pay off cars or HELOC first?

[sadbutinneed]

BK discharged about one month ago. I kept two cars and my house (although nothing is reaffirmed). Tried to do a 722, but it didn't get approved in time.

So I have one car 13k at 6% (325 monthly min) and one car at 25k (500 monthly min) at 6.5%. HELOC is 40K currently at prime (interest only currently 250 minimum payment)

So in my attempt to get rid of all of this debt, I don't know which to pay off first and put any extra money towards. The highest total debt? The highest interest rate? I am concerned prime will go up and I hate just throwing away the interest only payment each month.

Please no judgements on our decision to keep this debt even after bk.

[rck3]

I am in the same situation though we are just starting bk. I plan to pay off the cars first. We have 1 year left on 2 cars and I figure if I can pay them off early I will free up another $600/month which I can then split between my HELOC and savings. I also have student loans which I know will be in forberance for 12 months. Remember the interest on a car is not tax deductable which is why I am waiting on that. Well and also I have a 2.7% HELOC

[Never_Again]

I don't know what caused your bankruptcy, but debt is the root cause of most of them (if you have no debt, don't owe anyone any money, you really don't have a reason to file.) Therefore, as one who has been through this, the advice that I am going to give you is to become debt free, which it sounds like you are working on.

Do you need both cars, or can you get by with one? If you can get by with one, I would sell the one with the higher balance for as close to book value as possible. If this leaves you with a deficit, the finance company will probably take what you can get for it, because if they repossess it, they will most likely get less at auction than what you are getting for it. Either way, this debt was included in bankruptcy, so they can not come after you for the deficit.

If you need both cars, I would still do the above, and I would save and purchase with cash a lower priced car. Or, if you have equity in either car, sell and take the equity and purchase a lower price car. Then, apply the amount from the payment and any extra money that you can scrape up each month towards the other payment, and kill it quickly.

If you are committed to keeping both of these cars, I would pay off the one with the lowest balance first. It is more of an emotional decision, but it will allow you to see progress more quickly, and keep you encouraged.

Either way, get rid of all three of these debts as quickly as possible. The HELOC is last, because it is the highest (I don't care about the tax deductibility... you can send the bank $3000 per year, to save $500 in taxes... it is not very good math! You can do the same thing with your favorite charity, and help someone other than the bank. But you need to move to paying on the HELOC as quickly as possible, or else it will just become a routine bill that you think that you will always have. But kill both of those car loans first!

No judgments as to what you kept. Everyone has to make the decisions that are best for them. Just pay them off as quickly as possible, with whatever means (legally) that you can.

[Logan]

Of course paying off the higher interest loans 1st will save the most money but it isn't necessarily the best course of action. A big consideration is that the money put towards the cars is gone once you send off the check. If you pay down the HELOC you can always tap into it later if there is an emergency. If you have adequate savings and that isn't a concern then start with the highest interest rate.

Maybe even split the extra payments between the HELOC and the higher interest rate car payment.

Logan

[rck3]

Still depends on your situation. I have a low HELOC and I do care about tax deducability as it is potential cash in your pocket. It doesnt sound like you are in a situation that you can't pay your bills since bk (If you can't then this may not be the best course). Plain and simple you have 3 debts, I would normally deal with the one costing you the most. I would say focus on the 2 car loans. If you love the cars and want to keep them then pay down the 13K one 1st since the interest is not too diff and you can pay that one off quicker to free up more monthly cash. Then reinvest that into the other car loan. HELOC I say last but you don't say your interest %. Depending on your tax situation, that that interest amount and take about 25% off since that is the actual cost since it's tax deducatable

[HHM]

1. Do you have at least $5,000 in savings. If not, start there. Save up $5,000 as fast as possible (and I am not talking retirement accounts, 401k's etc, just available reserve funds).

2. Add $50 to the HELOC payment so you at least start paying down some principal. (as for the comment of making the HELOC balance avaialable, that is NOT a consideration, your goal is to NOT need or use credit).

