Debt payoff plan opinions

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills.
Topic Author
jtayl71
Posts: 74
Joined: Sat Feb 15, 2014 8:23 am

Debt payoff plan opinions

Post by jtayl71 »

I have 22k left on a car loan @5.99 percent, was a dumb move out of college and have since learned my lesson. I want the debt gone as I have no other debt and i can't stand the feeling of it anymore. I have 11k in a taxable investment account, and 6.5k in savings, and 6k in EE bonds given to me by my grandparents. My plan to pay this off in the next three months is as followed. Stop contributing to 401k, pay 2000 per month (already paying 1200), get principal down to 16k. Sell taxable account and withdraw 5k from savings, leaving the EE bonds as a safety net since they are accruing 4% interest. Then turn around build back up savings, then max out 401k and begin contributing to my ROTH regularly. Does this sound like a financially sound idea, or is there a better option for me?
User avatar
Phineas J. Whoopee
Posts: 9675
Joined: Sun Dec 18, 2011 5:18 pm

Re: Debt payoff plan opinions

Post by Phineas J. Whoopee »

jtayl71 wrote:I have 22k left on a car loan @5.99 percent, was a dumb move out of college and have since learned my lesson. I want the debt gone as I have no other debt and i can't stand the feeling of it anymore. I have 11k in a taxable investment account, and 6.5k in savings, and 6k in EE bonds given to me by my grandparents. My plan to pay this off in the next three months is as followed. Stop contributing to 401k, pay 2000 per month (already paying 1200), get principal down to 16k. Sell taxable account and withdraw 5k from savings, leaving the EE bonds as a safety net since they are accruing 4% interest. Then turn around build back up savings, then max out 401k and begin contributing to my ROTH regularly. Does this sound like a financially sound idea, or is there a better option for me?
The better option is to tolerate your debt discomfort. If you don't max your 401(k) and Roth IRA this year, that part of your opportunity for the tax advantages will be gone forever. Assuming you're not so very old yet, it's a lot of years of good stuff to give up in order to feel better for a little while.

Now, I certainly would accelerate principal payments on the loan rather than invest in taxable, unless your emergency reserve isn't sufficient. Between the savings account and the EE bonds, $12,500, how many months of your ordinary expenses does that represent?

To sum up: I wouldn't make such a decision, especially depleting accessible funds, just on the basis of a temporary bad emotional feeling. Emotions are real, and important, but it's better to get in the habit now of making your decisions based on the math. It will serve you well.

Hope that helps.

PJW
Topic Author
jtayl71
Posts: 74
Joined: Sat Feb 15, 2014 8:23 am

Re: Debt payoff plan opinions

Post by jtayl71 »

Phineas,

Thanks for the quick reply, I am not maxing out my 401k at the moment, currently about 5k short of that projected for the year. I have already maxed out my ROTH contributions for this year. I am 24, with 78k salary, and the 12.5k is roughly 6-7 months worth of expenses if you count the minimum payment on the car loan. I am also not investing in my taxable account, it was a windfall also passed on from my grandparents.
DSInvestor
Posts: 11647
Joined: Sat Oct 04, 2008 11:42 am

Re: Debt payoff plan opinions

Post by DSInvestor »

Are you contributing to Traditional 401k or Roth 401k? If Roth 401k, switch to Traditional 401k to get the tax deduction and free up take home pay to allow you to pay down the debt faster.

I see in another thread, that you receive an employer match in your 401k. Make sure you contribute enough to get the max employer match.
Last edited by DSInvestor on Sun Jul 13, 2014 1:39 pm, edited 1 time in total.
Wiki
Topic Author
jtayl71
Posts: 74
Joined: Sat Feb 15, 2014 8:23 am

Re: Debt payoff plan opinions

Post by jtayl71 »

DSInvestor,

Thanks for the reply, I am contributing to traditional 401k, roughly 12k a year.
User avatar
The529guy
Posts: 610
Joined: Fri May 23, 2014 1:08 am

Re: Debt payoff plan opinions

Post by The529guy »

Have you considered re-financing your auto loan to get a better rate? (Example: 1.49% APR for 36 months at PenFed.) With a lower monthly payment, maybe you could max out your 401k this year.

