Greetings fellow Fools, I am relatively new to this board and was recommended to post my question here instead of Fools and Their Money. My question is: I have several loans, credit cards, etc. My plan is to pay off the smaller ones first and then with the cash from the payments I would have been paying, pay off the next debt and keep going. I have also thought about paying off the high interest ones first which are pretty big. Interest is at 12.5% for one unsecured consumer loan and the balance is around 17,500. The other one is a 2nd Mortgage which I used for debt consolidation. The current rate is at 12.5% and is an interest only loan (which I wasn't too happy with getting). The balance is $42,000. I really needed to consolidate debt at the time (emergency) and I really didn't care about the terms. Now I am going to fix the problem. Question is which one would be the smarter ones to pay off first: the smaller balanced ones or the higher interest ones? For complete information on my situation see the Fools and Their Money Board. Any help on the subject matter will be most appreciated. Thank you in advance. SGT Sutton AKA ApacheMech
The key to the answer more depends on your pyschological preferences then anything else. Keep in mind that you know yourself better then anyone else. You might be more likely to stick with the plan that you can see immediate gains in or it might be easier for you to pay the accounts evenly, or any other of a thousand things.That being said, it generally would save you the most money in the long run to pay off the higher rate card/loan first and when paid off, divert the entire amount you were paying to the next highest interest rate loan. That is what is meant when you hear people say snowballing.Keep in mind that you are talking about effective interest rate which may be lower for tax advantaged loans.Other factors that are important to consider are the kind of loan, i.e. unsecured vs. secured, especially if you think there is a chance that you might not be able to pay back the loan in the future.But above all remember that it is you that will be following the plan through and you should make it so you will be most likely to do so.
I think that you benefit more in the bigger picture by getting rid of your smaller debt first--and not just from the psychological standpoint.If you retire your small debts first then one by one you will have more money to throw at you next debt and so on. That will take time, but as that time passes, your financial picture will get better and it might even present opportunities to lower your high interest debt. I think that too many times people look at the high interest debt and assume that they are married to it until the debt is completely paid off.How is your budgeting and your e-fund coming? Snowballing is useless without it.Thanks for keeping those Apaches flying.Fred
Hey Sgt Sutton/ApacheMech...You listed your debts on "Fools and their Money" as:Mortgage: 5.25% bal:178,000 min pay: 10752nd Mortgage: 12.5% bal: 42,000 min Pay: 465Unsec. Consumer Loan: 12% bal: 17,500 min pay: 563Car Loan: 6% bal: 10,500 min Pay: 265Credit Card: 7% bal: 8,500 min pay 200The 2nd interest-only mortgage sounds a little dangerous. I don't know much about that monster. Is there a way to refi it and consolidate it and your 1st mortgage all into one mortgage? A 12.5% interest-only loan is burning through alot of your money. Apart from the 2nd mortgage, which I will leave others to advise you on, I would pay minimum payments on everything but the Unsecured Consumer Loan. I would put all extra cash toward that loan and try to knock it down first just because it has such a high interest rate and it is likely to be much more difficult to negotiate. You'll save yourself more money by paying more toward the higher rate loan. You may even be able to Balance Transfer (BT) part of your consumer loan to your credit card if you can take advantage of low-interest-rate BT checks that many cards offer. (just pay close attention to the fees and small print!)The 7% rate on your credit card is not bad, but I would still call and ask for a lower rate. Tell em' your thinking of Balance Transfering the whole thing to somebody else b/c you got some offer in the mail, and they usually will work with you. I'd put the car loan and the 1st mortgage at the end of your list to pay-off as they have decent interest rates, the mortage has tax advantages, and your car loan at least has some collateral.
