cbmeeks wrote:

- quote -

Careful quoting Dave. This was the scenario;
1) Car loan ~$13,000 at 5.49% interest rate.
2) Student loan ~$38,000 at 3.875% interest rate.

If the dollar amounts were swapped, he'd still say to pay the $13,000
(at 3.875%) first, even though it's at a lower rate. This is his
premise, paying the lowest dollar balance first. I respectfully disagree
at http://www.joetaxpayer.com/dave.html

JOE

Pay off the car loan first and fast. Google Dave Ramsey debt
snowball :-)

Cash Flow
http://www.signaldev.com



On Apr 7, 6:37 am, denise.re...[at]gmail.com wrote:
- quote -

"Daniel T." <daniel_t[at]earthlink.net> writes:

- quote -

Over different periods of time. The amortizing payments
are only making it harder to see that.

--
Plain Bread alone for e-mail, thanks. The rest gets trashed.
No HTML in E-Mail! -- http://www.expita.com/nomime.html
Are you posting responses that are easy for others to follow?
http://www.greenend.org.uk/rjk/2000/06/14/quoting

BreadWithSpam[at]fractious.net wrote:
- quote -

I'm using overall cost of the loans. Obviously any amount paid over the
initial $20,000 will be interest.

joetaxpayer <joetaxpayer[at]nospam.com> wrote:
- quote -

OK, this is making sense. Thanks for clearing it up. It cost less per
year.

"Daniel T." <daniel_t[at]earthlink.net> wrote in message news:daniel_t-
- quote -

The problem with this is that when you pay additional principal early in the
process, it usually also decreases the life of the loan. Lenders seldom
reduce your monthly payment on an established loan even when you have made a
lump sum additional principal payment.

Elizabeth Richardson

"Daniel T." <daniel_t[at]earthlink.net> wrote
- quote -

There is a third variable here that is important to
understanding some of the others' points about paying off
the higher APR first, regardless of term: (3) what one would
make if one invested in say a CD instead of paying off the
lower interest, but longer term, loan.

A concept called the "future value of money" is one with
which you need to become familiar.

All other things equal, paying off the higher interest rate
loan first will benefit a person more, regardless of the
time period of each loan.

"Daniel T." <daniel_t[at]earthlink.net> writes:

- quote -

You are using *payments* not *interest* to compare.
Much of those payments is principal and by munging it,
you are, again, mixing up a comparison of apples and
oranges. Of course you pay more over time when you
borrow longer. But if you took that 10yr at 3% and
made payments at the same total quantity as the 5%
loan, each payment would have an even greater proportion
of principal than the 5% loan and, in fact, you'd pay
off the 10yr 3% loan in *less* - substantially less time
than that 5% loan.

Flip it the other way around, if you took that 5yr loan
and only paid the 10yr payment, since you'd be underpaying
on the principal, you'd not have it paid off after 5 yrs
and you'd have to keep paying for quite a while after that.

You are getting confused because you are mixing up
principal and interest. The numbers are easier to compare
if you do it in non-amortizing (ie. interest-only) space.

- quote -

Be careful using the word 'duration'. We know what you mean,
but to bond people, 'duration' has a very specific meaning
quite different from 'maturity'.


--
Plain Bread alone for e-mail, thanks. The rest gets trashed.
No HTML in E-Mail! -- http://www.expita.com/nomime.html
Are you posting responses that are easy for others to follow?
http://www.greenend.org.uk/rjk/2000/06/14/quoting

Daniel T. wrote:
- quote -

Your first example had a different $$ amount, so I snipped it.
Above we are left with a total of $19,000 and you have a total paid
which indicates you favor borrowing more money at 5% than 3%.
As a snapshot, 9K [at] 5% = $450 interest, + $10K [at] 3% = $300 interest,
total $750.
Second numbers, $10K [at]5% = $500 + $9K [at] 3% = $270 total $770 interest.

One can easily contrive a series of low dollar, high interest, short
payback loans that appear to have less interest than a higher dollar,
long term low interest loan. That's why the math is wrong, as BWS tried
to help me explain, you need to take a snapshot of 'annual interest cost
per thousand' to compare the choices. The difference above, 5% vs 3%
will produce a tiny difference, $20/yr. But if you apply this logic and
one day decide to pay down your 6% mortgage but leave a 20% credit card
chugging along, I'd hop on a soapbox to save you from your misapplied
equations. Take some time to think on this.

JOE

BreadWithSpam[at]fractious.net wrote:
- quote -

Here are the numbers I'm using:

$10,000 5years 5% = 189/mo * 60 months = $11,340
$10,000 10y 3% = 97/mo * 120 months = $11,640 total paid $22,980

$9,000 5years 5% = 170/mo * 60 months = $10,200
$10,000 10y 3% = 97/mo * 120 months = $11,640 total paid $22,840

$10,000 5years 5% = 189/mo * 60 months = $11,340
$9,000 10y 3% = 87/mo * 120 months = $10,440 total paid $22,780

Based on the above, putting the 1000 into the 10 year loan as opposed to
the 5 year loan seems to save an extra $60.