If this might be a solution that works for you, hopefully other folks here can offer advice about lenders.
Topic Author
jtayl71
Posts: 74
Joined: Sat Feb 15, 2014 8:23 am

Re: Debt payoff plan opinions

Post by jtayl71 »

529guy,

Also thanks for the reply, no I have not looked into refinancing, my required monthly payment is currently 582, of which I am putting 1200 each month towards. I will look into this refinancing, and check the terms of my existing loan.
DSInvestor
Posts: 11647
Joined: Sat Oct 04, 2008 11:42 am

Re: Debt payoff plan opinions

Post by DSInvestor »

jtayl71 wrote:DSInvestor,

Thanks for the reply, I am contributing to traditional 401k, roughly 12k a year.
How does your employer match work? Does it match 10% of everything you contribute (i.e. 1750 on 17,500) or is it up to 10% of salary (i.e. $7,800 of 78,000 salary)? Either way, I'd make sure that you're contributing enough to get the full match, maxing out for 17.5K if necessary.

What expenses can you cut back on? Are you living alone, with roommates or with parents? If living at home with parents, you should be able to max out retirement plans and pay off the debt quite easily on 78K income. For example, maybe cut back on cable and dining out rather than retirement contributions to pay off the car loan.
Wiki
User avatar
Toons
Posts: 14467
Joined: Fri Nov 21, 2008 9:20 am
Location: Hills of Tennessee

Re: Debt payoff plan opinions

Post by Toons »

"Does this sound like a financially sound idea"?

Any effort you make to pay off debt is sound.As to whether you "miss investing opportunity" by not contributing to a 401k is something to consider,but if paying off the debt now would give you the peace of mind that you are looking for ,then I say go ahead and take your available cash and be done with it,and move on .From the way you posted you sound like you are financially astute and it would not take long for you to rebuild your savings.Given your age you have decades of investing ahead of you. :happy
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee
User avatar
Phineas J. Whoopee
Posts: 9675
Joined: Sun Dec 18, 2011 5:18 pm

Re: Debt payoff plan opinions

Post by Phineas J. Whoopee »

jtayl71 wrote:Phineas,

Thanks for the quick reply, I am not maxing out my 401k at the moment, currently about 5k short of that projected for the year. I have already maxed out my ROTH contributions for this year. I am 24, with 78k salary, and the 12.5k is roughly 6-7 months worth of expenses if you count the minimum payment on the car loan. I am also not investing in my taxable account, it was a windfall also passed on from my grandparents.
Happy to be of service. Given what you've said, as long as capital gains taxes on the $11,000 taxable investment account are long-term and minimal, it could make sense to use that to pay off half the remaining car loan balance. My suggestion would be to do that and max out your 401(k), I agree in a tax-deferred manner given your likely marginal tax rate(s). You could do it and, even without figuring in the current-year tax savings, still put over $2400 per year, $200 per month, extra into the car loan.

I also agree about seeking refinancing opportunities. The rates available to you now, out of college and with a history of making payments in full and on time, are probably lower than 5.99%. It's a good idea which you should pursue, but I stand by my suggestion of fully maxing your 401(k), and since your emergency reserve is good enough, using what's left, including the current tax savings, to accelerate principal payments on your car loan, tolerating any bad feelings for however long it takes to polish it off.

I didn't do everything perfectly all along the way, but I find myself, now, very grateful to my younger self for doing a lot of things right, like saving, thereby putting my current me into a strong financial position.

PJW
Topic Author
jtayl71
Posts: 74
Joined: Sat Feb 15, 2014 8:23 am

Re: Debt payoff plan opinions

Post by jtayl71 »

DSInvestor,
My employer match is 10% of everything I contribute, so the most I will ever have matched is 1750. And i currently rent a townhouse with my fiance, we are both trying to cut back on our living costs. We split bills down the middle, and our expenses each month total, 2800, so I am out 1400 a month on living expenses. I currently am paying 2600 a month total with the current car note I am paying. With 4400/month income after taxes and health insurance but before 401k, that would leave me with 2200 per month which should be plenty for me to up my 401k contribution.

