Author Topic: To borrow or not to borrow?!?!??!  (Read 5649 times)

bmiles62

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To borrow or not to borrow?!?!??!
« on: March 25, 2014, 12:49:16 PM »
Hello! I have been reading this site for the last month and am currently going through the Dave Ramsey Financial Peace program. I am trying to decide how to proceed from here. I currently have the following debts

Auto $9768  4.5% Payment $339 (2009 Toyota Prius)
Student Loan $12346  7.5% Payments differed at this time. (For my daughter. Graduating this semester. :))
Credit Card $11943  7.5% Payment $350
Credit Card $4224  0% Payment $250

I have no mortgage on my townhouse and it is worth about $80,000.  Currently I am paying between $1000 and $1800 a month on these debts. I do have a couple of big expenses coming up this year of about $9000 that will need to be cash flowed. I am trying to decide whether to just keep trying to pay these debts off or get a Home Equity loan to pay off the two 7.5% debts. Currently I can get one for 4.75% with a $300 fee. While I deserve a face punch for having these debts we are making great strides at reducing our monthly living expenses. Our annual income is $61000. I am trying to balance the no more credit under any circumstance of the Dave Ramsey teachings with what makes the most sense in my situation. Thanks for your help!



schimt

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Re: To borrow or not to borrow?!?!??!
« Reply #1 on: March 25, 2014, 01:18:13 PM »
It depends on the mimimum payment on the other loan or the monthly payment amount you intend to pay.

How much all together per month are you planning to throw at debt reduction? Just what ever minimum your home equity loan is, or a specific amount above that?

gobius

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Re: To borrow or not to borrow?!?!??!
« Reply #2 on: March 25, 2014, 01:34:30 PM »
How long is the CC at 0% and what is the interest rate is it going to be when that time is over?

bmiles62

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Re: To borrow or not to borrow?!?!??!
« Reply #3 on: March 25, 2014, 01:38:28 PM »
It depends on the mimimum payment on the other loan or the monthly payment amount you intend to pay.

How much all together per month are you planning to throw at debt reduction? Just what ever minimum your home equity loan is, or a specific amount above that?
My plan would be to save up three months expenses while making the minimum payment and then go back to putting the extra $1000 to 1500 a month on it.

bmiles62

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Re: To borrow or not to borrow?!?!??!
« Reply #4 on: March 25, 2014, 01:39:33 PM »
How long is the CC at 0% and what is the interest rate is it going to be when that time is over?
My Zero% will be up in April 2015.

bmiles62

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Re: To borrow or not to borrow?!?!??!
« Reply #5 on: March 25, 2014, 01:43:55 PM »
Right now I do not have a lot in savings so every time there is an emergency of any kind it not only stops my ability to pay extra it also makes me scramble to get the emergency covered. So I am debating if it makes sense to borrow this so I can get some savings built up and then go back to attacking it.

schimt

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Re: To borrow or not to borrow?!?!??!
« Reply #6 on: March 25, 2014, 01:50:41 PM »
I assumed the payment on the student loan is going to be $350 a month. If you pay all the minimums, you will pay $3765 in interest and have it all paid off in July 2017. Which is initially a monthly payment of $1289.

If you reduce the interest rate of the 2 from 7.5 to 4.75% but still pay $700 a month towards it that you were paying to them before the balance transfer, you would pay a total of $2,480 plus the $300 fee = $2,780 or a savings of close to a $1,000.

If you stay with the same loans and pay $1,600 a month towards debt reduction and use the snowball strategy to pay them off, you will pay $2,897 in interest also with a savings of close to $1,000

And using snowballing with $1600 a month with the Home Equity Loan would cost $1,915 in interest plus the $300 fee would yeild a savings of $1,550.

Finally, if you refinance and the minimum on the Home Equity Loan at 4.75% has a minimum of $350 a month for example, and you are going to pay the minimum on all, you will pay a total of $4755 in interst plus the $300 fee, it will cost you an extra $1290 all together.

So it all depends on what your plan is.  See the attached speadsheet and play with the numbers

bmiles62

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Re: To borrow or not to borrow?!?!??!
« Reply #7 on: March 25, 2014, 01:59:20 PM »
I assumed the payment on the student loan is going to be $350 a month. If you pay all the minimums, you will pay $3765 in interest and have it all paid off in July 2017. Which is initially a monthly payment of $1289.

If you reduce the interest rate of the 2 from 7.5 to 4.75% but still pay $700 a month towards it that you were paying to them before the balance transfer, you would pay a total of $2,480 plus the $300 fee = $2,780 or a savings of close to a $1,000.

