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July 18, 2011 2:16 PM Subscribe
Help me make sense of this silly financial problem. It's very basic, and I'm a complete moron with money.
We are a family of two. We have a car debt of 10k (at 6.75%), and another loan for 6k (12% interest). We also happen to have a CD with discover (10 years, for 6k)
Now, financially handicapped as I am, I have the feeling that 12% is bad (is it?) and think that we might be better off killing our CD early and paying of that debt. SO says they do not want to pay off that debt with our savings, since it's a loan they incurred in when we were not a family yet, it's not ethical, they want to pay it with their own money, etc. I think that even if the debt isn't "ours" (and I think it is) it does hurt "us" to keep it! I think he's being overly considerate.
So my questions are:
*Cancelling the CD would cost us 131.00, after which we will have made 18.00 in interest, which seems like a waste of time (the penalty is 9 months of interest and we only would have kept it for ten). Would it be smart to do in order to pay off our 12% loan?
*could you convince my SO that this is a good idea, if you think it is? I will show them this thread.
We are a family of two. We have a car debt of 10k (at 6.75%), and another loan for 6k (12% interest). We also happen to have a CD with discover (10 years, for 6k)
Now, financially handicapped as I am, I have the feeling that 12% is bad (is it?) and think that we might be better off killing our CD early and paying of that debt. SO says they do not want to pay off that debt with our savings, since it's a loan they incurred in when we were not a family yet, it's not ethical, they want to pay it with their own money, etc. I think that even if the debt isn't "ours" (and I think it is) it does hurt "us" to keep it! I think he's being overly considerate.
So my questions are:
*Cancelling the CD would cost us 131.00, after which we will have made 18.00 in interest, which seems like a waste of time (the penalty is 9 months of interest and we only would have kept it for ten). Would it be smart to do in order to pay off our 12% loan?
*could you convince my SO that this is a good idea, if you think it is? I will show them this thread.
The $131 is insignificant enough to not even be mentioned really. The way to prove this point is pointing out how much interest is costing you on the 6k loan. At 12%, that amount dwarfs all of the other marginal amounts that you are discussing. If you look at a loan repayment table, you will see how much that pride is costing you. If you pay it off now, you make all of that in "savings" and those "savings" will be far larger than the yield you would have made off the CD.
The best "investment" right now is paying off the 12%. Only when that monkey is off your back can you really discuss "savings" as a couple. That pride is costing a lot of money.
On another note, you may be able to apply for a credit card with a 0% balance transfer to pay off that loan and lock in 0% for a while to save money while paying it off. Make sure you do not break any of their balance transfer rules in doing so, because those fees would hurt your case.
posted by milqman at 2:27 PM on July 18, 2011 [1 favorite]
The best "investment" right now is paying off the 12%. Only when that monkey is off your back can you really discuss "savings" as a couple. That pride is costing a lot of money.
On another note, you may be able to apply for a credit card with a 0% balance transfer to pay off that loan and lock in 0% for a while to save money while paying it off. Make sure you do not break any of their balance transfer rules in doing so, because those fees would hurt your case.
posted by milqman at 2:27 PM on July 18, 2011 [1 favorite]
12% is not usurious--it's a not-great, not-end-of-the-world interest rate in my view.
This kind of question can't be answered with simple math, though--it's not just "the loan has a higher interest rate than the CD, so we're paying more than we make, so we should pay it off." There is the financial context to consider, as well as your psychology with regard to money.
If the payments on the loan are a hardship to you, it might make sense to cash in the CD. Likewise, if you have other savings in case of an emergency, then it might make sense to cash in the CD. If the CD is your only savings, and you're managing the payments on the loan OK, then I'd hold onto the CD, personally. One thing I've learned in my life is that it is a lot easier to keep $6000 than it is to get $6000. And you might need that money in a real emergency.
