Author Topic: Priorities: Should I pay off a 0% loan if the creditor isn't worried about it?  (Read 4074 times)

FatKids

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A while back I was in financial trouble that I am since out of, but during that time my father loaned me $1,500.  The only other debt I have now is a car loan for $2,800 @ 13%.

The two times I've had the $1,500 saved up to pay him he's told me "not to worry about paying him back now," mainly b/c he knew I needed car repairs and major dental work done.

I'm now about to move to go to school full time.  I'll be taking loans out and working part-time (major pay decrease) to do this. I will soon have $1,500 saved up again, what should it go towards? My father? Moving expenses? Pay down my car loan?

I want to use my $ the most efficient way possible.  What's the Mustachian thing to do?  It was a big deal to me to ask my dad for help, and I want to pay him back, but I also recognize that it may not be in my best interest to do so right now if he's not worried about being paid back.

I have been paring down my expenses as much as I can.

Thanks for the time and advice!

grantmeaname

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Please tell me that 13% is a typo.

FatKids

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Sadly it's not, 12.95% on a $4,100 loan.  My credit was shot at the time.  I've been paying $180 a month all towards the principal; $134 is my minimum.

jpo

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I would keep 1 month's bare-bones expenses back in case you lose your job, then pour every cent into the car loan. After that, I would pay back your father as soon as possible.

Only then would I consider inflating lifestyle back above bare-bones expenses.

grantmeaname

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If you're paying off debt at 13% you may want to wait until that's done and you're back in the black to go back to school. It's not exactly "inflating your lifestyle" in the sense that I suspect jpo meant it, but it's similar in that both are spending more money.

FatKids

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Thanks for the advice!

Putting off college for another year isn't on the table but I honestly had no idea that that interest rate was so egregious.  I feel silly not knowing it but there it is.

grantmeaname

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Better to have a 13% rate on $4,000 than $40,000. You can get a credit union car loan for .99-3.99% with decent credit, and 13% is more like a bad-to-decent credit card. If your credit is good enough, you could go to a local credit union and talk with a loan officer about a refinance (the whole public purpose of credit unions, which are nonprofits, is to extend credit to people who have difficulty getting it elsewhere). You'll pay almost $400 in interest alone on the car in the next year. It may not sound like much, but it really is for how low-value the loan is overall.

That said, don't beat yourself up about your past mistakes. Your Money or Your Life, one of the core texts of this movement, emphasizes "No Shame, No Blame" for the past, and to focus on what you can do going forward.

FatKids

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Thanks grantmeaname,

I think that's what has me so puzzled about the interest rate (I doubled checked and it's 12.95%).  I got the loan from a local credit union and just assumed they would give me a fair rate. I'll talk to someone about it there.

FatKids

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I wanted to follow up for everyone who posted.

I refinanced my car loan today and reduced my interest rate from 13% to 6.5%.

Thanks for the opinions and advice! Ya'll saved me money!

.22guy

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Great, now pay it off ASAP!  The lower interest rate should help with that.

sheepstache

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Nice! 

Once you have that paid off and a little cushion, I would consider paying your dad back some amount monthly.  Say, $100 a month.  That way you can stop thinking about it and your dad will probably appreciate the gesture.  Use your bank's bill pay service so you don't have to pay for stamps.

AccidentalMiser

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OR you could borrow the necessary money to pay off your car from your dad and pay him all of it back at 5% over the next couple of years.  Win-win for everyone!

Gremlin

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As much as I know the financially correct answer is to minimise payment of the no interest loan, I'm a big believer in standing on your own two feet.  The money your Dad loaned could be either contributing towards his own retirement stache or providing him a further buffer if he's already retired.

As a parent, I'd loan the same for my own son or daughter when they are of age, but as a son to my own parents, I'd pay them back first and foremost if in that situation.  It's not always a strictly mathematical decision, in my opinion...

KingMe

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I agree with sheepstache.

I also borrowed on 0% terms from my father recently. And it was a lot more than $1,500, too. It was to help finance an addition on my house. I asked him when he wants it all back. His answer was choose a date when you want to no longer owe me money, and regular payments make me feel better. So that's my plan. Your paternal loan terms seem similar so you might want to consider that approach.

Unless our father is in precarious financial shape himself, he's doesn't seem like he's going to be worried about getting that $1,500 back this year or next. I think if you stick to regular payments while prioritizing your usurious car loan, he'll be ok with it. You can also run our plan by him to see if he's cool with it.