Pay down student loan, mortgage or car?

[dczech09]

increasing debt levels simply means this: if I pay down a 1% loan and leave outstanding a 15% loan, in 1 year I will owe more $ than if I did the reverse.

it is true that most people do not know how to do npv analysis. perhaps if they did they not go into debt, although some people really have no choice. doesn't that tell you that if they were educated on npv analysis, there would be fewer people with debt problems? why not educate them. it is actually quite simple to do in a spreadsheet.

as for the loss of flexibility on selling a car, granted there may be issues there. but someone in debt is probably better holding the current car rather than splurging on a new one. that would be their primary limitation. selling a car in an emergency may not be a feasible response, as you will still need a car to get to work and buy food. when the car is no longer functional, you simply talk to the lender, because they have no choice at that point. HOWEVER, the money you saved by paying down more expensive credit can be applied to pay back the car loan. the main risk at that point is that you might not be able to get a new car loan or lease a vehicle.

I can see looking at an auto loan underwater as a concern that you may not be able to take out another loan if you can't keep up with the payments and the car dies before the loan matures. But I think lenders know enough to structure loans to avoid this problem and it is probably quite rare. for this rare benefit, I don't see giving up the lower debt levels overall that come from paying down higher rate loans.

the only exception to npv analysis to me would be student loans that are not eliminated in a bankruptcy and where bankruptcy is a significant possibility...

Thanks for the reply. I just was not sure where exactly where you were coming from, but it makes sense. I still like my method. But above all, I gave the OP three options so that they can make a decision for themselves.

I do understand that NPV is a pretty simple analysis to perform. However I really do not think that bankruptcy concerns should really play into the decision making process here. I do not like the idea of even considering bankruptcy as that should be an absolute last resort.

[smk]

I agree that bankruptcy is not a primary issue here. I was just giving that as the only generic exception to npv analysis I could come up with off the top of my head.

[snafu]

brittq, 1st, retain at least a 3 month Emergency fund to protect yourselves if something goes awry. Great to see you're not carrying CC debt. I'm concerned that DW has incurred SLs totalling $90K with interest to be added and who's starting salary is $ 35K [gross?] I truly believe in running the numbers as suggested as they reveal unexpected results. Personally, I'd pay down the mortgage to correct the error of requiring an insurance payment that is not beneficial to you. Apply that sum directly to principal of your SL. I hope you'll hold the line on your standard of living and apply DW's net income to that ghastly, 25 year SL. That albatross has potential to affect every decision and every choice for years and years and years.

For future consideration...it's best to limit car payments to 3 years. You've still more than 4 years of payment on a depreciating asset which you can reasonably expect to be worth ? [what] when finally unencumbered? You will benefit from tracking your initial costs and KBB value each anniversary. When you buy a new vehicle you eat the depreciation unless it's your plan to drive it until the 'wheels fall off.' I suggest if DW requires a vehicle for work that it be at least 3 y/o to reduce the effects of depreciation and well researched for long term reliability rather than a desire for a 'desired ride.' It's a good idea to ask about insurance rates before making your final decision.

I'm confident you'll do well with finances and hope you'll continue update on SA.

[Nika]

I tend to lean towards the student loan -- it is at higher interest, and it will NEVER ever go away.

[greenskeeper]

Eliminating PMI would be great and frees up $100 per month in cash flow. The problem is that you do not know how the housing market is going to work out in the near future. The houses value could drop and you could end up below the 20% equity threshold again.

Once the bank removes PMI they can't reinstitute it on the same loan (unless you refinance and go above 80% again due to loss of value)

[~bs]

with loans like that against relatively small assets, most of which are not liquid, I would not use a $10k lump sum to pay down loans. If you could pay off a loan, different story. But you shoot that $10k into a loan, which only mkes a small dent, then if something happens to your job, health, etc. that money isn't there to help carry you through. Bad idea. Instead, you should use savings from your paychecks towards paying extra toward one of the student loans.