Refinance? Pay Off? IRA?

[DeePeez]

I really need some advice. I want to figure out if I should pay off my loan or refinance, start a roth for my wife and I or just keep the cash. So this is my situation. I'm 21 and so is my wife. We have a daughter and I'm in the military. My wife isn't employed currently. Right now we have a backup savings of $12,000. A car loan with 10,286 left on it at 9.95%. No credit cards or other debt. My wife has no credit at all and I'm in the 600 range mainly due to short credit history though I do have one bad mark on there.
My car loan is the big problem to me. I definitely want to get out under that 9.95% interest rate. I'm wondering should I try to refinance? Would I even be able to refinance considering that my credit is in the 600s range? If I do refinance should I then throw some money at the loan? And if I don't refinance should I just go ahead and throw some money at the loan?

This is what my wife and I wanted to do. We want to take 8,000-10,000 of our emergency fund and put it in a roth IRA. That way we would start our retirement savings and begin gaining interest but we still would be able to withdraw our initial contribution in the event of an emergency.

Then we wanted to try to build up my credit a little more (need suggestions), refinance and then add her name on the loan as well so that she can begin building credit. Once we did that we would put ($4000) on the loan bringing our balance down and start making bigger payments where we can.

We are also trying to get out from sprint with our phone. We have a year left on our contract but we've realized that getting the plan was implusive and stupid. We definitely could use the money elsewhere. We have no student loans.


Rent(including utilities) $1194
Car $257
Phone (sprint) $167

[JoeP]

If it were me, I would not take from my emergency fund to start paying into a Roth IRA. You're both young enough that you can start doing that now with money budgeted from your payroll.

When your cell phone is up for renewal, take a look at prepaid plans. If you've become "addicted" to high data usage, you may find yourself having to adjust for certain prepaid plans.

Can you make extra principal payments on your car loan? Can you sell anything to come up with more cash? Can your wife work part time to scare up more money that can be used for this?

[lorraineb]

You're thinking about these things at a young age which is a good thing.

How many years still on the car loan? While trying to refinance makes sense, I'm not sure how successful you'll be with your current credit history -- especially if the car is upside down which I assume it is. Try, but don't get your hopes up.

Depending on how many more months you have, I would start to chip away at that loan making sure not to incur any more debt. Every extra dollar you put in is a guaranteed rate of 9.95%, but you also don't want to leave yourself vulnerable to other possible emergencies by depleting your emergency fund completely.

I would pay off the car loan a soon as possible while still giving yourself a cushion, and then pay the remaining monthly payments that you would have paid toward the car to yourself for the reminder (for example, if you have 30 month left and can pay off in 10, then you pay for 20 months back toward your emergency fund/IRA)

[Bob B.]

I'm in the military. ... Right now we have a backup savings of $12,000. A car loan with 10,286 left on it at 9.95%.

...

Then we wanted to try to build up my credit a little more (need suggestions),

I'm going to give some advice that others may deem to be bad, but it's just my opinion.

Most people are advised to have a 6 month emergency fund mainly because if there is a job loss, they have that cushion to find a new job. You're in the military, so I'm assuming that job loss is unlikely, depending how much time is left in your enlistment. You're also young, so (hopefully) much less likely to have health issues that could pose need to drain the EF.

Therefore, you probably don't need a 12K EF. 3 or 4K is probably sufficient. Consider paying 8 or 9K toward the car. Then get it paid off, then start the Roth, and rebuild your EF for whenever your enlistment ends.

As far as building up your credit - just do the right things. Pay your bills on time, and you shouldn't have to do much more.

[jpg7n16]

What's your household income?

What does the rest of your budget look like?

[kork13]

Most people are advised to have a 6 month emergency fund mainly because if there is a job loss, they have that cushion to find a new job. You're in the military, so I'm assuming that job loss is unlikely, depending how much time is left in your enlistment. You're also young, so (hopefully) much less likely to have health issues that could pose need to drain the EF.

Therefore, you probably don't need a 12K EF. 3 or 4K is probably sufficient. Consider paying 8 or 9K toward the car. Then get it paid off, then start the Roth, and rebuild your EF for whenever your enlistment ends.

I actually have to agree with Bob -- I'm in the military as well, and even in spite of the current financial crisis the military is undergoing right now, our job security is relatively quite good (for better or worse, there's always another war or crisis). I'd suggest that you immediately get out from under your car loan..... like... today. Take the money from your emergency fund, pay off your car loan in full, then focus everything you can for a few months on rebuilding your EF up to at least $3k-$5k or so (to whatever point makes you comfortable). Ordinarily I would never suggest that, but a car loan (or any debt) at 10% is crazy, you have the cash available, and you have the security that the military provides to keep you going through the next few months while you build back up. You'll do much better for yourself by earning interest than paying it.

Once you've got your EF back up to at least a minimum level (probably at least 1-2 months' expenses), THEN start Roth IRA's for yourself and your wife. Also, open up a credit card for yourself and your wife with one of the military-centric banks -- USAA, Pentagon Federal Credit Union, or Navy Federal Credit Union are all good ones with good policies for the benefit of service members. They will give you a chance to build up good credit history for the both of you, as long as you use it responsibly and pay it off in full every month. Even if you both have poor/no current credit, they should at least be willing to give you a $500-$1000 limit that you can work with to start building up your credit. There's no reason to continue paying 10% interest just so you can get your wife some credit history.

[DeePeez]

I was leaning towards paying off the car loan as well. You guys definitely helped to solidify that decision. And my wife just got a secured credit card with USAA actually. I'm actually on vacation so as soon as I go back to base, I'm going to find out if there's a penalty for early payoff on the loan and get started on that process. I defintely think we'll be able to get back to having around 5000 in the next three or four months. After that I will work on the IRAs.

[kork13]

Just one thing to add... In the longer term, you DO still want to build up your emergency fund to be at least 4-6 months' expenses. Life happens, and it's always easier to deal with surprises when you've got some cash in the bank to cushion a blow. So perhaps once you start saving/investing in your Roth's, still send some money to slowly bulk up your EF, even if only $50/mo.

Also, I'm not sure how often you deploy, but if/when you do, you should strongly consider using the Savings Deposit Program (earns a guaranteed 10% interest while you're deployed to a combat zone). That can be a great boost to your savings (in addition to the tax exemption and combat pay, of course) during the time you find yourself overseas.

Bottom line though, just try to stay out of debt, save a healthy portion of your income, and spend less than you earn... with those basics, you'll do just fine for yourself. In the meantime, keep asking questions and keep learning.

[sherylgray]

As a suggestion, I think you should pay the loan. I don't know about you but have found many people to get into a very high debt while going for refinancing options.

[TheKayla]

If you can't refinance the car at a lower rate, I'd pay about 85% of it off, while keeping some cash in your savings for emergency. For the rest of the loan, pay it off consistently to help build your credit a bit, while at the same time saving for the future. You can begin investing in your Roth IRA at any time, keep it small amount while still paying off your debt and building up an emergency fun, and then play some 'catch up' once you get debt free.

[BunionDR]

Refinancing

Refinancing your debt is the way to go. Often, you can call your bank and have them find a solution for you, in which they can transfer credit card debt to another account that has much lower interest. Having lower interest will help you pay off your debt much faster.