Toons,
Thanks for the reply, and those were kind of the lines I was thinking on, I knew the math didnt quite support it. But its hard for me to not want to have it gone and then begin to pay myself from here on out. I have learned so much from this site and just got done reading the Bogleheads guide to investing, truly some great stuff.

Phineas,

The capital gains will be long term come October, so that is why I planned on paying 2000 per month for three months, then once those become long-term I would then sell that account, and pay down the loan . I am not sure why I have not though of refinancing before, but I am definitely looking into that now, and rethinking my plan.

Once again thanks for all of the help. I hope you all are having a great weekend, and not a stormy one like down here in South Louisiana.
Jack FFR1846
Posts: 18503
Joined: Tue Dec 31, 2013 6:05 am
Location: 26 miles, 385 yards west of Copley Square

Re: Debt payoff plan opinions

Post by Jack FFR1846 »

Are you able to get an account with Digital Credit Union? They'll refi your car for 1.24% for up to 65 months. That'll tank the payment to nothing and allow you to use that money towards maxing out your 401k.

I just used their calculator (limited $ and time options). $22.5k for 60 months is $387 a month.
Last edited by Jack FFR1846 on Sun Jul 13, 2014 2:18 pm, edited 1 time in total.
Bogle: Smart Beta is stupid
Topic Author
jtayl71
Posts: 74
Joined: Sat Feb 15, 2014 8:23 am

Re: Debt payoff plan opinions

Post by jtayl71 »

Jack,

I have no idea, have never heard of this. Will look into it. Thanks.
harikaried
Posts: 2613
Joined: Fri Mar 09, 2012 2:47 pm

Re: Debt payoff plan opinions

Post by harikaried »

PenFed offers 2.24% for 60 months with a minimum loan of $10k. This works out to roughly $175/mo, and if you only make minimum payments, the total amount of interest paid over 5 years is less than $600. (You would sell taxable, etc. to pay down the current loan to $10k either just before or as part of the refinance.)

Compared to your current loan, that's an extra $400/mo (after-tax) that you could be putting towards your 401k, so probably $500/mo (pre-tax). You said you're putting roughly an extra $600/mo (after-tax) towards the loan, and this used as 401k deferral would be roughly $800/mo (pre-tax). All together this means you could save an extra $1300/mo in your 401k for the rest of this year, so in addition to the current planned $12k towards the 401k would mean a maxed out 401k for 2014.

Then for 2015+, you could adjust the 401k deferral rate to spread out contributions over the whole year (might be preferable for some types of 401k company match), and this would give you some extra money each month to pay down your 2.24% car loan resulting in even less than $600 total interest paid for the remaining loan.
Topic Author
jtayl71
Posts: 74
Joined: Sat Feb 15, 2014 8:23 am

Re: Debt payoff plan opinions

Post by jtayl71 »

harikaried,

Thanks for the thought-out reply, that actually makes a good bit of sense as well, will definitely have to think about all of these suggestions.
User avatar
Kevin M
Posts: 15789
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: Debt payoff plan opinions

Post by Kevin M »

A 6% guaranteed return on paying down the debt is hard to beat. However, a 10% employer contribution is an immediate 10% return, but on an annualized basis it is reduced over time (in simplified terms, after two years it is a 5% annualized return). So I think I'd contribute as much to 401k as possible as long as I could pay off the car debt within two years or so.

I would place a higher priority on paying down car debt that anything else, including contributing to a Roth. You are young and have plenty of years to build up tax-advantaged space.

Agree that refinancing to lower rate is good no matter what else you do.

Then after that, sell taxable assets with long-term gains and use savings as you have indicated to pay down debt.

EDIT: But if you can get rate reduced to the 2% ballpark, you're in the same range as intermediate-term bond fund or 5-year CD yields, so no rush to pay down at that rate.