3. As for the cars, as was already mentioned, do you actually need both? Is either one, or both significantly under water. Can you trade down to a more affordable vehicle and payment? What is the remaining length of time on each loan. However, in general, you always pay extra toward the loan with the highest interest rate first. However, in your case, since the interest rates are not that different and these are only medium term loans, the savings from paying down the higher interest rate car is minimal. So, to feel more successful at this, start by paying down the car with the lower balance.

Incidentally, is the house upside down in value. Is the HELOC really secured. You may want to save up some money to offer a settlement to the HELOC if the home is worth less than what is owed on the first mortgage.

[Logan]

2. Add $50 to the HELOC payment so you at least start paying down some principal. (as for the comment of making the HELOC balance available, that is NOT a consideration, your goal is to NOT need or use credit).


Why would you put 5K in the bank and make maybe 1% on your money when you can put 5K against your HELOC and save at least 3.25% in interest? If you don't have a clue how to manage money then this may be a bad idea but otherwise you are saving at least 2.25% interest on 5K if you do it my way.

It's no different that using credit cards and paying them off every month. I charge 3 kto 5k a month on my credit card for living expenses. I get 1% cash back for my credit card charges (3% for gas purchases) and I earn 4% on my money in my checking account. That equals 5% in interest on the rolling balance of 3k to 5K a year.

It's all about making your money work for you!!!

Logan

[Never_Again]

Why would you put 5K in the bank and make maybe 1% on your money when you can put 5K against your HELOC and save at least 3.25% in interest? If you don't have a clue how to manage money then this may be a bad idea but otherwise you are saving at least 2.25% interest on 5K if you do it my way.

The interest on this amount is $112.00 per year. For me, personally, the security of that basic amount in the bank, liquid, is well worth that amount of money. Of course, I am still going to kill the HELOC and the car loans as quickly as possible.

It's no different that using credit cards and paying them off every month. I charge 3 kto 5k a month on my credit card for living expenses. I get 1% cash back for my credit card charges (3% for gas purchases) and I earn 4% on my money in my checking account. That equals 5% in interest on the rolling balance of 3k to 5K a year.

I used to do that. It was nothing for me to routinely charge anywhere from $8K to $14K per month on a Discover Card. For the first two years, I was able to pay it off like clock work. I did make some pretty good cashback bonuses. But don't kid yourself... the amount to pay off that balance did not come from available savings to back this up, and I think that this is the case with most people "working the numbers" this way. It was just cash flow. Cash flow is great until you hit a bump.

It happens over time with some (most?) people. That one month that you can not pay the balance off by the statement. You tell yourself "That's OK, I still paid a huge chunk, and that is what it is there for!"

Soon, the amounts paid per month drop, as cash flow dries up, helped by the 21% interest that the card is now charging you. From there, the death spiral continues.

That 5% of the balance of $3K to $5K is $850.00 per year at the best case. I think in most people's cases, it is only the 1% cashback bonus, because they do not have the balance on the credit card sitting in a bank account just earning interest. So, the worst case on $5K rolled this way each month is that you only make $600 per year (1% of $5000 per month times 12 months.)

It's all about making your money work for you!!!

True as well, but all of these financial equations completely ignore risk from the calculations. Too many people think that there is no risk, when most of us here on this forum know otherwise.

Everyone has to do what they feel is best, but for me, I will take the emergency fund of $5000 in the bank, making low interest, but it is there if needed, and attacking these other bills as quickly as possible, making them go away in this scenario.

[HHM]

2. Add $50 to the HELOC payment so you at least start paying down some principal. (as for the comment of making the HELOC balance available, that is NOT a consideration, your goal is to NOT need or use credit).


Why would you put 5K in the bank and make maybe 1% on your money when you can put 5K against your HELOC and save at least 3.25% in interest? If you don't have a clue how to manage money then this may be a bad idea but otherwise you are saving at least 2.25% interest on 5K if you do it my way.