If you stay with the same loans and pay $1,600 a month towards debt reduction and use the snowball strategy to pay them off, you will pay $2,897 in interest also with a savings of close to $1,000

And using snowballing with $1600 a month with the Home Equity Loan would cost $1,915 in interest plus the $300 fee would yeild a savings of $1,550.

Finally, if you refinance and the minimum on the Home Equity Loan at 4.75% has a minimum of $350 a month for example, and you are going to pay the minimum on all, you will pay a total of $4755 in interst plus the $300 fee, it will cost you an extra $1290 all together.

So it all depends on what your plan is.  See the attached speadsheet and play with the numbers
Wow Thanks for the quick reply with all of the information. I will play around with the calculator and see what all the options cost. I am struggling with knowing that I have some big expenses that I will have to cash flow over the next 12 months and making sure I have enough money for any emergencies that may come up. This calculator will help me look at all the possibilities. Thanks again!

schimt

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Re: To borrow or not to borrow?!?!??!
« Reply #8 on: March 25, 2014, 02:05:09 PM »
Right now I do not have a lot in savings so every time there is an emergency of any kind it not only stops my ability to pay extra it also makes me scramble to get the emergency covered. So I am debating if it makes sense to borrow this so I can get some savings built up and then go back to attacking it.

If you put enter a monthly payment equal to you minimum payment and select snowball strategy, then on the second tab you can enter random additional cash you plan to put towards your pay off in column D for the months you believe you will have the extra money to pay it off. Meaning 4 months from now you think you can start throwing an extra $1000 on top of the minimum payments, enter $1000 and drag it down, but if you don't think you will have extra money in december because of xmas, leave that month blank, and you will see the payment table to the right of it adjust as you make changes.

Enjoy and good luck!

nereo

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Re: To borrow or not to borrow?!?!??!
« Reply #9 on: March 25, 2014, 02:13:24 PM »
Right now I do not have a lot in savings so every time there is an emergency of any kind it not only stops my ability to pay extra it also makes me scramble to get the emergency covered. So I am debating if it makes sense to borrow this so I can get some savings built up and then go back to attacking it.
Hi there

Schimt covered the different scenarios for paying back your loans, so I won't go into that here.
Your above statement though makes me think that perhaps you are only looking at the "pay down debt" side of the equation.  In your shoes I'd recommend also eliminating every wasted dollar and picking up some extra income (overtime?) if at all possible. I'd be cutting everything you possibly can for 2 months.  No eating out, meals at home for <$10, no anything that costs extra.  you have large expenses coming down the pipe and another debt in the form of your daughters tuition coming up. You need an emergency fund and you need to know you can pay all of these off each month or your debts are just going to snowball.

sometimes the truth is harsh, i'm just trying to help.

bmiles62

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Re: To borrow or not to borrow?!?!??!
« Reply #10 on: March 25, 2014, 02:25:34 PM »
Right now I do not have a lot in savings so every time there is an emergency of any kind it not only stops my ability to pay extra it also makes me scramble to get the emergency covered. So I am debating if it makes sense to borrow this so I can get some savings built up and then go back to attacking it.
Hi there

Schimt covered the different scenarios for paying back your loans, so I won't go into that here.
Your above statement though makes me think that perhaps you are only looking at the "pay down debt" side of the equation.  In your shoes I'd recommend also eliminating every wasted dollar and picking up some extra income (overtime?) if at all possible. I'd be cutting everything you possibly can for 2 months.  No eating out, meals at home for <$10, no anything that costs extra.  you have large expenses coming down the pipe and another debt in the form of your daughters tuition coming up. You need an emergency fund and you need to know you can pay all of these off each month or your debts are just going to snowball.

sometimes the truth is harsh, i'm just trying to help.
Hey I want all sides. I appreciate the reality check. We have been doing a lot of budget reducing and still looking at every piece of it today. Here are a few of the things I have done so far.

Carpooling to work.
Started using YNAB
Eliminated eating out.
Cable is gone (Internet and OTA only.)
Housing and Exchange student for $600 a month. (Probably net about $300 a month.)
Cell Phones will be switched to republic wireless as soon as contracts are up.
Work all extra jobs at work.

Your point is the exact reason I would like to refinance my loans with a HELOC to free up money to build a bigger emergency fund. (Just to be clear I am not talking about borrowing more than I currently owe.)
« Last Edit: March 25, 2014, 02:30:36 PM by bmiles62 »

nereo

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Re: To borrow or not to borrow?!?!??!
« Reply #11 on: March 25, 2014, 02:48:32 PM »
Quote
Your point is the exact reason I would like to refinance my loans with a HELOC to free up money to build a bigger emergency fund.

