Paying down debt

[phunluvin82]

With any debt, you are accruing interest, so paying more is cutting down on the interest that you'd pay in the long term.

However, if you feel that you don't have a good enough cushion for an emergency...then it may make sense to do what you're describing.

If you have a solid emergency fund, it's less of an issue I think...but there's nothing wrong with attacking credit card debt aggressively, while being less focused on installment debt. I think you just have to decide what is right for your situation...but either way you should have an emergency fund of some sort.

[fbf2006]

Sept 18, 2012 16:32:11 GMT -5 phunluvin82 said:

With any debt, you are accruing interest, so paying more is cutting down on the interest that you'd pay in the long term.

However, if you feel that you don't have a good enough cushion for an emergency...then it may make sense to do what you're describing. If you have a solid emergency fund, it's less of an issue I think.

Agreed. You pay down monthly because of the interest, but you make a good point about having savings. If you don't have a decent emergency fund, yous hould probably do that first.

[Susie]

The interest rates on all those debts are inevitably higher than what you could earn in a savings account. So by doing it as you propose, you'd be incurring interest at a rate of, e.g., 4.5% on the whole debt, while only earning, e.g., 0.85% on the savings account balance.

If you make payments each month, you're lowering the balance on which you're paying that 4.5% (or whatever it is). Better move.

[thatgirl2478]

FYI on getting rid of PMI - be aware that you'll probably have to get re appraised - and you'll have to have at least 80% LTV with the new appraisal amount.

[soysauz123]

Thanks for the responses! I guess I am missing something on the math.

Example: car loan with $10k balance. $350 payment, where $300 per month goes to principal. Have $700 to put extra on principal so can pay down in 10 months.

I can either have a $0 loan balance in 10 months if I put the $700 to pay down the loan OR I can put $700 per month in the savings account and have a $7K savings balance at the end of the 10 months along with a $7K loan balance that I would pay off in savings. Either way I would pay $50x10 or $500 in interest bc it's not like my payments are recalculated when I put extra in, right? Are SLs and mortgages different?

FWIW we have 4 mos expenses in savings. We would also be adding to savigs at the same time. Is this wise or should we throw it all towards debt? We aret having toubke paying anything, just want to get rid of debt. We did an FHA loan so we just need to pay down to 78% of purchase price to get rid of the mortgage insurance.

[AAM2012]

Maybe this will help you:

www.bankrate.com/calculators/auto/early-payment-payoff-calculator.aspx

You can run the numbers. Basically you'll end up paying more in interest if you wait 10 months to pay it off versus paying extra for the next 10 months. Although the extra interest paid if you don't pay extra each month won't be very high (depends on interest rate) if you onl have 10 months left on the loan.

[soysauz123]

Hmm for some reason my original post is gone

[phunluvin82]

Yes there is a difference because the interest is compounding...just google compounding interest & you'll probably get the gist.

In the case of an installment loan, no your payment amount every month is not going to change...BUT, the interest that you would accrue every month is going to be less and less each month if you are paying extra each month than just saving up to pay off.

Like AAM2012 said though, it will possibly be a very small difference, depending on your interest rate and how much is left on the loan. www.whatsthecost.com is also a good calculator.

[ohgillian]

Sept 18, 2012 18:22:13 GMT -5 soysauz123 said:

Hmm for some reason my original post is gone

I'm confused by that too. I kept looking around to figure out where it was....