My debts include:Mortgage: 5.25% bal:178,000 min pay: 10752nd Mortgage: 12.5% bal: 42,000 min Pay: 465Unsec. Consumer Loan: 12% bal: 17,500 min pay: 563Car Loan: 6% bal: 10,500 min Pay: 265Credit Card: 7% bal: 8,500 min pay 200Welcome apachemech, and thank you for you're service. I am going to express a few opinions so please take what you want and throw the rest away. It appears as if you have done the same thing as many of us and bought into the loan consolidation myth and used the equity of your house as a balance transfer for debt. This can be a good thing if you have a well organized plan for getting rid of the debt. But, what happens to many people including myself is you look at the 2nd mortgage or HELOC as a monthly expense and pay down only the minimum and suddenly it appears that you have all this nice money that your now free to spend. So the credit cards and unsecured debt starts creeping up again and again. I have had CC debt for almost 24 years and I am sick too my very sole of it. I no longer accept that any loan consolidation or pulling off parts of my house and hocking them will do any good until I changed my spending and gained control of my finances. Has it worked, Yes I found TMF and read as many library books as I could find. Great books I read that did not cost me a penny are. The wealthiest man in Babylon, Total money makeover by Dave Ramsey, The wealth Barber, The millionaire next door, and many others in section 322. One of the easies most down to earth books was The Total money makeover. Apachemech, you went through a lot of training and discipline to get were you are in you career use that strength to take control of your personal finances and you will do great. You need to go to war against this debt. You did a nice job on getting a good first mortgage and the car loan is not bad either. Congratulations. --sorry for the rant , Now for you question.IMHO: Stopping all use of the CC's and attack them first. You should also try to build up an emergency fund. Biggest emergency is usually auto related so you should probably try to build it up to at least the deductible for your car insurance. Then steadily try to grow it. By the time you kill off your CC debt. Your FICO should be very good and you will have a wealth of different ways to lower your interest rates and attack the unsecured loans. The auto rate is good and by the time you get around to it after the unsecured loan it will probably be about gone anyway.The consumer loan, car, 2nd mortgage debt you want to kill but, you need to cover your back this is when I would be building the efund and a debt fund. One safe way to take on car loans, helocs, and other Consumer loans. Is get a really good FICO score by paying off your CC debt. Save up a Debt fund for a while. Then use a Balance Transfer at 0% (BT at 0%) for the amount in your Debt account and attack the target debt with a vengeance. The BT is really just holding part of your debt while you destroy the highest interest rate. Why this will work? First you have killed off the CC debt, Next you have learned to save money by living below your means and building a debt account. Your BT is protected by your debt account and by this time you will have all the discipline needed to take on any kind of debt. My self I might be looking to refinance the 2nd mortgage but only after the CC debt is gone so you could get a real good loan.Roy (Come up with a strong plan and you can easily control this debt)
Hi Apache,Thanks again for your service to our country! A couple of other avenues to explore - what else can you do to increase your income? A few examples that might free up some of your income that can be put towards debt reduction: - get a roommate, if possible.- use some of your house for storage space and charge low 'rent', either for someone who wants to stick their stuff in a shed out back, or a spare room? - odd jobs- try to find someone to barter skils or stuff with, preferable if you're trading them for something that might have cost you money. - make a rule for yourself, anything you need to buy, see how much you can beat the store's price. Freecycle, craigslist, ebay, garage sale. Hope that helps!
How is your budgeting and your e-fund coming? Snowballing is useless without it.My budgeting is pretty strict to say the least. I have a couple of things I can streamline like cable and cell phones. I also have an annuity I am not quite sure about. It makes money, but I have to dive into the numbers (expense ratio) and stuff when I return home. I leave a little money to splurge on and that helps keep the strict budget worth while.As far as my e-fund, I currently have roughly $1500 in it and am hoping to have $5000 by the time I am done with it when I get home around March 2006 time frame.
I also have an annuity I am not quite sure about. It makes money, but I have to dive into the numbers (expense ratio) and stuff when I return home.Annuities are usually a bad choice unless you've maxed out your IRA and any employer investment options (401k, 403b, TSP for gov't employees, etc). And even then, you need to search far and wide for one that doesn't rip you off in fees.But don't worry, you're only about the 10 billionth person to be sold an annuity when it was improper for them.Also, as someone who's in debt, it may not seem like it, but your savings are 'false savings'. Basically, it's effectively like you borrowed money to invest it. Over the long haul, you are not gonna earn 12.5% on your investments, especially after taxes (and yes, annuities are tax deferred, but not tax free). The numbers work out such that you are essentially losing money for every dime you invest. You should give serious consideration to pulling the money out and using it to pay off debt. Afterall, it's a 12.5%, after-tax, guaranteed return - who wouldn't jump on that investment?I think it's an excellent point that if you can take just a fraction of the professional discipline you've developed in the military and put it towards your finances, this should be a relatively breeze for you ;). Bless you, good luck out there, and you'll find tons of good advice on this board and on the Living Below Your Means board for your situation.