Author Topic: Please help my wife and I decide what debt to attack next  (Read 5204 times)

atourlimit111

  • 5 O'Clock Shadow
  • *
  • Posts: 13
Please help my wife and I decide what debt to attack next
« on: September 18, 2014, 11:30:33 PM »
My wife and I have a small disagreement between the two of us. Through hard work and myself picking up a second job we have paid most of our credit cards off. I'm a Lyft driver now and soon to be a Uber driver too.

Here is our current debt summary:

-CC1: $2,319.54 at 19.80% interest. Minimum payment has been at $64 dollars a month.

-CC2: $1,624.10 at 0% right now. The 0% interest will expire and we will get interest at 19.80% starting in April 2015. Monthly payment has been $50 dollars.

Mazda car loan: We still owe $10,500 on it. Currently at 14.4% interest. Monthly payment is $340.  We have looked into it. Selling it to a car dealership at it's current state would be $3,000 dollars. Private sell would be $4,000 to $5,000 dollars.

T-Mobile cell phones: I'm not sure exactly what we still pay for the smart phones.  To make things easier I'm going to say that we owe $1,000 dollars for both phones. T-Mobile does not charge us interest. But for my wife's cell phone it adds $25 dollars extra to the bill and my phone $27 dollars to the bill.

My wife wants to attack the car loan principal with any extra money we have left over after  monthly expenses are taken care off. Also any extra money that we acquire like selling things, overtime pay, my second job doing Lyft and she is also working watching other parents kids.

I disagree with her and want to attack the credit cards next and then paying off the cell phones. She does not want to pay off the cell phones because she keeps saying "they don't charge us interest".

What we want to know is what debt to attack next and why?

If we do get any extra money from taxes next year we hope to put a big dent into the car principal balance. But we are not sure what to do currently.

I hope you guys can help us out.

Thank you.

former player

  • Magnum Stache
  • ******
  • Posts: 4684
  • Location: Avalon
Re: Please help my wife and I decide what debt to attack next
« Reply #1 on: September 19, 2014, 01:37:54 AM »
Congratulations on the work you've already been putting in to paying off debt.

You don't give quite enough information for someone here to advise you fully - there is advice on how to write a case study in the stickied thread at the top of Ask A Mustacian.

To answer just your specific question, the essential information would to know whether you have any assets you can apply to paying off debt and how much income you can apply to debt each month.  Without knowing that, I'd be suggesting you follow the basic rule first: pay off the highest interest debt as fast as possible, then pay off the next highest interest debt as fast as possible.

1.  First issue to consider is whether you can refinance credit card #1 to get a 0% deal?  If not, then it seems to be the current highest interest debt, so pay it off first with everything spare you have.

2.  Your next highest interest debt will be credit card #2 from April next year.  Would you be able to refinance that one before interest becomes due?  If not, you need to be sure that you will have approx. $1,300 to pay it off before interest becomes payable.  So calculate how quickly you can put that sum together working backwards from the date on which you need to pay it - for instance, you can get this money together in March, or in Feb and March, or in Jan, Feb and March.  Pay the minimum until you get to whatever date you come up with, then put everything you save to paying this one off.

3.  If you have any money to spare between paying off CC#1 and saving to pay off CC#2, and then when you have money after paying off CC#2, put it to the car loan, which is your next highest interest debt.  You probably can't afford to sell the car at the moment, and also it is a useful source of income.  Think about learning some basic maintenance to keep it in as good a shape as you can - it needs careful tending to preserve its value and usefulness.

4.  Try to find the terms of your phone contracts and then try to make sense of them so that you know what you owe, what you are paying and when the contracts expire.  At the amounts you are paying and the amount you say you owe, it could take another 3 years to pay them off.

Finally, if you can fine-tune your taxes so that you pay a bit less during the year and get less back from the taxman at the end of the year, it is to your advantage because you get the use of your money sooner, rather than giving it to the taxman to hold until he gives it back to you.  This is easier to do if you have regular and stable incomes.  Don't go so far with this that you could be subject to penalties, though.

Good luck.

shuffler

  • Bristles
  • ***
  • Posts: 326
Re: Please help my wife and I decide what debt to attack next
« Reply #2 on: September 19, 2014, 01:40:03 AM »
I'd have to recommend that you pay off the highest-rate debt first.  So that'd be CC1.

