What would you do?

[SyntheticDivision]

My wife just started working in January 06 and before that we were used to living on my income alone and I still want to keep living on one income, so I ask, what she be done with her paycheck? I paid off all my credit cards and small loans already. I do however, have a big school loan (owe $38K), car payment (owe $28K) and she has a school loan as well (owe $12K). Our next plans are to purchase or build a house by summer of 07. I have made myself a financial plan that will allow me to payoff my car in 8 months, but should I? That extra $600 a month would help us with our mortage payment. Should I save the money instead? Or should I pay off her school loan or my school loan? What would be your next step?

Any input would be greatly appreciated.

 

[Brat]

You need to do an analysis of the relative interest rates, tax deductability, and opportunity cost.

I don't know the size of your future morgage, but having more equity could save you from mortgage insurance. For me that would be goal one.

 

[SyntheticDivision]

Thanks for the input, the interest on the car loan is 3% while the school loan is 8% (and not fixed) : / I was thinking of getting rid of my car payment 1st to free up the $600 a month and then attack my school loan. My school loan repayment won't start till the end of this year.

 

[starry night]

By all means, if you can defer the school loan payment until year-end, then attack the car payment by paying additional toward principal (make sure you work this out with the finance co. , and are not just "doubling up on payments". You want to relieve the payment of interest and target your dollars to reducing the loan principal). Then, as you say, with the auto loan paid off you will have additional monthly funds to apply toward thos college loans and mortgage qualifying.

You didn't mention any credit card debt. WAY TO GO!

And remember, for your mortgage loan qualifying, a good history of loan repayment is a key factor, often moreso than the debt-to-income ratio, so make sure you are not delinquent on payments, etc.

 

[Sheryl]

Personally I'd be paying off the 8% loan as fast as possible. That's costing you $2,200+ per year.

Then worry about the 3% loan, which is only costing about $840 a year.

 

[JPatrick]

Personally I'd be paying off the 8% loan as fast as possible.  That's costing you $2,200+ per year. 

Then worry about the 3% loan, which is only costing about $840 a year.

I think Sheryl has it right as far as the two loans go.
Hopefully you are working on your home down payment as you want to avoid that pesky PMI for sure.  Way off topic, but in another thread I think you said something about a 4 month old kiddo.  Regarding that, I'd recommend a nice chunk of cheap term so you can sleep even better at night.  I know, you didn't ask.

 

[starry night]

I agree, if the school loan is accruing interest. But if it is deferred until year-end, take advantage of that window of opportunity to reduce other debt.

 

[Sam]

Thanks for the input, the interest on the car loan is 3% while the school loan is 8% (and not fixed) : /  I was thinking of getting rid of my car payment 1st to free up the $600 a month and then attack my school loan. My school loan repayment won't start till the end of this year.

I'd delay the car loan as long as possible.  That is, I would just pay what's required and no more.  3% is basically inflation.  I would attack the student loan first.  Anyway, that's the easy decision.

The harder decision is to decide whether to save up for the future house or to get rid of the student loan.  I would base my decision on how the local housing market is doing.  If I believe that the local housing market is appreciating by 5% or more, I would save to money for the down payment first.  On the other hand, if it's only 3%, then I would go ahead with the student loan.

Good luck,
Sam

 

[SteveR]

I am going a slightly different direction here from the others.

- Delay buying the house until you can afford at least 20% down.

- If you cash flow allows you to save your house payment including closing costs and pay off a loan then work on the one with the highest interest rate while paying off the car per your loan schedule.

Cash flow may be a bigger issue for you now than debt. What can you cut to get more cash flow to fund the two items above? If you are already bare bones then maybe you need to wait on the house. A house can eat you alive in additional costs like drapes, shades, landscaping, appliance repair/replacement, painting, furniture, and the day to day stuff like insurance and higher utility bills, taxes etc. etc. Be sure you have the cash flow for all this stuff or you may get in over your head.

 

[Brat]

I agree with SteveR.

 

[SyntheticDivision]

Thanks for all the input. My student loan is accruing interest as we speak, so i'm leaning more into paying the school loan off first. The only reason I was thinking of paying off my car first was to free up the $600, but it only makes sense to pay the school loan off 1st to save $$ in the long run. Besides, my school loan will probably be around $400 or so.

