Author Topic: Pay 2 car loans vs. down payment??  (Read 3460 times)

DebtFreeinPhilly

  • Stubble
  • **
  • Posts: 159
  • Location: Philadelphia
Pay 2 car loans vs. down payment??
« on: October 04, 2017, 11:41:38 AM »
Hi Everyone!

Backstory: In February 2017, I was temporarily reassigned at work to teach in another state. We were planning on moving anyways, so our house was already on the market and sold in June 2017. The farmhouse we were planning on moving in to turned out to be a bad decision and that sold in June 2017. My work has been paying our housing and food allowance (yay for govt job!) since February 2017. Since July we haven't had any housing expenses. We made about $12,000 combined on the sale of both homes and have managed to save an additional $2,000 each month.

We have two car loans totaling $24,000 @ $556/month. I am not replacing the vehicles at the moment and I don't plan to in the near future. Don't ask but face punch if you want to. We are working each month on changing our lifestyle to be more in line with MMM principles and FIRE. We are focused on reducing our food budget since we spend way more than a normal family of 3.5 should. Once that is under control, we will tackle the other areas. Steady progress is the game for now.

Eventually we will be moving back to the Philadelphia area when my temporary assignment ends in February and will be looking for a new place. Having $25,000 in cash for a down payment or a portion of one, is nice since I have never had that before. Yes I owned houses before but I borrowed from my TSP/401k for the down payment. I have no other debts besides the car loans.

Question: Should I pay off the two car loans with savings and the amount we will save each month? Or should I save the money for a down payment in?

 TIA!
 

honeybbq

  • Handlebar Stache
  • *****
  • Posts: 1468
  • Location: Seattle
Re: Pay 2 car loans vs. down payment??
« Reply #1 on: October 04, 2017, 01:06:05 PM »
How long is your next assignment guaranteed for? The general rule of thumb is you need 5 years at a place before moving to make it 'worth' buying. Is that true in your field? Can you be sure it makes sense to buy a house in your next arrangement?

ducky19

  • Pencil Stache
  • ****
  • Posts: 765
Re: Pay 2 car loans vs. down payment??
« Reply #2 on: October 04, 2017, 01:12:28 PM »
Pay off the cars and save the payments each month - if you're already saving $2k a month, you'll be back up to $10k by the time your assignment ends in February with the savings from the car payments. Agree with honeybbq, you may want to look at renting if you won't be in Philly for at least 5 years. Best of luck!

DebtFreeinPhilly

  • Stubble
  • **
  • Posts: 159
  • Location: Philadelphia
Re: Pay 2 car loans vs. down payment??
« Reply #3 on: October 04, 2017, 01:48:16 PM »
How long is your next assignment guaranteed for? The general rule of thumb is you need 5 years at a place before moving to make it 'worth' buying. Is that true in your field? Can you be sure it makes sense to buy a house in your next arrangement?
My permanent office is Philadelphia. We don't plan on moving from there unless I get promoted which is not likely at this point. I am ok with renting if its financially better.

Pay off the cars and save the payments each month - if you're already saving $2k a month, you'll be back up to $10k by the time your assignment ends in February with the savings from the car payments. Agree with honeybbq, you may want to look at renting if you won't be in Philly for at least 5 years. Best of luck!
The $2k a month would be used to pay off the remaining car loan after using the $16,000 savings to pay them off/down.

We might be able to squeeze out an extra $1000 (payment from 1st car) in the four months because one car would be completely paid off right away. Thanks for the replies!

RWD

  • Walrus Stache
  • *******
  • Posts: 6530
  • Location: Arizona
Re: Pay 2 car loans vs. down payment??
« Reply #4 on: October 04, 2017, 02:50:58 PM »
What are your interest rates? Recommended investment order:
https://forum.mrmoneymustache.com/investor-alley/investment-order/msg1333153/#msg1333153

DebtFreeinPhilly

  • Stubble
  • **
  • Posts: 159
  • Location: Philadelphia
Re: Pay 2 car loans vs. down payment??
« Reply #5 on: October 05, 2017, 11:16:06 AM »
What are your interest rates? Recommended investment order:
https://forum.mrmoneymustache.com/investor-alley/investment-order/msg1333153/#msg1333153

I am already maxing out my TSP/401k each year, and I will be maxing out HSA and DW's Roth IRA in 2018. It took me several years to get up to the TSP-max-per-paycheck amount ($700/paycheck) so I understand that goes against the investment order but psychologically its better for me. I currently do bi-weekly payments for the car loans.

Here are the details of the loans:
Truck Loan
Balance:  $11,379
Interest:  9.48%
Payment: $332
Terms:     49 months (41 left)

Car Loan
Balance:  $10,062
Interest:  2.89%
Payment: $218
Terms:     72 months (50 left)

 

shadesofgreen

  • Pencil Stache
  • ****
  • Posts: 754
  • Location: PNW
Re: Pay 2 car loans vs. down payment??
« Reply #6 on: October 05, 2017, 11:32:43 AM »
I'll be honest and say that you need to kill the TRUCK LOAN. 9.48% interest? That is huge! -- I actually cringed after reading that.