If you don't cash in the CD but pay off the loan over time, at some point, the loan will be paid off and you'll still have the $6000 CD, plus the interest. If you cash in the CD, pay off the loan, and then spend the money you were using for payments rather than saving it, then at that same point you will not have the loan to pay off, but you also won't have the 6k+ in savings.
For my family, it is easier to hold onto savings than to build savings; and it is easier to pay off a fixed-payment, fixed-term loan than to put the equivalent amount of money into savings. So I would factor those things into this decision, and would probably hold onto the CD and pay off the loan from income.
posted by not that girl at 2:28 PM on July 18, 2011
This kind of question can't be answered with simple math, though--it's not just "the loan has a higher interest rate than the CD, so we're paying more than we make, so we should pay it off." There is the financial context to consider, as well as your psychology with regard to money.
If the payments on the loan are a hardship to you, it might make sense to cash in the CD. Likewise, if you have other savings in case of an emergency, then it might make sense to cash in the CD. If the CD is your only savings, and you're managing the payments on the loan OK, then I'd hold onto the CD, personally. One thing I've learned in my life is that it is a lot easier to keep $6000 than it is to get $6000. And you might need that money in a real emergency.
If you don't cash in the CD but pay off the loan over time, at some point, the loan will be paid off and you'll still have the $6000 CD, plus the interest. If you cash in the CD, pay off the loan, and then spend the money you were using for payments rather than saving it, then at that same point you will not have the loan to pay off, but you also won't have the 6k+ in savings.
For my family, it is easier to hold onto savings than to build savings; and it is easier to pay off a fixed-payment, fixed-term loan than to put the equivalent amount of money into savings. So I would factor those things into this decision, and would probably hold onto the CD and pay off the loan from income.
posted by not that girl at 2:28 PM on July 18, 2011
Is the 6k CD your emergency fund? You need 6-12 months of expenses saved up, then you can worry about paying off debt faster. (That is the liquidity willnot refers to.)
If the 6K CD is not part of your emergency fund, it would make sense to use that to pay off your debt. Paying off the debt early gives you a 12% return on your investment. I doubt your CD's interest rate comes within a hundred miles of that!
posted by ifandonlyif at 2:29 PM on July 18, 2011
If the 6K CD is not part of your emergency fund, it would make sense to use that to pay off your debt. Paying off the debt early gives you a 12% return on your investment. I doubt your CD's interest rate comes within a hundred miles of that!
posted by ifandonlyif at 2:29 PM on July 18, 2011
The first two paragraphs by milqman are right on. Leaving aside the question of whose debt it is, the only reason to keep cash in a low-interest CD while carrying a high interest loan is if you have reason to believe you're going to need that cash for an emergency.
As for it being "his" debt, those high monthly payments are coming out of your joint income. The sooner you get rid of that debt, the better.
posted by maxim0512 at 2:31 PM on July 18, 2011
As for it being "his" debt, those high monthly payments are coming out of your joint income. The sooner you get rid of that debt, the better.
posted by maxim0512 at 2:31 PM on July 18, 2011
What is the term of the loan at 12%--that is, how many years will it take to pay it off? With that information you can use a loan interest calculator (like this one) to figure out the cost of the loan. If it's 3 years at 12%, the interest will end up costing you $1174.44. That's a pretty big chunk of change.
As others have said, a lot depends on whether you have emergency funds other than the CD. If you have 6 months' living expenses saved up on top of that, then from a strictly financial point of view it makes sense to cash in the CD and pay off the 12% loan.
But as not that girl writes, the strictly financial point of view is only part of the picture. If you find it hard to accumulate new savings, and the loan payments aren't a hardship, it might be better for you, psychologically, to keep the CD and pay down the loan. But at least you'll be making that decision after weighing the financial costs.
And I'll second maxim0512: it doesn't matter whose debt it is; if you are pooling your finances now, the interest is a joint expense.
posted by brianogilvie at 2:35 PM on July 18, 2011
As others have said, a lot depends on whether you have emergency funds other than the CD. If you have 6 months' living expenses saved up on top of that, then from a strictly financial point of view it makes sense to cash in the CD and pay off the 12% loan.