Kevin
Last edited by Kevin M on Sun Jul 13, 2014 2:31 pm, edited 1 time in total.
If I make a calculation error, #Cruncher probably will let me know.
User avatar
Toons
Posts: 14467
Joined: Fri Nov 21, 2008 9:20 am
Location: Hills of Tennessee

Re: Debt payoff plan opinions

Post by Toons »

Kevin M wrote:A 6% guaranteed return on paying down the debt is hard to beat. However, a 10% employer contribution is an immediate 10% return, but on an annualized basis it is reduced over time (in simplified terms, after two years it is a 5% annualized return). So I think I'd contribute as much to 401k as possible as long as I could pay off the car debt within two years or so.

I would place a higher priority on paying down car debt that anything else, including contributing to a Roth. You are young and have plenty of years to build up tax-advantaged space.

Agree that refinancing to lower rate is good no matter what else you do.

Then after that, sell taxable assets with long-term gains and use savings as you have indicated to pay down debt.

Kevin
I think I read that somewhere else in this thread.... :sharebeer We think alike
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee
Topic Author
jtayl71
Posts: 74
Joined: Sat Feb 15, 2014 8:23 am

Re: Debt payoff plan opinions

Post by jtayl71 »

Kevin,

Thanks so much for the reply, I've got my calculator out now and am starting to dissect all of this information. Truly appreciate your time.
Topic Author
jtayl71
Posts: 74
Joined: Sat Feb 15, 2014 8:23 am

Re: Debt payoff plan opinions

Post by jtayl71 »

Just re-read through my company benefits package I just started there 8 months ago. The percentage of match is dependent on how well the company did for the year, so they set the percentage once a year, it could be less than 10 percent could be more, but apparently the past three years it has been set at 10 percent of my contributions. I'm not sure if this would sway anyone's opinion on my situation or not.
User avatar
Toons
Posts: 14467
Joined: Fri Nov 21, 2008 9:20 am
Location: Hills of Tennessee

Re: Debt payoff plan opinions

Post by Toons »

jtayl71 wrote:Just re-read through my company benefits package I just started there 8 months ago. The percentage of match is dependent on how well the company did for the year, so they set the percentage once a year, it could be less than 10 percent could be more, but apparently the past three years it has been set at 10 percent of my contributions. I'm not sure if this would sway anyone's opinion on my situation or not.
It wouldn't sway mine ,I have always liked paying off debt as fast as I could when I was in my younger years.Don't know if it is the perfect strategy(then again what is perfect),but it was just a matter of personal preference.Debt Free :happy
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee
Topic Author
jtayl71
Posts: 74
Joined: Sat Feb 15, 2014 8:23 am

Re: Debt payoff plan opinions

Post by jtayl71 »

I hear ya Toons, the engineer in me is saying to follow the math and numbers, but the other part of me is saying, just get rid of it. Haha
User avatar
Toons
Posts: 14467
Joined: Fri Nov 21, 2008 9:20 am
Location: Hills of Tennessee

Re: Debt payoff plan opinions

Post by Toons »

"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee
Topic Author
jtayl71
Posts: 74
Joined: Sat Feb 15, 2014 8:23 am

Re: Debt payoff plan opinions

Post by jtayl71 »

Thank you very much for that link haha. Pretty helpful.
User avatar
Toons
Posts: 14467
Joined: Fri Nov 21, 2008 9:20 am
Location: Hills of Tennessee

Re: Debt payoff plan opinions

Post by Toons »

jtayl71 wrote:Thank you very much for that link haha. Pretty helpful.
Yep,,,those amortization tables used to "Pain" me,,when I would look at the interest I was paying on a mortgage or a car payment ,,when I had one. :happy
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee
Topic Author
jtayl71
Posts: 74
Joined: Sat Feb 15, 2014 8:23 am

Re: Debt payoff plan opinions

Post by jtayl71 »

Oh yes, I know this pain you speak of, I first experienced it when I saw how much i paid in interest on the first payment for the car loan. Since that day I vowed to figure this financial stuff out, and that actually how I stumbled onto this site.
User avatar
Kevin M
Posts: 15789
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: Debt payoff plan opinions

Post by Kevin M »

jtayl71 wrote:Just re-read through my company benefits package I just started there 8 months ago. The percentage of match is dependent on how well the company did for the year, so they set the percentage once a year, it could be less than 10 percent could be more, but apparently the past three years it has been set at 10 percent of my contributions. I'm not sure if this would sway anyone's opinion on my situation or not.
When do they set it for this year? If it's already set, you know you're getting 10%, and you can worry about next year next year. If they set it at the end of the year for the current year, it's more of a crapshoot, but you probably have some idea about how your company is doing.

