How to spend 25k to reduce debt and increase freedom!
June 13, 2008 2:11 PM   Subscribe

A man has debt, he comes into a little bit of money... how best should he spend it?

A man has debt.
6k in student loans (5%)
19750k in credit card debt (ranging from 8-10 % interest)
15500k car loan (car is worth 12k)

Man gets 25k at 2% interest.
Man thinks he could get away with no car for 6 months, saving him 600 a month.

Should man pay off credit cards & student loans and continue to drive his car

or

Should man pay some student loans, sell car (take the lose) and pay off credit cards?

What makes the most financial sense. Ultimately regained financial freedom and the ability to go back to school is the goal. Though eventually another car will be needed.

P.S Current car is a gas hog. 18 MPG
posted by crewshell to Work & Money (13 answers total) 2 users marked this as a favorite
 
I think everyone will tell you to pay off the credit cards first. 10% interest is no joke.
posted by mattbucher at 2:16 PM on June 13, 2008


Knocking off credit card debt is almost always a good idea.

If you go back to school, you can almost certainly defer your existing low-interest student loan payments, and by earning (presumably) less income while at school, paying off the credit card may be more difficult.

I'm not sure what I'd do about the car, in your situation. You're losing money with the car, either way, it seems. Can you trade it in for a car with better mileage and lower maintenance/insurance costs? That might reduce your overall hit in the long run.
posted by Blazecock Pileon at 2:16 PM on June 13, 2008


What do you mean by 2% on the 25K? Is this another loan or do you have it in some 2% savings account?
posted by mattbucher at 2:16 PM on June 13, 2008


Well in both cases, the Credit Cards are most definitely being paid off. The main question is about the student loans vs the Car.

The car actually has a lower interest rate then the student loans but its variable. Basically I could get way with no car for 6 months, so would it make sense to get out from under it and take the 3kish lose or to just keep driving it.
posted by crewshell at 2:18 PM on June 13, 2008


I'd sell the car and pay off the loan with the 12K proceeds and another $3500. This gets rid of that whole thing, plus insurance and gas payments. I'm assuming you can live without a car, at least for a while. And you've got $21500 left - pay off those credit cards! You'll save tons on credit card interest. This leaves you with $1750, which you should save - the student loans are no big deal. That's what I'd do.
posted by Dee Xtrovert at 2:18 PM on June 13, 2008 [1 favorite]


Its a 25k loan at 2% over 5 years. Current play is to pay 1000-1200 on it a month to cut that term down to 18ish months.
posted by crewshell at 2:19 PM on June 13, 2008


Sell the car, take the hit and save the money. Then use the rest to pay off you credit cards and as much student loan as possible. Put all the money that you would be saving on the car straight into a savings account (maybe if you are really feeling squeezed by in $500 and use $100 to make your life a tiny better each month) and save hard balancing borrowing and saving to get back to college, which the long term is an investment.

Oh, and buy a bike and feel richer from not having the pay the running costs on your car too.
posted by cluck at 2:21 PM on June 13, 2008


Here is what I would do:

1) Pay off credit cards.
2) Take my time selling the car for the best price I can get.
3) Use remaining money to buy outright an inexpensive, used vehicle that will meet my long term needs.
4) Focus any excess income on student loans and building savings.
posted by worstkidever at 2:29 PM on June 13, 2008


Definitely clear all the credit card debt as soon as possible. Hang onto the rest of the loan for a bit to really consider the options, but I think I'd use a grand or two to get a beater car with good gas mileage, and the remainder to absorb the loss of selling the existing one.
posted by hungrysquirrels at 2:45 PM on June 13, 2008


nth worstkidever's suggestions with a little mod.

Man should:

1) Pay off the credit card
2) Sell the car making up the owed/worth difference with the funds man has available
3) Buy another vehicle outright (immediately, and for nothing more than the remaining cash)
4) Pay the minimum amount required on the 25k loan ($450-ish?)
5) Using all other monies man has available, to include the $550 to 750 currently earmarked toward paying on the 25k loan, and potentially the $600 man currently pays on the car, man should reduce the student loan debt to zero in short order (6 months tops, eh?)

At that point, the only remaining debt would be the 25k which should then be the focus of all debt repayment.

And do check out jdroth's site, Get Rich Slowly.
posted by Incognita at 3:22 PM on June 13, 2008


I bet your 2% loan has a clause where if you miss a payment, the interest rate on it suddenly changes to like 20%.

So I agree that you should use most of the money to pay down your credit cards, but you should bank some of it, so that you have a cash cushion for emergencies and can prevent that hike from taking place.
posted by Class Goat at 4:05 PM on June 13, 2008


The conventional wisdom is to pay off the loan with the highest interest, first. You don't mention what that is for your car loan.

Consider that student loan representatives are very forgiving and a lot "nicer" than credit card companies. They are usually willing to wait and tend not to do nasty stuff like suddenly triple your interest if you miss a payment. Also consider that having *some* debt that you pay regularly every month actually betters your credit score, so it's best to have it with something benign and low-interest like a student loan. So I'd wait on the student loan.

If you're really willing to do without a car for 6 months, though, then in addition to any paying-off you do otherwise, I'd sell it and bank the cash. Put the cash in a 6-month CD so it accrues highish interest and you can't get at it. In 6 months you take that cash and buy a used civic or non-gas-guzzler as soon as you really need it. (Never buy new because there's always a big difference in cost/value). Then you'll be saving on gas, too.
posted by GardenGal at 4:32 PM on June 13, 2008


Pay off the loan with the highest interest first. End of story.
posted by whitedoor at 6:58 PM on June 13, 2008


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