But as not that girl writes, the strictly financial point of view is only part of the picture. If you find it hard to accumulate new savings, and the loan payments aren't a hardship, it might be better for you, psychologically, to keep the CD and pay down the loan. But at least you'll be making that decision after weighing the financial costs.
And I'll second maxim0512: it doesn't matter whose debt it is; if you are pooling your finances now, the interest is a joint expense.
posted by brianogilvie at 2:35 PM on July 18, 2011
Others will chime in about the exact numbers, and why paying off that 12% debt would probably be a good idea, provided that you have other 'emergency' savings set aside in case of job loss, medical issue or other rainy-day situations.
As far as reasoning with your SO, though, I understand where they're coming from, not wanting to make you responsible for a debt incurred before your relationship. However, I would point out to them that whatever money they pay to an outside party (outside your relationship, that is) in the form of interest payments on that debt is money they won't have in the future, that otherwise could have increased your SO's ability to pay their share of your future financial goals.
In other words, they may have incurred the debt on their own, but insisting now on paying it back on their own, while understandable, has an opportunity cost as well - and if you're both trying to contribute equally to a shared financial future together, money they pay to a lender is money they won't be able to contribute, down the line, to your financial life as a couple. In that sense, having your SO keep that debt to themselves does, in fact, affect you as well.
posted by amy lecteur at 2:40 PM on July 18, 2011
As far as reasoning with your SO, though, I understand where they're coming from, not wanting to make you responsible for a debt incurred before your relationship. However, I would point out to them that whatever money they pay to an outside party (outside your relationship, that is) in the form of interest payments on that debt is money they won't have in the future, that otherwise could have increased your SO's ability to pay their share of your future financial goals.
In other words, they may have incurred the debt on their own, but insisting now on paying it back on their own, while understandable, has an opportunity cost as well - and if you're both trying to contribute equally to a shared financial future together, money they pay to a lender is money they won't be able to contribute, down the line, to your financial life as a couple. In that sense, having your SO keep that debt to themselves does, in fact, affect you as well.
posted by amy lecteur at 2:40 PM on July 18, 2011
If SO is really against paying off their debt with your savings, they could perhaps borrow the savings to pay off the debt, and then use the debt payments they would have made to "repay" the savings.
What everyone says about making sure you have an emergency fund is right, but if it would be easy for you to borrow money in an emergency at a similar rate to what you're now paying, then you could use the emergency money (or a good bit of it) to pay off the debt. If there's no emergency, you save some interest - and if there is an emergency, you're no worse off than you are now.
posted by emilyw at 3:25 PM on July 18, 2011
What everyone says about making sure you have an emergency fund is right, but if it would be easy for you to borrow money in an emergency at a similar rate to what you're now paying, then you could use the emergency money (or a good bit of it) to pay off the debt. If there's no emergency, you save some interest - and if there is an emergency, you're no worse off than you are now.
posted by emilyw at 3:25 PM on July 18, 2011
Having been in a deep debt (incurred prior to marriage) situation that i walked into unknowingly, I second this piece of advice:
If the payments on the loan are a hardship to you, it might make sense to cash in the CD. Likewise, if you have other savings in case of an emergency, then it might make sense to cash in the CD. If the CD is your only savings, and you're managing the payments on the loan OK, then I'd hold onto the CD, personally. One thing I've learned in my life is that it is a lot easier to keep $6000 than it is to get $6000. And you might need that money in a real emergency.
posted by infini at 4:13 PM on July 18, 2011
If the payments on the loan are a hardship to you, it might make sense to cash in the CD. Likewise, if you have other savings in case of an emergency, then it might make sense to cash in the CD. If the CD is your only savings, and you're managing the payments on the loan OK, then I'd hold onto the CD, personally. One thing I've learned in my life is that it is a lot easier to keep $6000 than it is to get $6000. And you might need that money in a real emergency.
posted by infini at 4:13 PM on July 18, 2011
SO sounds like a keeper. Sit down and work out a budget, and make a plan to pay off that 12% loan 1st, then the car loan, and a savings plan. Making it a joint challenge takes away a lot of the pain of giving up Starbucks, reducing meals out, cutting back on whatever you can.