The other thing to consider of course is the net tax benefit. If you get a tax deduction of 25% now and end up paying a 15% tax rate on withdrawal in retirement, then that's also kind of like an immediate 10% return (but that also gets amortized over the years).

Kevin
If I make a calculation error, #Cruncher probably will let me know.
Topic Author
jtayl71
Posts: 74
Joined: Sat Feb 15, 2014 8:23 am

Re: Debt payoff plan opinions

Post by jtayl71 »

Kevin,

I am not sure when they set it, but I will be asking that question when i get to the office tomorrow, it is not stated in the benefits package.
harikaried
Posts: 2613
Joined: Fri Mar 09, 2012 2:47 pm

Re: Debt payoff plan opinions

Post by harikaried »

jtayl71 wrote:I am 24, with 78k salary... I am out 1400 a month on living expenses... With 4400/month income after taxes and health insurance but before 401k...
So your base salary is 78k and assuming basic income tax with standard deduction, etc., that's $13k in federal income tax, $5k FICA tax, $1k Medicare, $3k Louisiana income tax, $3k insurance -> $53k take home for $4400/mo. Subtract $1400/mo living expenses leaves $3k to pay down debt/save/invest. You're currently paying $1200/mo towards the debt, so what are you doing with the extra $1800/mo?

If you contribute the max $17.5k to your 401k, the tax numbers: $8.5k federal, $3.8k FICA, $900 Medicare, $2k Louisiana, $3k insurance -> $42k take home for $3500/mo. Subtracting $1400/mo living expenses leaves $2100/mo to pay down debt/save/invest. So it seems that you should be able to do just fine to cover your monthly expenses while maxing out your 401k. Then it's a question of prioritizing/minimizing debt payments vs saving/investing, so check out the wiki for Paying down loans versus investing:

http://www.bogleheads.org/wiki/Paying_d ... the_choice
  1. Invest in 401(k) to get maximum employer match (rate may be over 100% in the first year)
  2. Pay down credit cards (rate 10-30+%)
  3. Pay down non-deductible auto or student loans, or other medium-rate loans (rate 5-8%)
  4. Invest in Roth IRA, deductible IRA or decent 401(k) (rate 5% on Treasury bonds)
  5. Pay down deductible mortgage or student loans (rate 4% after tax)
  6. Invest in taxable account (rate 4% on municipal bonds)
  7. Do not pay down subsidized loans as long as subsidy lasts (rate 0-3%)
Your current car loan is 5.99%, but you should be able to refinance it to under 2%. Whether or not you sell your taxable to pay down the sub-2% loan is similar to the decision of if you would take out a sub-2% loan to invest/save as you currently are.
Topic Author
jtayl71
Posts: 74
Joined: Sat Feb 15, 2014 8:23 am

Re: Debt payoff plan opinions

Post by jtayl71 »

harikaried,

Thanks again for the reply, of that $1800, $900 of it has been going into my 401k. And just until last month I had been paying the majority of the living expense, as my fiance just started her career one month ago. So I am just now to the point where I can really start attacking this with my surplus since she is now pitching in much more than she was. Thanks for posting a link to that, I dont believe I have ran across that in my time on the wiki section for some reason. I am reading through it now.
Topic Author
jtayl71
Posts: 74
Joined: Sat Feb 15, 2014 8:23 am

Re: Debt payoff plan opinions

Post by jtayl71 »

Also, how much of a hassle is it to refinance a vehicle. I'm assuming the title has to be transferred and so forth and I'm sure that's not free. What all would that entail on my part?
User avatar
Kevin M
Posts: 15789
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: Debt payoff plan opinions

Post by Kevin M »

I'd just call PenFed (or whomever) and ask. My son-in-law refinanced his car loan awhile back, and I don't remember hearing about any big hassles. I've never had a car loan, so can't speak from personal experience on this one, but I think it would be worth it.

