Author Topic: Would this be a valid exception to paying off the highest interest debt first?  (Read 5357 times)

knoxnate79

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Hello all! I'm brand new to MMM. I have vehicle loans and credit card debt. I understand the logic of paying off the highest interest debt first, then the second highest, etc. I wonder whether there might be an exception to this. I am about $4,000 upside down on a loan for a motorcycle I own. If I made paying as much as possible on the motorcycle and just made minimum payments on my other loans for a period of 4-5 months, I would be right side up on the motorcycle loan, and therefore in a position to sell the bike. That would free me of that payment, insurance on the bike, and I could sell some motorcycle gear on craigslist. At that point in this scenario, I would take all of the money I freed up from the motorcycle to pay down my highest interest loan. I should note that my highest interest credit card has an interest rate of 15.24% while the motorcycle loan is at an interest rate of 1.89%

Whichever debt rises to the top priority, I'll have approximately $1,000/month to throw at it on top of the minimum payment.

Thanks in advance for your time.

ShoulderThingThatGoesUp

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We need to know the balance on your credit cards. And I expect the budget masters here can find you more than $1000/month to put towards debt.

waffle

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Why don't you just sell the motorcycle now? Yes you would still owe some money on it, but you would immediately see savings on interest, insurance, operation costs, and depreciation. That would allow you to pay off the remaining balance that much faster.

humbleMouse

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Out of curiosity, what kind of motorcycle is it?  Hard to imagine being that much upside down on a motorcycle.  Did you buy a brand new Ducati?

Also, there are no exceptions to the pay-the-highest debt rule except for psychological reasons.  The reason you pay down high interest debt first is math.  If you want to pay your motorcycle debt down and then tackle high interest credit card debt, you can do it, but it wouldn't be the smart financial decision. 

CowboyAndIndian

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I think instead of just considering the interest alone, you should consider the total cost of interest/insurance etc for your motorcycle. It it is equal to your higher interest loan then you should go ahead and sell the motorcycle.

One caveat, now is the time to sell a motorcycle in the US (start of summer). You will have a hard time selling it in the fall and may have to sell at a discount.

knoxnate79

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Why don't you just sell the motorcycle now? Yes you would still owe some money on it, but you would immediately see savings on interest, insurance, operation costs, and depreciation. That would allow you to pay off the remaining balance that much faster.

My lender is the title holder. If I sell the bike now, they will demand immediate payment on the balance of the loan. I don't have that much cash. It would take me about 4-5 months to pay down the principle to be right side up on the loan.

Out of curiosity, what kind of motorcycle is it?  Hard to imagine being that much upside down on a motorcycle.  Did you buy a brand new Ducati?

A brand new BMW R 1200 GS Adventure. Nothing down. My brand of stupid can't be made up. At least wising up now is better than later . . . or never.

We need to know the balance on your credit cards. And I expect the budget masters here can find you more than $1000/month to put towards debt.

Credit card 1 of 2: 15.24% with a balance of -$10,000.

Credit card 2 of 2: 11% with a balance of -$6,300.

Motorcycle loan: 1.89% with a balance of -$23,851

Car loan: 0% with a balance of -$35,000

TIAA-CREF retirement account balance $69,400 with contributions from my employer equal to 10% of my gross salary.

401(k) my employer offers a $50/month match, which I am participating in but I'm not contributing more until my debts are paid off. Balance: $14,385.

Monthly gasoline expenses at $100/month. I'm currently bicycling to work 1-2 days per week at an 11 mile commute one way. I'm moving to an appartment only 1 mile from my work in October 2015, which will allow me to use my bicycle or walk for everything but inter-city/state travel.

$250/month on groceries and other household items.

$75-100/month on utilities.

No cable.

No internet.

Paying too much for a cell phone with Verizon at $111/month.

Insurance: car ($64/month), motorcycle ($74/month), renters insurance ($20/month).

Monthly take home pay, $4,700/month.

beltim

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Yes, this is a very good plan.  Consider the numbers:

If you pay off the highest interest loan, you would be saving the interest.  In the next 5 months, if you paid off $1000/month for a total of $5000, you would be saving $5000*15.24% = $762 per year from that point on.