Now if you put the $1000 extra in *and* then paid extra every month to
shorten the duration of the loan you put it in, then you would be right.

$10,000 5years 5% = 189/mo * 60 months = $11,340
$10,000 10y 3% = 97/mo * 120 months = $11,640 total paid $22,980

$9,000 5years 5% = 189/mo * 53 months = $10,017
$10,000 10y 3% = 97/mo * 120 months = $11,640 total paid $22,657

$10,000 5years 5% = 189/mo * 60 months = $11,340
$9,000 10y 3% = 97/mo * 106 months = $10,282 total paid $22,622

But of course, shortening the duration of a loan is going to cost less.

I guess the part I'm having trouble with is this: The cost of the loan
is dependent on (1) the APR and (2) how long you are borrowing the money
for. To not take the latter into account seems wrong to me somehow.


======================================= MODERATOR'S COMMENT:
Please trim the post to which you are responding. "Trim" means that except for a FEW lines to add context, the previous post is deleted.

BreadWithSpam[at]fractious.net wrote:

- quote -

Understood. Which is why I referenced that, acknowledging that it's not
all about the numbers. And why the 'sleep factor' can produce a
different plan for two individuals whose numbers are precisely the same.
In this case, so long as Daniel understands the numbers, he is free to
choose his path.
JOE

joetaxpayer <joetaxpayer[at]nospam.com> writes:

- quote -

That's not numerical or financial, but rather, psychological.
It's not invalid - the feeling of accomplishment at having
one less bill to pay, one less debt to tally up, etc - is
very real and can help motivate one for the rest.

But ignoring feelings and looking at numbers, says to pay off
the higher rate first.

Not everyone does that well with that. Neither can everyone
maintain the discipline to pay off his credit card each month,
either. Some folks can and some can't. For those who can't,
they need to take their own behavior and motivation into
account and recognize these things and find ways to help
themselves stay the course. If that means using a debit
card instead of a credit card, or paying off the smaller
loan rather than the higher rate loan, so bet it.




--
Plain Bread alone for e-mail, thanks. The rest gets trashed.
No HTML in E-Mail! -- http://www.expita.com/nomime.html
Are you posting responses that are easy for others to follow?
http://www.greenend.org.uk/rjk/2000/06/14/quoting

Daniel T. wrote:

- quote -

Because what counts is how much interest you've paid on your year end
statement. It's actually simpler than you are trying to make it.
$1000 on the mort, costs $45/yr, on the CC $120.
(For this exercise, let's ignore the tax implications, but in many
postings I won't). Since I'm looking at the cost per $1000, and focusing
on the rate itself, neither the total loan nor the time left on the loan
come in to the decision. In fact, with the rate on the mortgage below
current money market rates, one would not pre-pay this at all, just
build cash on the side earning more than the cost of the money.

Consider this absurd analogy - I lend you $1000, at 2% interest, the
term is 100 years, in 2107 the $1000 is due, and just the $20/yr until
then. Applying your time equation, you'd consider paying this off sooner
than the credit card debt, so long as the ($1000 x int x time) was over
$2000.

In all fairness, there are those who have a bit of a different take on
this such as Dave Ramsey, see http://www.joetaxpayer.com/dave.html for
my analysis of his approach, to choose the smaller debt first. We also
have a friendly debate here whether to invest in the stock market vs
paying down one's mortgage faster. I'm on the fence there, and still
considering both sides.
JOE

"Daniel T." <daniel_t[at]earthlink.net> writes:
- quote -

I know it *looks* like by multiplying by the number of years
remaining, you are taking time-value of money into account,
but you are not. In order for it to (better, but not perfectly)
do so, you need the same time periods. Look at it this way:

Let's look at two debts and I'm going to make up some easier
number - suppose you have a 5 yr loan at 5% and a 10 yr loan
at 3%. The sizes of the loans isn't important for the moment,
but we're going to assume you have $1000 in hand available
to pay one of them down. According to your method, paying
that $1000 on the 5yr loan will save you $50/yr for 5 yrs = $250
and on the 10 yr loan, it'd be $30/yr for 10 yrs = $300.

The thing you're ignoring is that second 5 years - by paying
down the 10 yr loan, not only are you not paying the $150
in interest in the first 5 years, but you are not paying
the $150 in interest during the second 5 years. With the
5 yr loan, you are not paying $250 during those first 5
years, but your *also* not paying any interest during those
second 5 years *either*. You cannot ignore that. So you
need to either assume that had you not paid off that first
loan, then after 5 years, you'd have had to refinance it
or borrow again and pay some interest - who knows what -
during that second 5 years. Or you have to ignore that
second five years for both the first and the second loan -
in which case, your choice isn't $250 for one or $300
for the other, but, indeed, saving $250 for one or $150
for the other.