Kevin
If I make a calculation error, #Cruncher probably will let me know.
User avatar
grabiner
Advisory Board
Posts: 35307
Joined: Tue Feb 20, 2007 10:58 pm
Location: Columbia, MD

Re: Debt payoff plan opinions

Post by grabiner »

jtayl71 wrote:My employer match is 10% of everything I contribute, so the most I will ever have matched is 1750.
Independent of whether you pay down the car loan early or not, you should max out the 401(k) in preference to contributing to a Roth IRA, because of this 10% match. And you should probably prefer a traditional 401(k) to a Roth if you aren't maxing out, since you get a larger (traditional) match.

I would recommend paying down the car loan quickly if you can't refinance it; a 6% risk-free and tax-free return is hard to beat. If you can refinance to a reasonable rate, and will be able to max out the 401(k) and Roth IRA every year, then keeping the loan may be a reasonable idea because larger 401(k) and IRA contributions give you a permanent increase in tax-deferred savings.
Wiki David Grabiner
Topic Author
jtayl71
Posts: 74
Joined: Sat Feb 15, 2014 8:23 am

Re: Debt payoff plan opinions

Post by jtayl71 »

So I believe I came up my plan. Since I have paid so much down on my current loan, it actually states that my next payment is not due until July 8th of next year. So starting today, my monthly payment towards my current loan will be $300. This will get it down to roughly 21k by the end of October. This is when my capital gains on my taxable account become long-term, I will then sale that account, pay towards loan, reduce it to 10k. Refinance my loan at a much lower rate and continue paying minimum amount for 2014. Also starting today I am maxing out the 401k for 2014 and will continue to do so through 2015. Come January 1st when my monthly percentage to 401k decreases I will attack the 10k loan even further and pay it off in a reasonable amount of time. Thanks again for all of y'alls help, it has truly been appreciated and I feel I have a good game plan now to proceed with.
Rob Bertram
Posts: 859
Joined: Mon May 05, 2014 12:15 pm

Re: Debt payoff plan opinions

Post by Rob Bertram »

jtayl71 wrote:So I believe I came up my plan. Since I have paid so much down on my current loan, it actually states that my next payment is not due until July 8th of next year.
Danger!!! This sounds like your extra payments are going towards future interest and not towards principle. That's not good. You aren't getting any benefit from paying extra. Check the terms of your loan. Some stipulate that you must explicitly state that an extra payment goes towards principle. You need to get that resolved before you send them any more money.

I would see about refinancing the loan with a credit union where they treat you better. Several posters have offered suggestions on places that offer 2-3% rates.
Topic Author
jtayl71
Posts: 74
Joined: Sat Feb 15, 2014 8:23 am

Re: Debt payoff plan opinions

Post by jtayl71 »

Rob,

Thanks for the reply, but I have checked prior to posting this and my extra payments do go towards the principal.
DSInvestor
Posts: 11647
Joined: Sat Oct 04, 2008 11:42 am

Re: Debt payoff plan opinions

Post by DSInvestor »

jtayl71 wrote:Rob,

Thanks for the reply, but I have checked prior to posting this and my extra payments do go towards the principal.
If this were the case, the next payment would be due next month, not next year.
Wiki
Novine
Posts: 1240
Joined: Mon Nov 17, 2008 8:07 pm

Re: Debt payoff plan opinions

Post by Novine »

"Also, how much of a hassle is it to refinance a vehicle. I'm assuming the title has to be transferred and so forth and I'm sure that's not free. What all would that entail on my part?"