Steve, what I originally planned was to pay off 1 loan and then save for putting down on the house. But there is nothing keeping me from doing both at the same time. The only thing is my school loan would take a bit longer to pay off, but its no big deal. The house in Summer 07 was a preference, not a must, so delaying it would be no problem.

John

 

[thefed]

yep.

Student loan 1st

Save for down payment, to eliminate PMI

Pay down car

 

[nwsteve]

I was thinking of getting rid of my car payment 1st to free up the $600 a month and then attack my school loan.

SD
Before you payoff your car loan, be sure to check the terms of the loan.  Many car loans are "rule of 72"amortization, and once you are past mid-point, they have already collected most of the interest.  Make sure you have a simple amortization schedule
nwsteve

 

[Texas Proud]

Can you consolidate the two school loans into one at a much lower rate I seem to remember reading that the rates were lower than 8%... but since I have not seen any kind of student loan in decades....

 

[accountingsucks]

Umm, just a question but why did you purchase a $30K+ car?

 

[FlowGirl]

Umm, just a question but why did you purchase a $30K+ car?

I was kind of wondering the same thing. Selling the car and buying something cheaper would cut the debt substantially. Plus a smaller payment (or no payment if you can swing it) would free up money to knock out the student loan.

 

[SyntheticDivision]

steve, thanks, i'll look into that

Texasproud, not sure if I can seeing that the other loan is under my wifes name, i'll have to ask

The car was a personal choice on my part, really no reason. I wanted it and I bought it. Can't sell the car right now since I did buy the car brand new and the car depreciates so much driving it off the lot. I plan on keeping the car for some time, its my family car.

 

[azanon]

My wife just started working in January 06 and before that we were used to living on my income alone and I still want to keep living on one income, so I ask, what she be done with her paycheck?

Did you actually pull this off? Usually when a second spouse goes to work, it incurs extra expenses, starting with taxes for one, and going from there. (I could list several possible things that could get more expensive from a second wage earner working, but for now i'll assume this is given). So, how is this working?

 

[SyntheticDivision]

Did you actually pull this off?  Usually when a second spouse goes to work, it incurs extra expenses, starting with taxes for one, and going from there.  (I could list several possible things that could get more expensive from a second wage earner working, but for now i'll assume this is given).   So, how is this working?

It's working so far. Obviously, it's easier to spend more if the money is there, but were very disciplined on our spending. I guess it's because all the extra expenses are not that significant. Who knows, things may change in the future, but its very feasable in my current situation to live off of one income.

 

[cute fuzzy bunny]

Did you actually pull this off? Usually when a second spouse goes to work

Pull what off? Having a second spouse or having two of them and getting both to work?

Christ on a crutch...Johnny G would be all over this plan...

 

[HFWR]

Don't use "second spouse" and "pull this off" in the same sentence...

 

[cute fuzzy bunny]

This from a sheep in garters and high heels...

 

[chris2008]

In principle it makes sense to pay off the debt that has the highest interest. However, I have the feeling that you might have a different problem.
I wonder a bit about your use of "her", "my" "our".

I believe that first of all you and your wife should talk about the use of "her" paycheck.
Now that you both have income, why not sharing expenses at a ratio related to the relative income.
Then, some of "her" paycheck should go to "her school loan". If you both plan to get a house, some of your both income should go to your both mortgage or savings.
Only you and your wife can decide if some of "her" paycheck should go to what you call "my car" or to your school loan.
Yes, up to now your paycheck was used for both of you. So it is fair enough to share the second income as well. But make sure to talk this over with your wife.
She may throw in an argument to balance out your income of the past - like "but I did most of the household"...

Please excuse if I mis- or overinterpreted your post.

 

[SyntheticDivision]

Chris2008, we have talked about it and she agrees with paying off the higher debt 1st, then paying off her loan. I would never make a decision like that without her input.

and lol@ the second spouse comment, didn't catch that

 

[DonkeyTown]

Have you tried to consolidate your student loan at a lower rate? I was able to consolidate my student loans at a 3% interest rate last year. You might not be able to get it that low now, but it's still worth looking into.