Need help with small windfall

[sweeps]

You've erred in your calculations. Use this snowball calculator to prove that paying the student loan off first is the better choice.

Note you always have a choice to not accept the gift if you don't like what it's being given to you for. Taking the money and using it for something else is dishonest.

[Scanner]

You are thinking all wrong.

Yeah, my credit card statements have low monthly minimums too but that doesn't mean I should pay that down second if it's in line with other debt.

What if I had a $100 monthly minimum on a credit card and a $400 car payment?

Would you advocate paying down the car first just because the monthly payment is higher?

From what I can tell, those student loans are financed out 25 years (I am merely guessing by the low monthly minimum). That's why student loan financing is suuuuuuuccchhhh a cash cow. It's basically another mortgage (and forget the student interest deduction - it ain't worth that much).

100K over 25 years is going to add up to about $225,000 in interest. Even if the student loans are financed out 10 years, it's still about $150,000 in interest (plus prinicipal).

You knock down some prinicipal now and in the long run, you save yourself a bundle.

I don't see much interest savings by paying a 4.9% loan with a 5 year term off early.

Term baby.

Term.

[autoxer]

actually, I think I have reconsidered.

After working out the amortization schedules I have the following:

10,500 Student loan
7.35% annual interest
115.14 monthly minimum payment

12,454 car loan
4.9% annual interest
315.84 monthly minimum payment

These calculations assume that I use the money saved each month on the one debt to use to pay off the other.

If I pay off the student loan with the money I will be making payments of
430 per month for ~31 months to pay off the car.

If I pay off the car loan with the money I will be making payments of
430 per month for ~26 months to pay off the student loan. This assumes that you will use $2000 more of your tax refund, then if you only paid off the student loan.

If you had $12,500 to put towards debt, then you could pay off the car, & put $430 towards the student loan paying that off in 27 months.

or you could put 10,500 towards the student loan, & $2000 towards the car leaving you paying $430 a month for 26 months.

So putting the windfall towards the higher interest rate will save you about $430 in interest over the next two years.

[creditcardfree]

It must be worth $430 to OP to pay off the car first and be debt free sooner. I think he stated he has other debts.

[autoxer]

Other student loans (not listed above):
$447 (out Prin. 45K) 8%/year
$265 (out Prin. 52K) 3.75%/year

So you have three student loans & one car loan?

$10,500 @ 7.35%
$45,000 @ 8% (adjustable)
$52,000 @ 3.75%
$12,454 @ 4.9%

Look at how much interest accrues for this month:

$10,500 * 7.35% / 12 = $64.31
$45,000 * 8% / 12 = $300.00
$52,000 * 3.75% / 12 = $162.50
$12,454 * 4.9% / 12 = $50.85
Total = $577.66

Now if you put $10,000 towards the car loan:

$10,500 * 7.35% / 12 = $64.31
$45,000 * 8% / 12 = $300.00
$52,000 * 3.75% / 12 = $162.50
$2,454 * 4.9% / 12 = $10.02
Total = $536.83 interest for the month.

Now if you put $10,000 towards the killer student loan:

$10,500 * 7.35% / 12 = $64.31
$35,000 * 8% / 12 = $233.33
$52,000 * 3.75% / 12 = $162.50
$12,454 * 4.9% / 12 = $50.85
Total = $510.99 interest for the month.

So your minimum payments add up to $447+115+265+315 = $1142. How much of it do you want to go towards interest & how much do you want to go towards the principal?

So if you want to increase your cash flow, by reducing your minimum payments, then pay off the car, but if you want to get out of debt quicker by reducing your interest cost, then pay down the highest interest rate debt.

[SavedintheCity]

Thanks for the help, but my situation as I mentioned before, does not permit me to pay off the biggie (45K @ 8%) off first. I need to pair down total # of debts for my move abroad, not decrease the overall interest payout. Remember, it is not the total interest paid that I really care about, but the time required to pay off a certain # of debts. In no scenario can I pay off the big student loans (45K and 52k) in the short term. So I can little concern myself with them due to my current situation.

[SavedintheCity]

If you had $12,500 to put towards debt, then you could pay off the car, & put $430 towards the student loan paying that off in 27 months.

Yep I am going to put in some of my own dough to pay off the car.

[sweeps]

So if you want to increase your cash flow, by reducing your minimum payments, then pay off the car, but if you want to get out of debt quicker by reducing your interest cost, then pay down the highest interest rate debt.

This is true. But also keep in mind the downside of increasing cash flow (over reducing interest cost and total payoff time). That's extra money burning a hole in the debtor's pocket. Makes it tempting to buy more stuff with that money -- maybe even another new car.

[SavedintheCity]

This is true. But also keep in mind the downside of increasing cash flow (over reducing interest cost and total payoff time). That's extra money burning a hole in the debtor's pocket. Makes it tempting to buy more stuff with that money -- maybe even another new car.

Don't worry about that. We live in an apartment and have only one garage space, so no new car. Also, despite appearances to the contrary, we do live a budgeted life, with few extravagances.

You were right (of course) about the amorts. I was treating some money differently. I was going to put in my tax refund of 1,700 (state and fed) on the car. (I know it's high I adjusted my withholding. )

I have found the optimal* scenario:

Pay tax refund on car 12545 - 1700 = 10754
Pay off student loan 11500 - 10500=1000
Excess 1K to Car loan 10754 - 1000 = 9754
9754 @4.9% over ~24 months at 430/month

*within my constraints as mentioned.

Thanks everyone for all the help. All those nervous nellies who believe in conditional gifts will be mollified that the money is going to go to pay off it's "intended" purpose.

[sweeps]

Good choice.

[bjl584]

[QUOTE=SavedintheCity;106252]Well, the long and the short of it is that my parents will be giving me 10k to pay off some school debt. I have not asked for this, but I would be foolish to turn it down.

I think your original statement above is why everyone assumed that the 10K was conditional and intended for a specific purpose. You said that it is for paying down "some school debt." Just wanted to clear that up. Now I can go back to my nervous nellie ways.

[cptacek]

I am trying to pare down the number of creditors in the states and not the total debt, because I will need to make monthly payments in foreign currency which will expose me to exchange rates so I need to limit that to as few credits as possible. It will cost me more in terms of the length of term, but it will help hedge against unfavorable fluctuations in exchange rates.

I am confused as to why having less creditors is better than having less money owed in the US. Is it because of the hassle of getting the money exchanged? I don't understand the logic behind "I will need to make monthly payments in foreign currency which will expose me to exchange rates so I need to limit that to as few credits as possible." Won't having a higher total balance mean that if the exchange rate is not so good, you will be paying more money off to fewer creditors with an unfavorable rate instead of paying less money off to more creditors with the same unfavorable rate?