Depends. Who holds the car loan?
Topic Author
jtayl71
Posts: 74
Joined: Sat Feb 15, 2014 8:23 am

Re: Debt payoff plan opinions

Post by jtayl71 »

Then how come it states on my account that everytime I send a paymount, my principal balance goes down that corresponding amount plus interest each time and it says that next payment isnt due until July 8th, 2015. I have called before and asked about both and they said that my extra amount goes towards principal and if I wanted to take a month off from paying that I could because my next payment was not due until next year. I guess I should give them a call again and double check.
Topic Author
jtayl71
Posts: 74
Joined: Sat Feb 15, 2014 8:23 am

Re: Debt payoff plan opinions

Post by jtayl71 »

Novine,

The car loan is through a small local bank.
placeholder
Posts: 8421
Joined: Tue Aug 06, 2013 12:43 pm

Re: Debt payoff plan opinions

Post by placeholder »

jtayl71 wrote:Then how come it states on my account that everytime I send a paymount, my principal balance goes down that corresponding amount plus interest each time and it says that next payment isnt due until July 8th, 2015. I have called before and asked about both and they said that my extra amount goes towards principal and if I wanted to take a month off from paying that I could because my next payment was not due until next year. I guess I should give them a call again and double check.
That's not just not correct because when it goes to principal it comes off the back end of the loan shortening it while in your case you're just paying ahead and the payment is going to the normal mix of principal and interest.
harikaried
Posts: 2613
Joined: Fri Mar 09, 2012 2:47 pm

Re: Debt payoff plan opinions

Post by harikaried »

jtayl71 wrote:how much of a hassle is it to refinance a vehicle.
At least with PenFed, you can do all the application online. You specify that you're looking to refinance an auto loan, put in the terms you want (how much, how long), provide some information about the vehicle and current loan. Once approved, you'll get a check made out to you and the current lienholder, so you endorse that check to pay off the current loan and send it to the current lender with instructions to send the title to PenFed. You'll also need to update your auto insurance to have PenFed as the loss payee.

I believe there are no additional costs to you except maybe a postage stamp -- you don't even need to leave home. Much simpler than a home mortgage -- no going to title companies, etc.
Last edited by harikaried on Mon Jul 14, 2014 4:11 pm, edited 1 time in total.
Topic Author
jtayl71
Posts: 74
Joined: Sat Feb 15, 2014 8:23 am

Re: Debt payoff plan opinions

Post by jtayl71 »

Placeholder,

Thanks for the reply, I am going to get on the phone with them as soon as I leave work and figure this out.
Topic Author
jtayl71
Posts: 74
Joined: Sat Feb 15, 2014 8:23 am

Re: Debt payoff plan opinions

Post by jtayl71 »

harikaried,

Thanks for lining that out for me.
Topic Author
jtayl71
Posts: 74
Joined: Sat Feb 15, 2014 8:23 am

Re: Debt payoff plan opinions

Post by jtayl71 »

So I called the bank with my loan, I asked them if my extra payments went towards my principle and also asked about why my payment date is so far away. And the guy told me that it does both, it goes toward your principle and goes towards your future payments at the same time. Please let me know if this person has no idea what they are talking about or if that is even possible.
Rob Bertram
Posts: 859
Joined: Mon May 05, 2014 12:15 pm

Re: Debt payoff plan opinions

Post by Rob Bertram »

jtayl71 wrote:So I called the bank with my loan, I asked them if my extra payments went towards my principle and also asked about why my payment date is so far away. And the guy told me that it does both, it goes toward your principle and goes towards your future payments at the same time. Please let me know if this person has no idea what they are talking about or if that is even possible.
It's possible in the sense that every monthly payment is part interest and part principal. You are essentially putting money towards next August's payment which includes a year of phantom interest and whatever principal would have been paid for that month.

Banks are in the business of making money for their owners, not for you. Some loans do not allow early payoff or charge a penalty for early payment. There are two options for early payment (1) extra money goes entirely towards principal minus any pre-payment penalty, and (2) extra money goes towards the next month's payment (interest + principal). Some banks will default to option #2 unless you tell them otherwise. It probably was buried somewhere in the loan details.