If you paid off the motorcycle, however, considering only the interest and insurance, you'd be saving $5000 * .0189 + $74 * 12 = $982.5 per year from that point on.  Other motorcycle costs that you could eliminate or motorcycle gear you could sell would just add to the savings.

The posts that you've gotten so far have been ... interesting.  We don't need to know the balances to do the math.  And I'm not sure what "math" humbleMouse is using, because obviously the strategy of getting rid of your motorcycle earlier reduces your expenses more than paying off your credit card over the next 5 months.  C&I on the other hand correctly identified the correct math, which I've illustrated in my post.

knoxnate79

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Thanks, Beltim. I'm going to ask my credit union (through whom I have my motorcycle loan) whether they'd give me a loan for the difference between what I owe on the motorcycle loan and the market value/sale price of the bike. If they take my up on the offer I can put the bike on the market at the beginning of riding season, and be left with a loan I can pay off in 4-5 months. Otherwise, I think I'll stick with my plan of paying down the motorcycle loan until I reach a balance equal to market value, then sell it.

Cheddar Stacker

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Thanks, Beltim. I'm going to ask my credit union (through whom I have my motorcycle loan) whether they'd give me a loan for the difference between what I owe on the motorcycle loan and the market value/sale price of the bike. If they take my up on the offer I can put the bike on the market at the beginning of riding season, and be left with a loan I can pay off in 4-5 months. Otherwise, I think I'll stick with my plan of paying down the motorcycle loan until I reach a balance equal to market value, then sell it.

Congrats on making it here, and asking the questions. Stick around. With $4,700/month net, you'll be out of the hole very quickly. Once you get close, start maxing out that 401K.

knoxnate79

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Thanks to all who took the time to reply. Good news, my credit union is behind me selling it right now, then getting a personal loan from them to pay off the balance on the motorcycle loan. I anticipate the personal loan being higher interest without the bike as a security interest, but I'll be paying it off in 4-5 months.

kib

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That is excellent news!   I would have agreed with your strategy anyway - motorcycles can be giant money pits, and feeding and caring for one unto eternity only because you're upside down on a low rate loan would only have dragged you down.  That you can sell it right now and make payment choices truly based on logic is great!

trammatic

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I anticipate the personal loan being higher interest without the bike as a security interest, but I'll be paying it off in 4-5 months.
I'd get as long a term as possible on the personal loan...  After the bike is gone, insurance and registration disappears and you can reevaluate which loan to focus on.  So long as your personal lone is under the 15% CC (and then 11% CC), focus your effort on the CCs.

Fuzz

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Go with the credit union and get the bike listed this weekend. My guess is you can get a fair amount more for the bike in the spring. Waiting till the fall (or really, till next spring) is going to make it harder to sell.

PJ

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Thanks to all who took the time to reply. Good news, my credit union is behind me selling it right now, then getting a personal loan from them to pay off the balance on the motorcycle loan. I anticipate the personal loan being higher interest without the bike as a security interest, but I'll be paying it off in 4-5 months.

Great solution!  Yes, sell now while the market is best, and make sure to do the same with all the gear too.

knoxnate79

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An update.

I wrote my initial question on this post the morning of Friday May 22. That afternoon I called my credit union, through which I had my motorcycle loan. I told them about my desire to sell and whether they would do a personal loan for the balance on the motorcycle loan after selling my bike. Once I got a thumbs up from them, I posted an add for my motorcycle on eBay Friday night. I made it a three day sale, so when the auction ended Monday night I had a winning bid just above market value for my bike.

In less than a week I increased my net worth by $17,000+ and lowered my loan payment, substituting a relatively small private loan for an embarrassingly large motorcycle loan. Now I will be debt free that much earlier.

I feel a little stubble coming in on that upper lip.

4alpacas

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An update.

I wrote my initial question on this post the morning of Friday May 22. That afternoon I called my credit union, through which I had my motorcycle loan. I told them about my desire to sell and whether they would do a personal loan for the balance on the motorcycle loan after selling my bike. Once I got a thumbs up from them, I posted an add for my motorcycle on eBay Friday night. I made it a three day sale, so when the auction ended Monday night I had a winning bid just above market value for my bike.