The reason?
The average interest-rate you're currently paying is:
($2139.54 * 0.198 + $1624.10 * 0 + $10500 * 0.144) / ($2319.54 + $1624.10 + $10500) = 13.65%

If you had $1000, you could put it on either ...
CC1:
($1139.54 * 0.198 + $1624.10 * 0 + $10500 * 0.144) / ($1319.54 + $1624.10 + $10500) = 12.93%

... or CC2:
($2139.54 * 0.198 + $0624.10 * 0 + $10500 * 0.144) / ($2319.54 + $0624.10 + $10500) = 14.40%

... or the car:
($2139.54 * 0.198 + $1624.10 * 0 + $9500 * 0.144) / ($2319.54 + $1624.10 + $9500) = 13.33%

Paying CC2 with its 0% interest rate ends up being the worst place to put your money.  It actually increases your average interest-rate, because you've reduced your debt without reducing any of the interest you have to pay.

Paying CC1 with its highest rate of 19.8% is the best place.  It reduces your average interest-rate the most, thereby reducing your interest payments the most.

(Note that other factors could influence the outcome.  An example would be if there is a time-limit for CC2's 0%, especially if the you'd owe "back" payments if it isn't paid in full by the end of that time limit (some agreements are like that).  Another factor could be if you're afraid that you might default on some of this debt, rather than pay it off.  If that's the case, then you'd want to think about secured vs. unsecured debt, what the creditors could claim/repossess, and what could be discharged in bankruptcy.  But you didn't mention any of these things, so I think the basic answer of "CC1" is correct.)


theadvicist

  • Handlebar Stache
  • *****
  • Posts: 1447
Re: Please help my wife and I decide what debt to attack next
« Reply #3 on: September 19, 2014, 01:49:17 AM »
CC1 because it's the highest interest rate.

Also, I found (though this was years ago) that once you get a balance down to 0, they often come up with balance transfers offers with low introductory rates, which might mean you might then be able move CC2 to a lower rate.

Chrissy

  • Pencil Stache
  • ****
  • Posts: 969
  • Age: 42
  • Location: Chicago
Re: Please help my wife and I decide what debt to attack next
« Reply #4 on: September 19, 2014, 09:42:28 AM »
CC1 first, then the car loan.

RH

  • Stubble
  • **
  • Posts: 108
Re: Please help my wife and I decide what debt to attack next
« Reply #5 on: September 19, 2014, 10:18:25 AM »
Pay off the smallest debt first...looks to be CC2. This way you get a sense of achievement. It may not save you the most amount of interest, but it will keep you focused in then paying off the next debt. With the Uber/Lyft side hussle, you should be able to tackle CC2 very quickly.

 


Prairie Stash

  • Handlebar Stache
  • *****
  • Posts: 1809
Re: Please help my wife and I decide what debt to attack next
« Reply #6 on: September 19, 2014, 10:35:30 AM »
Do  balance transfer from CC1 to CC#2, if possible. Then CC#1 is at 0% till April which gives breathing room and saves money.

Then the strange part is calculating whether to transfer more debt to 0%, likely not. To answer that you would need to approximately know how much extra/month you can afford. The math is more difficult than just comparing rates, its worth it though if an hour of transfers saves you $100 or more (unless you make $100/hour). How much extra/month do you have?

For the next few months I'd pay off car, assuming the balance transfer was successful.  Then sometime early in 2015 start paying off CC#2.  The best month to start is dictated by how much extra you apply.  If its only $100/month you would actually need to start now. If its $1000/month then March 2015 is great.

The goal is to pay the smallest amount of interest possible. 

alwayslearning

  • 5 O'Clock Shadow
  • *
  • Posts: 89
Re: Please help my wife and I decide what debt to attack next
« Reply #7 on: September 19, 2014, 10:46:06 AM »
Can you refinance your car loan? 14.4% seems awfully high. This will give you a better rate and more money to pay down the credit cards.

Deepsouth

  • 5 O'Clock Shadow
  • *
  • Posts: 26
Re: Please help my wife and I decide what debt to attack next
« Reply #8 on: September 19, 2014, 12:01:29 PM »
Pay off CC1 then CC2.  After those two I would look at the car.  I wouldn't mess with paying the cell phones off.  I would use a gophone or Republic wireless in the future.  GL

Bob W

  • Magnum Stache
  • ******
  • Posts: 2947
  • Age: 60
  • Location: Missouri
  • Live on minimum wage, earn on maximum
Re: Please help my wife and I decide what debt to attack next
« Reply #9 on: September 19, 2014, 12:12:34 PM »
You didn't state your income?  I'm guessing you make more than 60K combined?   