You don't mention credit cards; do you have any? At what rate? Being debt-free, or nearly so, is a great feeling; I recommend it as a goal, but probably not at the cost of the savings.
posted by theora55 at 6:19 PM on July 18, 2011
You don't mention credit cards; do you have any? At what rate? Being debt-free, or nearly so, is a great feeling; I recommend it as a goal, but probably not at the cost of the savings.
posted by theora55 at 6:19 PM on July 18, 2011
Lots of good advice in this thread. I'd love to know more about the CD other than what it would cost to cash out.
In the long run it's better for the family as a whole to not pay 12% interest over the life of the CD. Cash it in, pay off the 12% loan, and start a budget to buy another 6k CD down the road if you want, the key point is that you're not paying 12% on the 6k during this time.
posted by Sphinx at 9:53 PM on July 18, 2011
In the long run it's better for the family as a whole to not pay 12% interest over the life of the CD. Cash it in, pay off the 12% loan, and start a budget to buy another 6k CD down the road if you want, the key point is that you're not paying 12% on the 6k during this time.
posted by Sphinx at 9:53 PM on July 18, 2011
So it sounds like the CD is paying about 1.80% p.a. right? but you are Paying 12% p.a. on the $6,000 Loan.
So the Loan is costing you about $720 per year. (assuming the full principal is outstanding)
If you keep the CD for 1 year you will make about $108 in interest on the CD and loose $720 on the loan.
ie your net position after 12 months is minus $600.
By paying it off right now you essentially "save" $600
the $131 sounds like its just 'lost interest' not actually 'break costs' .
I'd just say if we just pay this off we can save 600 this year (and you can buy me some nice shoes).*
posted by mary8nne at 5:53 AM on July 19, 2011
So the Loan is costing you about $720 per year. (assuming the full principal is outstanding)
If you keep the CD for 1 year you will make about $108 in interest on the CD and loose $720 on the loan.
ie your net position after 12 months is minus $600.
By paying it off right now you essentially "save" $600
the $131 sounds like its just 'lost interest' not actually 'break costs' .
I'd just say if we just pay this off we can save 600 this year (and you can buy me some nice shoes).*
posted by mary8nne at 5:53 AM on July 19, 2011
"I have the feeling that 12% is bad (is it?) and think that we might be better off killing our CD early and paying of that debt. SO says they do not want to pay off that debt with our savings, since it's a loan they incurred in when we were not a family yet, it's not ethical, they want to pay it with their own money, etc. "
It's a fairly straightforward calculation to show that you'll earn more investing at 12 percent than whatever absymal rate your CD gets. If your SO truly wants to pay it off on their own, I'd suggest breaking the CD to pay off the debt and invite them to pay 12 percent interest to the family instead.
posted by pwnguin at 6:18 AM on July 19, 2011
It's a fairly straightforward calculation to show that you'll earn more investing at 12 percent than whatever absymal rate your CD gets. If your SO truly wants to pay it off on their own, I'd suggest breaking the CD to pay off the debt and invite them to pay 12 percent interest to the family instead.
posted by pwnguin at 6:18 AM on July 19, 2011
This thread is closed to new comments.
You don't say how much time is left on the loan (principle and number of payments remaining), so it's tough to determine how much in interest will be paid over the life of the loan.
One other thought to consider is whether you have emergency money set aside (the than the CD you're thinking about using to pay off the car loan). It makes sense to save interest if you can afford to pay it off, but if you need that money later it will be a lot less liquid tied up in the car than it is tied up in your CD.
posted by willnot at 2:23 PM on July 18, 2011