In other words, if you compare interest over time, you need
to match the time periods one way or another. An interest
rate is a *rate* - an amount *per year*. So you have to
compare over the same number of years.

There may be other considerations (ie. cashflow, minimum
payments, liquidity, etc) but all else being equal, it's
generally going to benefit you more to pay off the highest
rate first, at least in simple dollar terms. Not the longest,
not the highest balance, but the highest rate.

- quote -

It would not. A 12% credit card versus a 4.5% loan means you
are paying more interest over any identical time period. During
year on, $1000 loan at 12% means you are paying $120 to someone,
versus paying $45 to someone. At the end of year one, regardless
of the term remaining on the loan, you have less money if you pay
the higher rate.

There may be other considerations - generally cashflow-related
ones (ie. size of minimum payment, etc) - but in general, if
you want to keep more of your money, pay the highest rate loan
off first.

--
Plain Bread alone for e-mail, thanks. The rest gets trashed.
No HTML in E-Mail! -- http://www.expita.com/nomime.html
Are you posting responses that are easy for others to follow?
http://www.greenend.org.uk/rjk/2000/06/14/quoting

joetaxpayer <joetaxpayer[at]nospam.com> wrote:
- quote -

Why? I'm just learning here. It seems to me that if putting a $1,000 on
one loan would save me $275 (assuming loan 1 is 5 years) and putting a
$1,000 on the other would save me $387 (assuming loan 2 is 10 years)
then I should put the money on the one that saves me the most...

- quote -

That would depend on how much you owe on each.

On Apr 7, 5:54 pm, BreadWithS...[at]fractious.net wrote:
- quote -

I know Elle will berate me for posting here while I should be
attending my foster son (though to be fair, he is sitting right next
to me). But when I read this, I just had to chime in.

Bread is absolutely right. The above is seriously flawed advice.
Transferring your student debt to a credit card will A) SUBSTANTIALLY
increase your interest rate and B) eliminate any possibility of
deducting the interest. That's a steep price to pay for having the
debt discharged if you have to claim bankruptcy. Claiming bankruptcy
is truly a last resort. God-willing, you'll never be in that
situation.

--Bill

"Bul thistle" <bulthistle[at]gmail.com> writes:
- quote -

And in the event that you don't declare bankruptcy (or you do
declare it but your income is high enough), not only does the
credit card debt not go away, but it's going to be at a much
higher interest rate.

This is seriously flawed advice. Do NOT do this.

If you are on the verge of bankruptcy, you need to talk to
a lawyer, not this newsgroup.

And if you are not on the verge of bankruptcy, there's no
upside to this advice.


--
Plain Bread alone for e-mail, thanks. The rest gets trashed.
No HTML in E-Mail! -- http://www.expita.com/nomime.html
Are you posting responses that are easy for others to follow?
http://www.greenend.org.uk/rjk/2000/06/14/quoting

Daniel T. wrote:

- quote -


- quote -

That logic will produce flawed results. It would suggest that a 30 yr
loan at 4.5% should be repaid faster than a 12% credit card that has a 5
year payback. If this is the only choice, pay 1 or 2 faster, I'd choose
the higher rate (ignoring the number of years left) which is the 5.49% note.

But, as others posted, I'd first ask; Does OP have a matching 401(k)? Is
she funding up to that match? Roth IRA? Then, how is the emergency fund?
While it's a great feeling to knock down debt, both lending institutions
are not likely to re-lend her the money at the same rate. It appears the
message that "debt is evil" has been well broadcast, but in my
'hierarchy of money priorities' the fast payoff of this debt isn't at
the top.

JOE

<woessner[at]gmail.com> wrote in message
news:1175953842.402436.62900[at]d57g2000hsg.googlegroups.com...
- quote -

I would agree with the above statement. Although I currently have a $5000
car loan at 2.99% myself, it's nice knowing that I have an emergency fund
sources of funds. I could use one of these funds to pay for the car now but
then I would lose of on my savings funds and then have to work to get one of
those funds back up.

If an major emergency were to arise then I would have to take funds out of a
retirement plan and that's costly tax wise and retirement plan wise.

I know I sleep much better at night paying a smaller interest car loan and
having emergency savings stashed away then having a paid off car and a lower
emergency fun

On Apr 7, 9:51 am, "woess...[at]gmail.com" <woess...[at]gmail.com> wrote:
- quote -


Let's take a different tact. Pay off by transfer to a credit card the
student loan.

In the event you get layed-off or disabled your bankruptcy will
eliminate the unsecured loan (student).

I have a client with 100k in student loans and no visible means to
ever pay it off.
Student loan system should never give these huge loans to students in
majors where salaries
are so low they will never pay them off.