Great!  It looks like you are already taking steps.  Anytime I hear of someone wanting to use a HELOC to reduce monthy debt it starts alarm bells ringing in my head.  Yes, as Schimt pointed out you can come out ahead, but there's a natural tendancy of consolidating debt to lower monthly payments - and then using the reduced monthly balance to spend more.  Instead of SLs being paid off in 10 years, they last for 20+. 
Keep attacking the spending-side, and use any reduction in monthtly payments to keep paying down those debts (after funding an emergency fund and possibly saving in tax-advantaged accounts).
Does that make sense?

bmiles62

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Re: To borrow or not to borrow?!?!??!
« Reply #12 on: March 25, 2014, 03:31:15 PM »
Quote
Your point is the exact reason I would like to refinance my loans with a HELOC to free up money to build a bigger emergency fund.

Great!  It looks like you are already taking steps.  Anytime I hear of someone wanting to use a HELOC to reduce monthy debt it starts alarm bells ringing in my head.  Yes, as Schimt pointed out you can come out ahead, but there's a natural tendancy of consolidating debt to lower monthly payments - and then using the reduced monthly balance to spend more.  Instead of SLs being paid off in 10 years, they last for 20+. 
Keep attacking the spending-side, and use any reduction in monthtly payments to keep paying down those debts (after funding an emergency fund and possibly saving in tax-advantaged accounts).
Does that make sense?
Makes sense to me. Thanks for the advice!

DoubleDown

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Re: To borrow or not to borrow?!?!??!
« Reply #13 on: March 25, 2014, 03:57:14 PM »
My opinion: I would turn over the student loan payments to your daughter, in full, with her new job and paycheck. That will cut your debt dramatically. They were taken for her education, they should be her obligation to repay (assuming you did not somehow foist them upon her, directing her into an expensive education or field she would not otherwise have undertaken). I repaid my own student loans -- it builds responsibility, and I can't imagine a parent repaying them any more than I could advocate a parent doing their kids' homework for them.

You've got great advice above on the math with different debt repayment plans. I'm reluctant, though, to anyone taking on any more debt (in the form of a HELOC) unless you are really committed to paying off that other debt and will do so promptly. Too many times  people access their home equity to pay off other debt, and then instead just continue to spend more with the newfound "bonanza of cash." If you'll really use it to pay off debt, then great.

Cassie

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Re: To borrow or not to borrow?!?!??!
« Reply #14 on: March 25, 2014, 04:01:53 PM »
I would not want to turn unsecured debt (cc's) into secured debt (heloc).  You never know what will happen.  If you lost all your jobs etc you could walk away from the CC debt. Not so with the heloc.

bmiles62

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Re: To borrow or not to borrow?!?!??!
« Reply #15 on: March 25, 2014, 04:14:56 PM »
My opinion: I would turn over the student loan payments to your daughter, in full, with her new job and paycheck. That will cut your debt dramatically. They were taken for her education, they should be her obligation to repay (assuming you did not somehow foist them upon her, directing her into an expensive education or field she would not otherwise have undertaken). I repaid my own student loans -- it builds responsibility, and I can't imagine a parent repaying them any more than I could advocate a parent doing their kids' homework for them.

You've got great advice above on the math with different debt repayment plans. I'm reluctant, though, to anyone taking on any more debt (in the form of a HELOC) unless you are really committed to paying off that other debt and will do so promptly. Too many times  people access their home equity to pay off other debt, and then instead just continue to spend more with the newfound "bonanza of cash." If you'll really use it to pay off debt, then great.
I already paid for her Siblings college in full so I am going to pay this myself but I do understand the concept of her paying. These were actually a parent assist loans that I took out to help with general expenses most of them mine while she was in college. (Mistake I know but I was going through a divorce at the time so not thinking straight.) I should have just spent less and not borrowed the money. She actually covered most of her 4 year cost with scholarships. I am committed to paying the debt off as fast as possible but I do understand where you are coming from. Thanks for the comments.

bmiles62

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Re: To borrow or not to borrow?!?!??!
« Reply #16 on: March 25, 2014, 04:18:23 PM »
I would not want to turn unsecured debt (cc's) into secured debt (heloc).  You never know what will happen.  If you lost all your jobs etc you could walk away from the CC debt. Not so with the heloc.
I totally get where you are coming from on this. There is a piece of mind to owning your house out right. Something to think about for sure. Thanks.

Cassie

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Re: To borrow or not to borrow?!?!??!
« Reply #17 on: March 26, 2014, 01:11:42 PM »
Yes I was not suggesting walking away from your cc debt but sometimes enough bad things happen beyond our control and it would be better not to have your debt tied to your home.  We never know what life will hand us.