Author Topic: Pay off loans? What about an emergency?  (Read 3399 times)

chucknorris

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Pay off loans? What about an emergency?
« on: June 24, 2013, 09:48:11 AM »
I have a motorcycle loan (my primary transporation) at BMW Financial Services for about 5K at 7% APR.  I am working in a temporary job that could end at any time, but I have a solid professional job that starts next February.  I have a few thousand in cash reserves, that I may need if I lose my job.  I would like to start paying as much as possible on this loan.  If I pay more than the monthly payment, can that count towards future monthly payments or will I still owe the regular amount in addition to what I have already contributed? 

I would be happy to reduce my interest liability by paying more than the monthly payment, but only if in the future I can stop paying on it while it draws from the additional contributions I would have made in the past.

How does this work?

matchewed

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Re: Pay off loans? What about an emergency?
« Reply #1 on: June 24, 2013, 10:08:54 AM »
a) facepunch for taking out a loan for your transportation.

b) You'll have to contact BMW Financial Services to answer how additional payments are handled.

c) You will not be able to stop paying because you paid more at an earlier date. The moment you took on this debt you agreed to pay the scheduled amounts until the loan is paid off. You don't get off the hook because you paid more in advance.

chucknorris

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Re: Pay off loans? What about an emergency?
« Reply #2 on: June 24, 2013, 10:13:29 AM »
Facepunch to the stubble well deserved.  I also have almost 40K of student debt, mostly at 6.8% APR.  Any chance it works differently with Fedloan? 

matchewed

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Re: Pay off loans? What about an emergency?
« Reply #3 on: June 24, 2013, 10:35:03 AM »
Points b) and c) will still be applicable for your student loans. Point a) not at all. :)

StarryC

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Re: Pay off loans? What about an emergency?
« Reply #4 on: June 24, 2013, 10:48:26 AM »
My car loan does work the way you are suggesting.  When I pay 2x the payment it pays this month and next month.  Then when I pay 2x again next month it pays for the third month and fourth month.  If I keep doing it, I will pay less.  If after doing this for 6 months I take 6 months off from paying then I'll just pay the same interest amount.  I've found calling to be pretty useless.  If you go to the website and make at least a double payment, then go back about a week later and see if they've moved your due date ahead an additional month that is a more certain way to tell.

I'm under the impression this isn't in your best interest because it might not reduce your interest as much as if they didn't do it this way.  However, I didn't bother arguing about it because the interest on my loan isn't much and I'll have it paid of within a year. 

This is also the way my some of my student loans work.  However, others don't.    On the student loans, it is much more frustrating because the interest is higher and the payment term much longer.

chucknorris

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Re: Pay off loans? What about an emergency?
« Reply #5 on: June 24, 2013, 10:52:29 AM »
Ah, that's what I'm asking.  Although, I know I may not be using the vocabulary properly.  The other alternative I was thinking is to stash away my extra few thousand bucks in an REIT at 6% return.  The net effect is basically the same and I keep my money more liquid in case of a cash flow crisis.  Are there fees which make pulling my money out of one of these stocks prohibitively expensive?

arebelspy

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Re: Pay off loans? What about an emergency?
« Reply #6 on: June 24, 2013, 10:53:47 AM »
Many loans you have the option to pay down principal (thus still needing to make the monthly payments) or making prepayments (so you could suspend payment for a few months).

When you send in the payment you can write an explanation what to apply it towards.

If you just send extra money with no explanation, they usually have a default they will do - some companies apply it to principal, as matchewed said, some do to early payments, like StarryC said.

Call the company to see which, if either, option you have.

Also, to answer the question in the OP "What about an emergency?" you have to answer this: what is an emergency?
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arebelspy

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Re: Pay off loans? What about an emergency?
« Reply #7 on: June 24, 2013, 10:55:03 AM »
Are there fees which make pulling my money out of one of these stocks prohibitively expensive?

Short term capital gains if it goes up in price (though the profits would pay for that, keep it in mind so you aren't hit with a big tax bill).

Also, um, they can go down in price.  Not a fee, but you could take a huge loss when you need the money, that would be bad.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

matchewed

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Re: Pay off loans? What about an emergency?
« Reply #8 on: June 24, 2013, 10:56:57 AM »
Ah I was wrong on my statement then (never listen to the debt free dude :P ). Seems like I've got some researching to do.

As an aside investing in stocks or REITs for a short term emergency fund is risky. That 6% return is over a long time frame and not typical for a short term, fees will vary from company to company it is taxes you will have to worry about.

Saving accounts and money markets are a better place to put your emergency fund.

chucknorris

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Re: Pay off loans? What about an emergency?
« Reply #9 on: June 24, 2013, 11:01:10 AM »
An "emergency" for me, is losing my temp job sooner than I would hope and having to float my living expenses while eating lots of beans for a few months until my new job starts next year.