In less than a week I increased my net worth by $17,000+ and lowered my loan payment, substituting a relatively small private loan for an embarrassingly large motorcycle loan. Now I will be debt free that much earlier.

I feel a little stubble coming in on that upper lip.
Congratulations!

arebelspy

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An update.

I wrote my initial question on this post the morning of Friday May 22. That afternoon I called my credit union, through which I had my motorcycle loan. I told them about my desire to sell and whether they would do a personal loan for the balance on the motorcycle loan after selling my bike. Once I got a thumbs up from them, I posted an add for my motorcycle on eBay Friday night. I made it a three day sale, so when the auction ended Monday night I had a winning bid just above market value for my bike.

In less than a week I increased my net worth by $17,000+ and lowered my loan payment, substituting a relatively small private loan for an embarrassingly large motorcycle loan. Now I will be debt free that much earlier.

I feel a little stubble coming in on that upper lip.

Well done taking action!

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surfhb

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Great job !    However, you're not done.   Sell that god awful $35k vehicle ASAP and get a normal car ;)

knoxnate79

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Great job !    However, you're not done.   Sell that god awful $35k vehicle ASAP and get a normal car ;)

I know this is good advice. It's a brand new (face punch) 100%+ financed (knee to the face) Toyota Prius (pat on the back). It's a 0% interest car loan. Having purchased that vehicle violates basic mustachianism. However, now that I have it, that particular loan seems to be the lowest priority to pay off. Am I wrong. Had I discovered MMM before making the choice to get this car, I would not have purchased it. Dealing with my reality as my starting point to FI, should I not pay off the credit cards first.

I distinguish my car from my original question about my motorcycle, because, it's cheaper to operate and insure, and it's actually one of MMM's recommended vehicles, though regrettably brand new. I've read all of the MMM blog posts (that I could find thus far), so I understand the underlying problem with my choice. My only question is a mater of how to prioritize this car loan in relation to higher interest loans (my two credit cards and my personal loan).

Gone Fishing

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Great! Now find some low rate promotional credit cards to transfer those high rate balances onto.

Gone Fishing

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Great job !    However, you're not done.   Sell that god awful $35k vehicle ASAP and get a normal car ;)

I know this is good advice. It's a brand new (face punch) 100%+ financed (knee to the face) Toyota Prius (pat on the back). It's a 0% interest car loan. Having purchased that vehicle violates basic mustachianism. However, now that I have it, that particular loan seems to be the lowest priority to pay off. Am I wrong. Had I discovered MMM before making the choice to get this car, I would not have purchased it. Dealing with my reality as my starting point to FI, should I not pay off the credit cards first.

I distinguish my car from my original question about my motorcycle, because, it's cheaper to operate and insure, and it's actually one of MMM's recommended vehicles, though regrettably brand new. I've read all of the MMM blog posts (that I could find thus far), so I understand the underlying problem with my choice. My only question is a mater of how to prioritize this car loan in relation to higher interest loans (my two credit cards and my personal loan).

I see a MSRP of $25k for a Prius. How did you manage to pay $35k?  Negative equity on the tade in?

knoxnate79

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Great job !    However, you're not done.   Sell that god awful $35k vehicle ASAP and get a normal car ;)

I know this is good advice. It's a brand new (face punch) 100%+ financed (knee to the face) Toyota Prius (pat on the back). It's a 0% interest car loan. Having purchased that vehicle violates basic mustachianism. However, now that I have it, that particular loan seems to be the lowest priority to pay off. Am I wrong. Had I discovered MMM before making the choice to get this car, I would not have purchased it. Dealing with my reality as my starting point to FI, should I not pay off the credit cards first.

I distinguish my car from my original question about my motorcycle, because, it's cheaper to operate and insure, and it's actually one of MMM's recommended vehicles, though regrettably brand new. I've read all of the MMM blog posts (that I could find thus far), so I understand the underlying problem with my choice. My only question is a mater of how to prioritize this car loan in relation to higher interest loans (my two credit cards and my personal loan).

I see a MSRP of $25k for a Prius. How did you manage to pay $35k?  Negative equity on the tade in?

Negative equity on the trade in, sales tax, title, registration.