I would than split what the payment was between savings and extra towards the car but only if you wanted to.

KCM5

  • Pencil Stache
  • ****
  • Posts: 881
Re: Pay 2 car loans vs. down payment??
« Reply #7 on: October 05, 2017, 12:32:40 PM »
Ouch! Pay off that truck loan and keep the rest for a down payment. What sort of home price range are you looking to buy? Would that give you enough for 20% down?

I personally have a 2.09% car loan that I keep around - it's low interest, so I don't worry about paying it off early. Same with my 3% mortgage. Reasonable people can disagree on this, but I would feel comfortable keeping the other loan around and paying it on schedule.

DebtFreeinPhilly

  • Stubble
  • **
  • Posts: 159
  • Location: Philadelphia
Re: Pay 2 car loans vs. down payment??
« Reply #8 on: October 05, 2017, 01:38:47 PM »
I'll be honest and say that you need to kill the TRUCK LOAN. 9.48% interest? That is huge! -- I actually cringed after reading that.
Ouch! Pay off that truck loan
Yikes, pay that truck loan off asap!  Then go back to saving for a downpayment.  The second loan isn't so high I'd be concerned about paying it off faster - though I'd possibly be a little concerned about the mindset that led you to have 24k of car loans in the first place, but I will give the benefit and assume you wouldn't do it again, if you had it to do over ;)

Soooo you're saying I should keep the truck loan? ;-p

I have learned my lesson on car loans and having debt period. Since I bought the truck, we have done a near 180 on MMM/FIRE/Debt Free Living. Also, the truck is one of my bucket list items. Excuse for being a jackass who made a poor financial decision, yes, I know that now. Moving forward, our plan is to pay cash for everything except the house.

I like the idea of taking the truck payment and applying half to the other car loan and half to the down payment.

What sort of home price range are you looking to buy? Would that give you enough for 20% down? 

In the Philadelphia area, homes in decent school district range from $190k - $295k. The most we would be able to save by February, after paying off the truck, would be $11,621. We might be able to squeeze out another thousand or two but we are still not on a good budget practice (i.e. we overspend in certain categories). Like I said earlier, each month we are improving our situation and getting our finances under control. $11,621 isn't even close to 20%, though neither was $26k, but $26k was a whole lot closer.


sisto

  • Handlebar Stache
  • *****
  • Posts: 1084
  • Age: 55
  • Location: Sacramento, CA
Re: Pay 2 car loans vs. down payment??
« Reply #9 on: October 05, 2017, 03:12:52 PM »
With the details you just provided, you can pay off the truck now and still get your down payment back up to what it is today. That's your best bet right now. If you really scrub your budget and crack down you can probably bump that down payment up a bunch more.

RWD

  • Walrus Stache
  • *******
  • Posts: 6530
  • Location: Arizona
Re: Pay 2 car loans vs. down payment??
« Reply #10 on: October 05, 2017, 08:13:10 PM »
No brainer. Pay off the truck loan. Keep the low interest car loan for the remaining 50 months.

GetItRight

  • Pencil Stache
  • ****
  • Posts: 627
Re: Pay 2 car loans vs. down payment??
« Reply #11 on: October 05, 2017, 09:41:54 PM »
49 and 72 month loans? You cannot afford those vehicles. Sell them and buy vehicles you can afford that meet your needs. Stop living beyond your means.

That being said, If I was adamant on keeping fancy new econobox cars I would pay them both off and start saving my pennies. Paying the higher interest loan is a no brainer. I am personally risk and debt averse, the lower interest is close enough to my 3% threshhold that I'd probably pay it off. Save your pennies for other things, it'll go faster without paying interest for luxuries. Alternatively, pay off the high interest loan and save to stay flexible. If you have enough to pay off the ~3% loan one you relocate, do so (without depleting EF).

ender

  • Walrus Stache
  • *******
  • Posts: 7402
Re: Pay 2 car loans vs. down payment??
« Reply #12 on: October 06, 2017, 01:36:43 PM »
I'd pay down the loans and then save for the house.

Reason being, you want to change your mindset about debt to be less of a "can have toys without the money" and right now the house is the next shiny toy.

DebtFreeinPhilly

  • Stubble
  • **
  • Posts: 159
  • Location: Philadelphia
Re: Pay 2 car loans vs. down payment??
« Reply #13 on: October 11, 2017, 08:07:24 AM »
Thanks for all the replies! I paid off the truck yesterday and should get the clear title in a few weeks. We are left with about $4k in savings. Our plan is to have the other car paid off by Christmas and then fast track the down payment fund starting January 1. Over the weekend, my wife and I sat down to pencil out a 5 year plan going forward...no new debt beyond a house is priority one. Thank you again for all the replies!

I'll update the post when we pay off the other car.