It's no different that using credit cards and paying them off every month. I charge 3 kto 5k a month on my credit card for living expenses. I get 1% cash back for my credit card charges (3% for gas purchases) and I earn 4% on my money in my checking account. That equals 5% in interest on the rolling balance of 3k to 5K a year.

It's all about making your money work for you!!!

Logan

This person is just out of BK, he doesn't really have ready access to credit in the first place. So he needs some sort of emergency fund to deal with periodic or one time expenses. The suggestion about the $5K has nothing to do with making that money "work" for the person in an investment sense, it is so they can avoid using credit and getting back into debt.

[Logan]

The interest on this amount is $112.00 per year. For me, personally, the security of that basic amount in the bank, liquid, is well worth that amount of money. Of course, I am still going to kill the HELOC and the car loans as quickly as possible.

Most likely the interest rate on the HELOC is higher and the interest in his savings is lower. I'm willing to bet his savings would be closer to $20 a month. HHM suggested putting an extra $50 a month towards his HELOC so if you put 5K against the HELOC versus a savings account you could make an extra payment of $30 a month and have the same result as putting $50 every month.

My wife recently asked me why we were using a separate bill pay service to pay our rent than the banks bill pay. I explained that we would float the $2000 rent for about 5 days a month and earn interest on the 2K for an extra 60 days a year. My interest in my checking is 4% so your only talking about an extra 1$ a month but if you apply this to many situations next thing you know you're saving hundreds of dollars a year.

I am currently making/saving over $120 a month by using techniques like I've described above. I have another plan to implement (really to complicated to explain here) that will have me about $40 a month or more on my car loan over the next few years.

Logan

[Logan]

That 5% of the balance of $3K to $5K is $850.00 per year at the best case. I think in most people's cases, it is only the 1% cashback bonus, because they do not have the balance on the credit card sitting in a bank account just earning interest. So, the worst case on $5K rolled this way each month is that you only make $600 per year (1% of $5000 per month times 12 months.)
.

It's very simple to get a high rate checking account. I get 4% and this is a bank in MA that you can use exclusively online.

Also, I use MINT.COM to track my checking and credit cards. In mint it automatically deducts the cc balance from the checking balance so when I log on every morning I see that number. I don't care what my credit card balance is as long as I meet a certain net value.

As stated above, I use many different techniques so my savings/interest earned is pretty good. It pays for our monthly alcohol bill!!!

Logan

[HHM]

I get what you are saying. But in some sense, your idea is merely paper savings, not real, in the sense that if you needed that $5k or a portion of it, it is not available. And even if it was, it is still "debt". Whether your plan is feasible is more of a cash flow issue. For the sake of argument, I am assuming with the OP just out of BK 7 and no ready access to credit, cash flow is still probably tight. Also, we don't know if the HELOC is liquid or not, many banks have cut off access.

Your techniques are better employed when the person financial situation has stabilized. However, I think the OP is better off with liquid cash in the near term, and then paying down higher interest rate loans first. Also, with cars, although they are depreciating assets, the loan is still an expense and car is relatively more liquid than a house. So, if he paid down the cars more quickly, and if something happened that required a quick sale, the person could do it. Just my thoughts.

[Logan]

I get what you are saying. But in some sense, your idea is merely paper savings, not real, in the sense that if you needed that $5k or a portion of it, it is not available. And even if it was, it is still "debt". Whether your plan is feasible is more of a cash flow issue. For the sake of argument, I am assuming with the OP just out of BK 7 and no ready access to credit, cash flow is still probably tight. Also, we don't know if the HELOC is liquid or not, many banks have cut off access.

Your techniques are better employed when the person financial situation has stabilized. However, I think the OP is better off with liquid cash in the near term, and then paying down higher interest rate loans first. Also, with cars, although they are depreciating assets, the loan is still an expense and car is relatively more liquid than a house. So, if he paid down the cars more quickly, and if something happened that required a quick sale, the person could do it. Just my thoughts.

HHM,

I agree with everything you say. I enjoy working with finances and I have the time to do all this. I have had bad luck in my life with jobs and I'm about to take a 10% paycut so I save and earn my money where I can.

Logan