You might be able to call the bank back and ask for someone higher up to discuss your loan. Some banks might re-apply your payments towards principal. Others might tell you that what's done is done. If they give you problems, refinance with a place that you trust. Credit unions tends to do more for their customers. I think another poster mentioned PenFed which is a credit union.
Topic Author
jtayl71
Posts: 74
Joined: Sat Feb 15, 2014 8:23 am

Re: Debt payoff plan opinions

Post by jtayl71 »

Rob,

I plan on refinancing with someone else come October, would it be wise to just pay very little towards the loan now and then pay it off correctly once I refinance?
User avatar
Kevin M
Posts: 15789
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: Debt payoff plan opinions

Post by Kevin M »

jtayl71 wrote: I plan on refinancing with someone else come October, would it be wise to just pay very little towards the loan now and then pay it off correctly once I refinance?
I would not wait until October unless you are sure they will not continue to charge you interest until then, and there's nothing you can do to have them redirect all early payments to principal (if they did not already happen). The latter is the ideal, since you do not want to pay 6% interest from now until October, whether prepaid or not.

I would call and tell them that I intended for all of my extra payments to go toward paying down the principal (if you're sure that's not what they've already done), and see if they can make that happen. Then refinance ASAP.

If somehow you have prepaid interest until your next payment is due, and that cannot be reversed, then I see no point in making any more payments. Just refinance just before the next payment is due.

If extra payment amounts did indeed all go toward principal reduction, then they will continue to charge 6% interest on the remaining balance, and add that to your balance (probably monthly) until your next payment is due. Otherwise, they would be giving you a 0% loan until the next payment is due, and I doubt that's the case.

Kevin
If I make a calculation error, #Cruncher probably will let me know.
Topic Author
jtayl71
Posts: 74
Joined: Sat Feb 15, 2014 8:23 am

Re: Debt payoff plan opinions

Post by jtayl71 »

So the reason I wanted to wait until October was going to be so I could wait for my capital gains on my taxable account to become long-term then once that occurred sell that, pay all of that down, reduce the principal to 10k then refinance that 10k making my monthly payments really low. Is it possible to refinance now, with a lump sum on top? For example instead of giving my current loan bank the 11k from my taxable then refinancing could I give the new credit union the 11k and say I want to refinance the remaining principal? Sorry if I am asking some less informed questions, but I am learning a ton from all of your responses.
Rob Bertram
Posts: 859
Joined: Mon May 05, 2014 12:15 pm

Re: Debt payoff plan opinions

Post by Rob Bertram »

jtayl71 wrote:Rob,

I plan on refinancing with someone else come October, would it be wise to just pay very little towards the loan now and then pay it off correctly once I refinance?
Call the bank and see if you can escalate the call until someone can correctly answer what happened. You may have to talk with a few different people. It might be their mistake which they will fix. Remember that banks are run by people that sometimes make mistakes. Or it might be your mistake (they don't allow early payoff) which the bank might also fix. Either way, talk with someone at the bank that can tell you what options are available to you.

If the bank can re-apply your payments to principal, wait for that to happen. Then, move the loan to a better place before you need to make another payment. (You shouldn't tell the bank you are going to do this. It makes them less cooperative.) Pick a place that you trust or that someone you know trusts.

You don't have to cash out the 11k in your taxable when you refinance. You can do the full 22k (or whatever is left). And if you get a loan somewhere around 2-4% APR, I would suggest keeping your taxable money. It's good to have some extra liquidity above your emergency funds. If you have super-emergency, you can always dip into your taxable. It's harder to dip into the equity in your car.

If you really want to pay extra, you can move your loan to a new bank or credit union. In October or November, cash out your taxable account and pay down some of your loan. Then, call the bank and ask them to re-calculate your monthly payments based on the current balance.
Topic Author
jtayl71
Posts: 74
Joined: Sat Feb 15, 2014 8:23 am

Re: Debt payoff plan opinions

Post by jtayl71 »

Rob,

Thanks so much for your help, I will get to the bottom of my current loan hopefully sometime today and figure it out from there. Will keep you posted, thanks again.
Post Reply