What to pay down?

[Spinney]

So I've found myself a little confused. At the end of February the interest relief on my student loans ends (prime + 1.5%, currently 7.5%). This one is accelerated, like a mortgage...the sooner I make payments the less interest I pay. I also have a small car loan for the used cavalier I just bought. About $8610 at 9.75%, but the payments are equalized...so I pay the same amount of principle and interest on the first payment as on the last one (month 36).

So here's the problem. By February I'll have saved up around $8000, and my assumption was that by paying the car loan early I could save on the interest. Now I'm starting to wonder if the payout price includes the interest too. Has anyone here ever had this type of a loan? Does it even make sense that this could be the case?

[outside the box]

you need to find out if the payoff amount for the car included the interest. Either way, pay off the car first as it is a liability and will be worth less the longer you have it anyway. The student loan(s) may allow for consolidation in the future for a lesser rate and/or the option to have the rate reduced if you make X number of ontime payments in a row.

Also, if you decide to go back to school you can defer the loan payments, but not the car payments.

[jrwilheim]

I agree. Pay off the car first.

Better yet, instead of saving $8000 to pay off the car in one lump sum, apply whatever you're saving each week/month directly to the car loan (if you can do this). You'll get the loan paid of faster. This is assuming you have enough stashed away in an emergency fund.

[shimma]

Pay off the loan with the highest interest rate first.

[weary]

your car loan payoff quote should NOT include the interest in most cases unless you have a balloon payment or other type of loan rather the usual set-up. it does not sound that way from your OP. can you ask for an amortization schedule from the dealer/bank/whoever your loan is through? that will help if you're not sure.

what are the terms of your student loan as far as acceleration goes? unless it's outrageous, i'd say like the others, pay off the car.

if you don't have an EF, don't blow the whole $8k on the car though. you need an EF funded.

[yankeeyosh]

Pay off the loan with the highest interest rate first.

Agreed 100%

[Spinney]

Well I know the car loan isn't actually amortized. The way the finance person explained it the interest is already calculated and split up. If I pay $3000 right now I still pay the same amount of interest every month as if I didn't make that lump payment. So until I have enough to pay off the balance of the loan there really isn't any point in making large payments if I can get a decent amount of interest on it in the bank.

The main question was whether or not I'd end up paying the same total amount of interest no matter when I pay the car off. From the sounds of it I'll have to talk to the bank holding the car loan, but I won't actually have my account number until November 1st when the first payment comes out of my bank account. Before that happens if I call them up to ask they won't have a clue who I am heh. I'm fairly sure that this is not the case, and making that large payment will reduce the interest I pay. It seemed like it would be odd for the payout balance to include all 36 months of interest, but I wasn't sure since I had never even heard of a non-amortized loan before.

[kelsi111]

First off, congrats on saving 8k! That's super awesome! :huge:

I'm going to second the advice in this quote:

I agree. Pay off the car first.

Better yet, instead of saving $8000 to pay off the car in one lump sum, apply whatever you're saving each week/month directly to the car loan (if you can do this). You'll get the loan paid of faster. This is assuming you have enough stashed away in an emergency fund.

I do software development in the financial industry so I know a lot about this. You'd have to be making one awesome interest rate to justify saving this money rather than putting it towards the debt. With your rate you will absolutely not find one. Seriously. 10% only happens in the stock market and that's only long term.


Calculate how much you spend in 2-3 months and put that in long term savings. Put the rest towards the car. As far as the loan, I'm sure it's the same as my fiancee’s before I made him pay it off. You will pay x a month interest and y in principle. If you put down 5k you will still pay the same x and y, but you will pay it for less time, which is where you will save your money. If you finish up 10 months early and you were paying $50 a month in interest you would have saved $500.

However, if you were talking about investing until you hit the point to pay it off since you have a set interest rate, I can see where you are coming from. However, that would be valid if you weren't sitting on a student loan. Paying down the amount you owe on your car will raise your credit rating. Having a higher credit rating will make it easier to negotiate a better loan for your student loan. By the 9.75% rate, I'm guessing the credit bureau thinks that you are living beyond your means by how much you owe and the amount going out verses coming in.


