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On the SavingAdvice forum this week, a user presented the group with his debts, asking for advice on the best way to pay off his credit car and auto loan debts. He has $15,000 in savings which could be put to use, and is thinking he should use $11,000 of it to pay off the loan on his SUV. The question is, which of the debts should he pay off now, and which ones should be paid over time? Here's his note: Need help...I may have ability to pay down debt!
Hi, I want to thank you for any help you might give me.. My main question is - what should I do with my finances? I've got an Auto Loan that is causing me at least $600/mo - (payments, insurance, high gas cost) Should I pay off the Auto Loan and save myself $300/mo at least?? Credit cards and Auto loan etc 1st mortgage:
$115,000
6.3% fixed rate
$735/mo. payment 2nd mortgage:
$140,000
4.9% variable interest only for 9 more years
$300/mo. (was $780 last year!) Citicards:
$8500 (maxed out)
7% for life of loan
$120/mo. Bank of America:
$13.000 (maxed out)
6.9% until Feb 2010 and then 12% (if I'm never late) Discover card:
$3700 ($2500 available credit)
6.9% until March 2010 and thereafter 12%
$80/mo. Auto loan (loan requires $118/mo. auto insurance and has bad gas mileage)
$11,000 (4 years left on loan)
$280/mo.
8.49% TOTAL cash available from emergency fund and cash savings - $15,000 TOTAL income is $2800/mo. (after taxes) and my TOTAL expenses total about $3000!
Thank you so much for any help!!!
Chris
Several SavingAdvice members, including myself, noted that the HELOC is the most risky element to his financial life, and really could hurt him if and when rates go back up. Still, I wanted to answer the question about clearing near-term debt, so I ran a couple alternative plans through DueMinder. The goal was to determine if its better to pay off the car first, or apply that same $11,000 to credit card debt. He didn't mention his Bank of America card payment, so I assumed $260 per month, which is based on a 2% payment, which seems to be the norm these days. I had thought going in to this exercise that paying down credit card debt first would save a small amount more money than paying off the auto loan first. It turns out that with his particular set of intro rates on the credit cards, the two methods are virtually identical in terms of the payoff date. By committing to a fixed amount of $740 towards debt service each month, his debts would be paid off in 3 years and 3 months. I arrived at the $740 commitment level by adding the minimum payments of the credit cards, plus the $280 car payment, which the poster indicated would be applied to credit card debt if he chose to pay off the car as he proposed. See below for the two different plans. Some members noted that its better to pay off variable-rate credit card debt before secured debt like auto loans. This is certainly the case, and you should have compelling reasons to override this rule of thumb. The primary reason Chris wants to pay off the car loan