So this goes way beyond math and logic.   The total amount of credit card debt you have could be whacked out  in 2 months easily.   

So go with the lowest owed card first for momentum.   

Then about the car --- Since you didn't mention your income or budget, we can guess you are spending way, way more than we might like.  You probably aren't contributing to 401K either?

Please present your budget (if you have one) or at least a guess.  And state your income.   

This is so much more than about a little credit card debt and a car payment.

For most readers here, I would say refinance the car at 2.5%.   But my guess is you have credit issues.

We can make some suggestions on how to address those if you like?   

So here is the order ---

1.   Pay lowest card owed regardless of interest rate first for momentum.
2.  Pay second card
3.  Pay Car or refi

4.  What other debts are there?   Student loans?  personal loans?  House mortgage?


Exflyboy

  • Walrus Stache
  • *******
  • Posts: 6493
  • Age: 58
  • Location: Corvallis, Oregon
  • Expat Brit living in the New World..:)
Re: Please help my wife and I decide what debt to attack next
« Reply #10 on: September 19, 2014, 03:08:47 PM »
Be careful trying to pay off the car loan heres why..

A friend of mine a few years back similar thing owed lets say bought car for $5000.

The interest payments over the life of the loan were also $5000 (makes the math easy).

I finally persuaded him to start paying it off.. It was about 5 years into a 10 year loan so to pay it off in one hit should be $2500 right?... WRONG!.. He owed $5000.. Huh?

Here's how this loan worked.. The add the total interest payments to the cost of the car and come up with $10,000.

Then they make you pay all the interest first before you touch ANY of the principle by making the monthly payments.

So you pay your monthly for half the life of the loan and you have paid nothing off the price of the car.


In other words the moment you drive it off the lot you end up paying ALL the interest for that loan no matter what you do.

I kid you not.. I asked how that could even be legal, but that's the way it was.

Frank

Bob W

  • Magnum Stache
  • ******
  • Posts: 2947
  • Age: 60
  • Location: Missouri
  • Live on minimum wage, earn on maximum
Re: Please help my wife and I decide what debt to attack next
« Reply #11 on: September 19, 2014, 07:53:16 PM »
That sucks frank!

Exflyboy

  • Walrus Stache
  • *******
  • Posts: 6493
  • Age: 58
  • Location: Corvallis, Oregon
  • Expat Brit living in the New World..:)
Re: Please help my wife and I decide what debt to attack next
« Reply #12 on: September 19, 2014, 08:57:55 PM »
Totally sucks.

The first thing they said was "ooh we never had anybody wanting to pay off their car loan before".. Made me sick but I can tell you my buddy never went into debt for anything again.

Frank

deborah

  • Walrus Stache
  • *******
  • Posts: 8931
  • Location: Australia or another awesome area
Re: Please help my wife and I decide what debt to attack next
« Reply #13 on: September 20, 2014, 01:54:03 AM »
Be careful trying to pay off the car loan heres why..

A friend of mine a few years back similar thing owed lets say bought car for $5000.

The interest payments over the life of the loan were also $5000 (makes the math easy).

I finally persuaded him to start paying it off.. It was about 5 years into a 10 year loan so to pay it off in one hit should be $2500 right?... WRONG!.. He owed $5000.. Huh?

Here's how this loan worked.. The add the total interest payments to the cost of the car and come up with $10,000.

Then they make you pay all the interest first before you touch ANY of the principle by making the monthly payments.

So you pay your monthly for half the life of the loan and you have paid nothing off the price of the car.


In other words the moment you drive it off the lot you end up paying ALL the interest for that loan no matter what you do.

I kid you not.. I asked how that could even be legal, but that's the way it was.

Frank
That's the way I always heard most car loans work.

Exflyboy

  • Walrus Stache
  • *******
  • Posts: 6493
  • Age: 58
  • Location: Corvallis, Oregon
  • Expat Brit living in the New World..:)
Re: Please help my wife and I decide what debt to attack next
« Reply #14 on: September 20, 2014, 09:48:09 AM »
IF this is how the OP's car loan works then you might as well forget about it.

No matter what you do you'll be paying the same amount of money.. I.e ALL of it.

So pay the CC's off first, get an emergency fun and lastly pay off the if you want to.. makes no difference.

Then... NEVER get another car loan as long as you live.

Frank