By the length of your student loan you will have to put down a substantial amount of money to effect your amount you pay on interest verses principle because of the curve of the rate. Beyond that, your car’s interest rate is a lot higher. I would recommend that you pay down the car with as much money as you can afford to and pay it off as quickly as you can by putting more than the minimum towards it each month so that you raise your credit rating and get away from that interest rate. Also, you can defer student loans in times of need, but you can never defer the car.

Another thing to check is if there is a penalty for paying off the car early. Some places charge you alot so you'd have to see if how much you'd save in interest by having the loan paid off early would be more than the penalty for paying it off early. Try to pay an extra set amount every month towards the car (50-75 if you can) on top of putting down as much as you can. As the "Debt Diet" says...getting out of debt trumps saving (as long as you have 2-3 months living expenses in emergency fund).


Good luck and congrats again at the 8k! :)

[Spinney]

Thanks! Most of that savings is due to me never taking vacation time at my last job and getting a massive payout when I quit heh.

The thing with my student loans is I've got interest relief until March. The government pays the interest, and I don't make payments on the principle until then either. My student loans are split into two parts...the large one is held directly by the government now, and the other $9000 is with a commercial bank still. Assuming that the bank holding the car loan isn't going to charge me the same $1500 in interest whether I pay off early or not then I'm clearly far better off to pay the car loan, since that's around $250 a month. No penalties for paying early either...first thing I asked about lol.

I actually already have a great credit rate, since I've been using my credit cards consistently for the last 8 years and always pay them off before the due date each month. Unfortunately I can't negotiate the rate on my student loans without taking a private loan, which I don't get government protection on (ie: interest relief) if I lose my job. I think the rate on the car loan was decided before they even had my credit info.

I think I'm going to keep sticking that money in the high interest account at least until I can confirm my understanding of the car loan interest is correct. If it is, then I'll keep putting it in there until the interest relief is over. Until that time I'll be saving around $900 per month, and I've calculated that I'll get around $150 in interest in the meantime. Once the student loans kick back in I'll have enough to pay off the car loan, and then I'll have a car and be able to put an extra $200 or $300 on my student loans.

If I miscalculated and don't have quite enough to pay off the entire car loan by then I'm sure I can find a short term loan at a lower interest rate to cover the balance, that I can easily fit in my budget.

Kind of amazing really...my first year in the work force I could barely afford to support myself. Now I move away from Vancouver to a small town, and I've got a car and enough money to make serious loan payments.

[analogman]

Make sure your car loan doesn't have a pre-payment penalty. However, from the way you've described it, it seems that there might be. If there is, you are probably better off keeping the money in a savings account rather than paying the loan off.

Also, in general, I'd prefer to pay off secured debt (i.e. house/car) before unsecured debt (credit card). That's an absolute worst case scenario planning though. From a cash flow point of view, paying off debt with the highest interest rate makes sense.

[careerstudent]

If you pay off the car loan in full with everything in your savings, what will you have for emergencies?

Student loan interest is tax deductible, so I would not necessarily worry about paying that off so quickly. It's great if you can, but you'll lose out on that tax deduction by doing so.

You need money for emergencies. You can pay extra money monthly towards your car and still get it paid off before the 36 months without jeopardizing your independence by spending your emergency fund to pay it off.

[jrwilheim]

If you pay off the car loan in full with everything in your savings, what will you have for emergencies?

Student loan interest is tax deductible, so I would not necessarily worry about paying that off so quickly. It's great if you can, but you'll lose out on that tax deduction by doing so.

You need money for emergencies. You can pay extra money monthly towards your car and still get it paid off before the 36 months without jeopardizing your independence by spending your emergency fund to pay it off.

I second this. Make sure you have an emergency fund first covering 3-6 months of living expenses. If you have that set up, then attack the car loan.

I don't see the tax deduction you get on student loans as a good reason not to pay them down. I pay $120 a month in student loans, about $90 of which is interest. So in a year I pay maybe $1,080 in interest and get back $270 in tax deductions. I'd much rather lose the $1,080 in interest payments per year than lose the $270 tax deduction. My only reason for not paying this loan down more is that the interest rate is under 3% (I consolidated at a perfect time) and so I can't justify putting money into that rather than into savings and investments.