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Credit Cards or Car Loan Payoff? **Unique Situation

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    Credit Cards or Car Loan Payoff? **Unique Situation

    Hi everyone, I'm new to the forum and know that this issue has been addressed on several other forums, but I wanted to get some opinions based on my unique circumstances.

    Conventional thinking would tell you to payoff credit card debt before a car payment due to the car being fixed rate,credit cards having higher interest, etc, etc. However I'm kind of in a unique situation here is a brief summary:

    - We have about 28k in unsecured debt (credit cards and personal line of credit) monthly payments range from $110-$300.

    - Car payoff is about $7800. Monthly payment is $370*** highest monthly payment not including mortgage.

    - Interest rates are not drastically different between my car loan (7.35%), personal credit line (10%), and two credit cards (both at 10.99%).

    - I will be receiving about 8k in benefits payments, work bonus, and tax refund within the next two to three weeks. With my extra income I will only have enough to pay 1 of the 3 accounts completely off (will not have enough to payoff personal credit line).

    - Making payments on time is not a problem (my wife and my credit scores are in the 715-770 range) so I'm not concerned about getting hit with penalty interest rates.

    - Credit cards have been removed from my wallet and wife's purse and have not touched in over 6 months. So adding additional debt to credit cards is not a concern either.

    - New baby just arrived and weekly income will be reduced by about $60 due to adding her to insurance.


    Should I buck conventional thinking and pay off the account with the highest monthly payment to allow us to have more cash flow in the house? In turn will go towards paying more towards the unsecured debt and for our new baby expenses?


    Thanks for your input.

    #2
    Originally posted by bwatson2005 View Post
    Interest rates are not drastically different between my car loan (7.35%), personal credit line (10%), and two credit cards (both at 10.99%).
    I don't think your situation is unusual or unique. I also think there is a big difference between 7.35% and 10.99% interest rates.

    You said that making the payments isn't an issue so I'd say to follow traditional advice and pay off your debt from highest rate to lowest rate.

    ETA: Any chance you could refinance anything. Your interest rates are terrible.
    Steve

    * Despite the high cost of living, it remains very popular.
    * Why should I pay for my daughter's education when she already knows everything?
    * There are no shortcuts to anywhere worth going.

    Comment


      #3
      I say to pay off any debt that makes you more comfortable, as long as you are planning to put that money, or the bulk of that money, toward other debts.

      My problem was too many loans, and I paid off the smaller ones for exactly the same reason you're looking to pay off the "dumber" car loan before the "smarter" credit card loans. I needed to free up some room in my monthly budget more than I needed to pay $23 less interest over six months by paying the "smarter" loan first.

      If you're taking a math test, pay off the higher-interest loans first. If you're looking for a lifestyle change, pay off the best one to pay off first. In your case, it sounds like the car payment makes your life easier more quickly, but that's your decision, not mine.

      Just don't go back to your old ways because you're taking some pressure off.

      Comment


        #4
        Thanks for the replies!

        Comment


          #5
          Congratulations on the new baby. Being a new father is a heck of a learning curve.

          With a good credit score and up-to-date payments on CC, it would make sense to switch to 0% cards if you can manage to clear the balance before the 0% period ends. This is a $$$ issue because the interest rate zooms if you miss that target date. Are there any spending reductions you'd be willing to make short term to clear CC debt? I suggest asking for a reduction in interest rate on your personal line of credit which is high at 10% given the puny interest paid on saving instruments. With car loan and CC balances gone, you will be able to snowball that PLC to submission. Won't it feel wonderful to get out from under the car loan, credit card debt and line of credit!

          BTW, in spite of marketing magician's bumph, babies need very little their first year and outgrow everything at a phenomenal rate.

          Comment


            #6
            Refinance your car loan. 7.35% is a very high interest rate for someone with good credit in the 700's.

            Comment


              #7
              I worry that with some 20k in credit card debt, making what sound like minimum payments, it will take you forever to pay those off. I would pay off the car loan, transfer your cards to a 0 interest rate, and put everything you can towards paying that off before the 0 interest expires. Good luck!

              Comment


                #8
                Originally posted by Bingo View Post
                I worry that with some 20k in credit card debt, making what sound like minimum payments, it will take you forever to pay those off. I would pay off the car loan, transfer your cards to a 0 interest rate, and put everything you can towards paying that off before the 0 interest expires. Good luck!
                This.

                Comment


                  #9
                  I would pay off your credit card debt first as it generally has the highest interest rate. You might want to consider debt consolidation as well. Google shows a nice guide at http://www.debt.ca/debt-consolidation. A friend of mine consolidated his debt and it was pretty crazy how they are able to lower the interest rates almost overnight. Best of luck to you!

                  Comment


                    #10
                    You are really in a tough situation because both loans are very high but if you pay the one which has a high interest rate it will be easier for you.my one friend going through same situation as he take loans from axis bank but after that he take a advice from bank and his problem was solved.

                    Comment


                      #11
                      First off refinance your car, the interest rate you are paying for a 700+ credit score is insanely high. You should be able to get a 3.25% or so rate.

                      The following advice applies if you have a fixed rate mortgage loan with some equity.
                      Consider a home equity line of credit (HELOC) to pay down debt. A HELOC is secured debt (your home is the collateral) and has much lower interest rates than a credit card. Will your lender recast your mortgage if you contribute a large sum to principal? A potential way to save money is to apply the $8000 to your loan principle, recast the mortgage (having the effect of increasing equity, and lowering your monthly mortgage obligation thus increasing cash flow) and take out a HELOC to pay off the unsecured debt. The repayment on the HELOC will likely be more affordable than the repayment of the unsecured debt resulting in higher cash flow and lowered interest rates.

                      Comment


                        #12
                        Why on earth would you recommend a HELOC for consumer debt!

                        Comment


                          #13
                          Heloc

                          HELOC stands for Home Equity Line Of Credit. It is a credit card with a lower interest rate because you're betting your house that you'll pay it off.

                          I have never gotten a HELOC, but many people see it as a way to pay off other loans, like a debt consolidation loan or as a way to pull money out of your house like a Home Equity Loan. The only thing I would consider a HELOC for is home improvements, but usually I save up and finance the major long-term improvements or I use my emergency fund for immediate repair needs.

                          The reason BabyNurse is wondering why anyone would recommend the HELOC for credit cards is because credit cards are unsecured. The bank is loaning you the money based on your credit score with nothing to back it up. If you don't pay credit cards, you must be sued to get the money. If you don't pay your HELOC, you can lose your house, not just your credit score.

                          Comment


                            #14
                            Originally posted by Baby_nurse View Post
                            Why on earth would you recommend a HELOC for consumer debt!
                            The better question is why would you accumulate consumer debt in the first place. I've personally never carried any credit card debt. I use the cards to take advantage of the rewards program, but they're always paid in full at the end of the month. In other words I buy nothing on credit that I couldn't immediately write a check for.

                            As for the HELOC, I recommended it as another alternative the OP hadn't thought of. If you are disciplined enough to control your spending a HELOC can save you lots of money and increase cash flow vs high interest cards.

                            Comment


                              #15
                              Originally posted by Baby_nurse View Post
                              Why on earth would you recommend a HELOC for consumer debt!
                              I used a home equity loan, not a line of credit, to pay down other debt (car loan and student loans). Why? Because the rate was much lower so I was able to retire the debt at a lower overall cost.
                              Steve

                              * Despite the high cost of living, it remains very popular.
                              * Why should I pay for my daughter's education when she already knows everything?
                              * There are no shortcuts to anywhere worth going.

                              Comment

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