spend that extra $1000.

Ok if that will be a problem I change my vote...but if not, I am curious what numbers auto comes up with......

autoxer · #12 (**permalink**) 07-20-2006, 07:32 AM

I've been messing around with Excel to see the actual difference, but I had to make some assumptions. Assuming your minimum payments are $300 and the total you can use towards debt is $1500:

If you pay $300/month towards Big Loan and $1200/month towards Car Loan. The car would be paid off in four months, then after four months, applying a full $1500/month towards Big Loan it will be paid off in 14 months. Total payments of 19521 or $955 in interest.
If you pay $1200/month towards Big Loan and $300/month towards Car Loan. The car would be paid off in sixteen months and the Big Loan it will be paid off in 13 months. Total payments of 19398 or $832 in interest.

Difference of $120. If you want me to plug in some different numbers let me know.

Gruntina · #13 (**permalink**) 07-20-2006, 10:11 AM

Hi All,

Thanks for your responses. It’s really awesome to have people out there like you supporting financial causes for the better.

Updates: Car Loan now stands at $4,367.86

Right now I pay bi-weekly $185.00 towards the big debts. It roughly comes about $400.00 a month when you divide the 26 payments by 12 months. The payments matches the schedule of my paychecks. I have no penalty when making additional payments and all additional payments goes towards principle. What I do each month, I call them up and pay additional $1000.00. The bi-weekly payments are automatic withdrawals from my account. I do not want the $1000.00 to be automatic in the case of an emergency were to happen. So far not! Whew!

Car payments are minimum of $144.00 dollars. I orgininally had this so low so I could focus on paying the bigger debts. I usually add an average of 300 dollars to it each month and it’s also no penalty of making additional payments and goes towards principle. In the mean time, I am still trying to find ways to lower my cost of living to see if I can put more towards the debts.

I see many of you have good perspectives and ideas. Thanks so much.

poundwise · #14 (**permalink**) 07-20-2006, 10:41 AM

I'm going to give you the 'if it were me' answer.

With the low interest and low payment on the car, I would definitely attack the larger debt first. I see the logic in the satisfaction of the quick win, however, if you pay off the car, you will not create a lot of additional monies to attack the larger debt with and you will have lost out on that total amount of debt reduction off of the higher balance, higher interest debt.

Again, I'm not saying the other way is wrong. In the end, it is what works for you best that will be 'best'. But I'd pay the larger debt first.

cschin4 · #15 (**permalink**) 07-21-2006, 04:14 AM

Don't pay off the car loan. The interest you would save is minimal. And, if you pay off your car, you may find yourself in the showroom before you know it getting hypnotized by the new car smell! I think you should keep paying for the car as long as possible and then you will be more likely to drive it for a longer time which will save you lots of money in the long run.
What is the big loan for? At 9%, this one needs to go.

Gruntina · #16 (**permalink**) 07-21-2006, 11:27 AM

Hi All Thanks for all your comments.

Unfortunately the big loan and the car loan were racked up by an ex-husband who used my credit cards while separating during a pending divorce. I had forgotten his name was listed under my name on the cards. It was mostly for revenge as I was granted a quick divorce for my immediate safety. I left with only a few items and the truck which I later sold for a cheaper car which I am currently using right now. This happened a few years ago and the debts were much higher to begin with... Plugging away at paying this debts off little by little has change my character and the way I view life and money and etc so I do not regret that this has made me a better person because of it. But I am sooo ready to be done with it and move on and do things I would like to do with my money in hope of saving for a down payment for a home or something. I feel with all the money I paid towards the debts, I could have done so much with it. Now I am much wiser and have no tolerance for drama or violence. (Life is just too short!)

After reading all your feedbacks, I am going to focus on the big debt. For motivational support, I think I am going to generate a visual chart or something on my wall so I can see something that is accomplished since it's not going to change my monthly bills for awhile. In the mean time, I need to make some sort of plan so when I do pay it off, I don’t spend it and I do something wise with it. Thank goodness for this site!!!!!!

autoxer · #17 (**permalink**) 07-21-2006, 12:27 PM

Quote:

Originally Posted by Gruntina

I am going to focus on the big debt. For motivational support, I think I am going to generate a visual chart or something on my wall so I can see something that is accomplished since it's not going to change my monthly bills for awhile.

If you keep going at the rate you have been going, it will all be gone in 11 months.

Good luck.

Each month I recalculate how much debt I have, to keep me on track. Just think, once you are out of debt, you can start making automatic payments into your savings account and earn interest instead of paying it.

debtdude · #18 (**permalink**) 07-29-2006, 06:38 AM

Quote:

Originally Posted by Broken Arrow

Uh oh. Let me put on my flame-retardant debate suit on.

Thanks.

The short and simple answer is, IF you desire to save more money in the long run, even if it means to "suffer" the sense of crushing debt longer, then the answer is to pay off the loan with the highest interest first. IF you value simplifying your debts and need motivational boosts to keep yourself going more than you need to save more money in the long run, then pay off the smallest balance first.

This is very well said. The only note I would add is some loans come with an early payoff penalty. Home loan penalties can run around 5% if it's within the first X years of the loan. I refi'd and then bought a new home a year or two later and got a 5% penality. (

)

b4freedom · #19 (**permalink**) 07-29-2006, 09:14 AM

Quote:

Originally Posted by Gruntina

1. Big Loan: $14,000.00 @ 9% flat interest (This one started at $65,000.00!!)
2. Car Loan: $4,566.21 @ 3.95% interest

Is this a bad idea since the interest rates has a 5% differences?

Pay off 9% loan first. Then, only make minimum payments to 3.95% loan. Instead, apply the extra into a high earning interest account or IRA earning more then 3.95%.

autoxer · #20 (**permalink**) 07-29-2006, 10:13 AM

Quote:

Originally Posted by b4freedom

Pay off 9% loan first. Then, only make minimum payments to 3.95% loan. Instead, apply the extra into a high earning interest account or IRA earning more then 3.95%.

To come out ahead after the earned interest is taxed, you would need to get more than 5.25%. I would pay down that 3.95% over storing money in a high yield savings, unless I had certain savings goals.