appears to be peace of mind and a guarantee that it won't be repossessed should he run into deeper financial problems. I really would not categorize that as a "compelling reason". In addition, the payoff plan which pays down credit card debt first preserves the fixed payment on the car loan. The alternative plan relies on Chris sticking to the commitment of always applying the $740 per month to credit card payments. How reliable will Chris be in sticking to that commitment? Human nature often allows commitments to falter, especially in hard times. So in the end, the advice to the average person in this case must be the traditional advice: pay down the credit card debt first, and the auto loan next. In the end, it seems the interest-only HELOC will still be the most risky area of Chris's financial life. He should look to refinance his primary mortgage and second mortgage into a single, fixed rate mortgage, to avoid the inevitable increase in HELOC rates. Plan 1: Pay off $11,000 auto loan, apply $280 payment to credit card debt. Commiting to $740 per month pays off this debt in 3 years, 3 months. Month  | Balance | Citi | To Pay | BofA | To Pay | Discover | To Pay |
|---|
| 3/2009 | $25,200.00 | $8,500.00 | $400.00 | $13,000.00 | $260.00 | $3,700.00 | $80.00 | | 4/2009 | $24,604.05 | $8,148.16 | $410.00 | $12,814.67 | $257.00 | $3,641.22 | $73.00 | | 5/2009 | $24,004.57 | $7,784.17 | $415.00 | $12,631.27 | $253.00 | $3,589.13 | $72.00 | | 6/2009 | $23,401.54 | $7,412.99 | $419.00 | $12,450.81 | $250.00 | $3,537.74 | $71.00 | | 7/2009 | $22,794.96 | $7,035.58 | $424.00 | $12,272.32 | $246.00 | $3,487.06 | $70.00 | | 8/2009 | $22,184.78 | $6,650.89 | $429.00 | $12,096.80 | $242.00 | $3,437.09 | $69.00 | | 9/2009 | $21,570.99 | $6,258.88 | $433.00 | $11,924.28 | $239.00 | $3,387.83 | $68.00 | | 10/2009 | $20,953.58 | $5,860.53 | $437.00 | $11,753.77 | $236.00 | $3,339.28 | $67.00 | | 11/2009 | $20,332.51 | $5,455.77 | $442.00 | $11,585.27 | $232.00 | $3,291.46 | $66.00 | | 12/2009 | $19,707.76 | $5,043.59 | $446.00 | $11,419.81 | $229.00 | $3,244.37 | $65.00 | | 1/2010 | $19,079.32 | $4,624.92 | $450.00 | $11,256.40 | $226.00 | $3,198.00 | $64.00 | | 2/2010 | $18,447.16 | $4,199.75 | $454.00 | $11,095.04 | $222.00 | $3,152.37 | $64.00 | | 3/2010 | $17,811.26 | $3,768.02 | $54.00 | $10,936.77 | $623.00 | $3,106.47 | $63.00 | | 4/2010 | $17,216.52 | $3,736.10 | $53.00 | $10,419.11 | $625.00 | $3,061.30 | $62.00 | | 5/2010 | $16,629.10 | $3,705.00 | $53.00 | $9,894.15 | $626.00 | $3,029.94 | $61.00 | | 6/2010 | $16,035.80 | $3,673.72 | $52.00 | $9,362.82 | $628.00 | $2,999.26 | $60.00 | | 7/2010 | $15,436.58 | $3,643.25 | $52.00 | $8,824.04 | $628.00 | $2,969.29 | $60.00 | | 8/2010 | $14,831.36 | $3,612.61 | $51.00 | $8,279.75 | $630.00 | $2,939.00 | $59.00 | | 9/2010 | $14,220.09 | $3,582.78 | $51.00 | $7,727.89 | $630.00 | $2,909.42 | $59.00 | | 10/2010 | $13,602.70 | $3,552.78 | $51.00 | $7,170.39 | $631.00 | $2,879.53 | $58.00 | | 11/2010 | $12,979.14 | $3,522.60 | $50.00 | $6,606.18 | $632.00 | $2,850.35 | $58.00 | | 12/2010 | $12,349.33 | $3,493.25 | $50.00 | $6,035.20 | $633.00 | $2,820.87 | $57.00 | | 1/2011 | $11,713.21 | $3,463.73 | $49.00 | $5,457.38 | $635.00 | $2,792.10 | $56.00 | | 2/2011 | $11,070.72 | $3,435.03 | $49.00 | $4,871.63 | $635.00 | $2,764.05 | $56.00 | | 3/2011 | $10,421.78 | $3,406.16 | $49.00 | $4,279.91 | $636.00 | $2,735.71 | $55.00 | | 4/2011 | $9,766.34 | $3,377.13 | $48.00 | $3,681.13 | $637.00 | $2,708.09 | $55.00 | | 5/2011 | $9,104.33 | $3,348.92 | $48.00 | $3,075.22 | $638.00 | $2,680.19 | $54.00 | | 6/2011 | $8,435.68 | $3,320.55 | $47.00 | $2,462.11 | $639.00 | $2,653.02 | $54.00 | | 7/2011 | $7,760.31 | $3,293.01 | $47.00 | $1,841.74 | $640.00 | $2,625.56 | $53.00 | | 8/2011 | $7,078.16 | $3,265.31 | $47.00 | $1,214.01 | $641.00 | $2,598.84 | $52.00 | | 9/2011 | $6,389.16 | $3,237.45 | $46.00 | $578.86 | $578.86 | $2,572.85 | $115.14 | | 10/2011 | $5,693.24 | $3,210.43 | $46.00 | $0.00 | Paid! | $2,482.82 | $694.00 | | 11/2011 | $4,990.33 | $3,183.24 | $45.00 | $0.00 | Paid! | $1,807.09 | $695.00 | | 12/2011 | $4,280.35 | $3,156.90 | $45.00 | $0.00 | Paid! | $1,123.45 | $695.00 | | 1/2012 | $3,563.23 | $3,130.40 | $307.18 | $0.00 | Paid! | $432.82 | $432.82 | | 2/2012 | $2,840.02 | $2,840.02 | $740.00 | $0.00 | Paid! | $0.00 | Paid! | | 3/2012 | $2,112.50 | $2,112.50 | $740.00 | $0.00 | Paid! | $0.00 | Paid! | | 4/2012 | $1,380.66 | $1,380.66 | $740.00 | $0.00 | Paid! | $0.00 | Paid! | | 5/2012 | $644.47 | $644.47 | $644.47 | $0.00 | Paid! | $0.00 | Paid! | | 6/2012 | $0.00 | $0.00 | Paid! | $0.00 | Paid! | $0.00 | Paid! | | Total | | | $9,413.65 | | $14,857.86 | | $4,492.96 |
Plan 2: Pay off $11,000 in credit card debt (applied to Bank of America). The same $740 monthly commitment pays off the debt in the same amount of time, 3 years, 3 months. | Month | Balance | Citi | To Pay | BofA | To Pay | Discover | To Pay | Auto | To Pay |
|---|
| 3/2009 | $25,200.00 | $8,500.00 | $120.00 | $2,000.00 | $260.00 | $3,700.00 | $80.00 | $11,000.00 | $280.00 | | 4/2009 | $24,618.60 | $8,429.83 | $119.00 | $1,750.20 | $268.00 | $3,641.22 | $73.00 | $10,797.36 | $280.00 | | 5/2009 | $24,033.51 | $8,360.24 | $118.00 | $1,490.88 | $270.00 | $3,589.13 | $72.00 | $10,593.25 | $280.00 | | 6/2009 | $23,444.71 | $8,291.25 | $117.00 | $1,228.04 | $272.00 | $3,537.74 | $71.00 | $10,387.67 | $280.00 | | 7/2009 | $22,852.17 | $8,222.86 | $116.00 | $961.64 | $274.00 | $3,487.06 | $70.00 | $10,180.61 | $280.00 | | 8/2009 | $22,255.87 | $8,155.06 | $115.00 | $691.67 | $276.00 | $3,437.09 | $69.00 | $9,972.05 | $280.00 | | 9/2009 | $21,655.79 | $8,087.87 | $115.00 | $418.11 | $277.00 | $3,387.83 | $68.00 | $9,761.99 | $280.00 | | 10/2009 | $21,051.91 | $8,020.27 | $114.00 | $141.94 | $141.94 | $3,339.28 | $204.06 | $9,550.41 | $280.00 | | 11/2009 | $20,444.19 | $7,953.28 | $113.00 | $0.00 | Paid! | $3,153.60 | $347.00 | $9,337.31 | $280.00 | | 12/2009 | $19,832.61 | $7,886.90 | $112.00 | $0.00 | Paid! | $2,823.04 | $348.00 | $9,122.67 | $280.00 | | 1/2010 | $19,217.16 | $7,821.13 | $111.00 | $0.00 | Paid! | $2,489.55 | $349.00 | $8,906.48 | $280.00 | | 2/2010 | $18,597.80 | $7,755.98 | $110.00 | $0.00 | Paid! | $2,153.10 | $350.00 | $8,688.73 | $280.00 | | 3/2010 | $17,974.50 | $7,691.44 | $109.00 | $0.00 | Paid! | $1,813.66 | $351.00 | $8,469.40 | $280.00 | | 4/2010 | $17,347.26 | $7,627.52 | $108.00 | $0.00 | Paid! | $1,471.24 | $352.00 | $8,248.50 | $280.00 | | 5/2010 | $16,720.90 | $7,564.23 | $107.00 | $0.00 | Paid! | $1,130.67 | $353.00 | $8,026.00 | $280.00 | | 6/2010 | $16,089.08 | $7,501.58 | $106.00 | $0.00 | Paid! | $785.61 | $354.00 | $7,801.90 | $280.00 | | 7/2010 | $15,451.74 | $7,439.55 | $105.00 | $0.00 | Paid! | $436.02 | $355.00 | $7,576.17 | $280.00 | | 8/2010 | $14,808.83 | $7,378.16 | $378.15 | $0.00 | Paid! | $81.85 | $81.85 | $7,348.82 | $280.00 | | 9/2010 | $14,161.46 | $7,041.63 | $460.00 | $0.00 | Paid! | $0.00 | Paid! | $7,119.83 | $280.00 | | 10/2010 | $13,509.95 | $6,620.76 | $460.00 | $0.00 | Paid! | $0.00 | Paid! | $6,889.19 | $280.00 | | 11/2010 | $12,854.28 | $6,197.40 | $460.00 | $0.00 | Paid! | $0.00 | Paid! | $6,656.88 | $280.00 | | 12/2010 | $12,194.41 | $5,771.51 | $460.00 | $0.00 | Paid! | $0.00 | Paid! | $6,422.90 | $280.00 | | 1/2011 | $11,530.32 | $5,343.09 | $460.00 | $0.00 | Paid! | $0.00 | Paid! | $6,187.22 | $280.00 | | 2/2011 | $10,861.98 | $4,912.13 | $460.00 | $0.00 | Paid! | $0.00 | Paid! | $5,949.85 | $280.00 | | 3/2011 | $10,189.37 | $4,478.60 | $460.00 | $0.00 | Paid! | $0.00 | Paid! | $5,710.77 | $280.00 | | 4/2011 | $9,512.45 | $4,042.49 | $460.00 | $0.00 | Paid! | $0.00 | Paid! | $5,469.95 | $280.00 | | 5/2011 | $8,831.20 | $3,603.80 | $460.00 | $0.00 | Paid! | $0.00 | Paid! | $5,227.41 | $280.00 | | 6/2011 | $8,145.60 | $3,162.49 | $460.00 | $0.00 | Paid! | $0.00 | Paid! | $4,983.11 | $280.00 | | 7/2011 | $7,455.60 | $2,718.56 | $460.00 | $0.00 | Paid! | $0.00 | Paid! | $4,737.04 | $280.00 | | 8/2011 | $6,761.19 | $2,271.99 | $460.00 | $0.00 | Paid! | $0.00 | Paid! | $4,489.21 | $280.00 | | 9/2011 | $6,062.34 | $1,822.76 | $460.00 | $0.00 | Paid! | $0.00 | Paid! | $4,239.58 | $280.00 | | 10/2011 | $5,359.02 | $1,370.86 | $460.00 | $0.00 | Paid! | $0.00 | Paid! | $3,988.15 | $280.00 | | 11/2011 | $4,651.19 | $916.28 | $460.00 | $0.00 | Paid! | $0.00 | Paid! | $3,734.91 | $280.00 | | 12/2011 | $3,938.84 | $458.99 | $458.99 | $0.00 | Paid! | $0.00 | Paid! | $3,479.84 | $281.01 | | 1/2012 | $3,221.92 | $0.00 | Paid! | $0.00 | Paid! | $0.00 | Paid! | $3,221.92 | $740.00 | | 2/2012 | $2,499.83 | $0.00 | Paid! | $0.00 | Paid! | $0.00 | Paid! | $2,499.83 | $740.00 | | 3/2012 | $1,772.53 | $0.00 | Paid! | $0.00 | Paid! | $0.00 | Paid! | $1,772.53 | $740.00 | | 4/2012 | $1,039.98 | $0.00 | Paid! | $0.00 | Paid! | $0.00 | Paid! | $1,039.98 | $740.00 | | 5/2012 | $302.14 | $0.00 | Paid! | $0.00 | Paid! | $0.00 | Paid! | $302.14 | $302.14 | | 6/2012 | $0.00 | $0.00 | Paid! | $0.00 | Paid! | $0.00 | Paid! | $0.00 | Paid! | | Total | | | $9,652.15 | | $2,038.94 | | $3,947.91 | | $12,783.15 |
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