Please help me decide which debt to pay off first

[richmond282]

Correct me if I'm wrong, but aren't car loans like mortgages in that you pay more interest/ less principal in the first bit of the loan and then towards the end you're paying more principal/ less interest?

I don't think you are going to save that much if anything by paying off the car loan first b/c you have already paid most of the interest anyway. Pay off the credit card.

 

[mistysue]

richmond282 - The idea of paying more interest up front and less later on is because they are charging interest on your remaining balance. Maybe there are exceptions (I've never seen any personally, but I guess early pay off fees would be one) but you aren't contracted to pay X amount of interest on the car loan. If your balance is $10K, you pay interest on that. If it is $5K you pay interest on that smaller amount, (and you pay half as much interest). Paying down the car loan makes the interest amount go down too, which is why your interest amount of the payment goes down over the life of the loan.
This is also true with a mortgage. It isn't that you paid that interest early (unless you paid points, which are silly if you ever pay anything early) it is that there is that much more balance for them to charge interest on. For the first couple years I rounded up my mortgage payments to the next hundred and paid two to three times/month rather than monthly (as in paying 1/2 or 1/3 of the payment, not making 2-3 whole payments) and at the five year mark I was over $2,000 ahead of schedule. It cost me about $500 to get $1500 off... If I keep doing this I will pay off my mortgage YEARS early. It isn't that I paid that same amount earlier, it is that they won't charge me all that interest. You might want to look into any loans you have if you have been taking this not pay early b/c there is more interest at the front end approach to finances. It might save you a lot in the end. I will get about 5 years of no mortgage from it...

 

[wdwfan16]

WRT the CC and skyrocketing interest rates. Didn't the new federal rules just go into effect so that you can't go from 1% to 29.99% in one step? I thought it was this month.

 

[TxRabbit]

You need to discover the amortization schedule for the car loan. If you accelerate repayment of your car loan, you may not reduce the amount of interest paid.

Some car loans are similar to a mortgage, in which case, the PP post describing how you can pay it off sooner and save interest is accurate.

Some car loans adhere to the rule of 7/8s, which is how my mother described it, I'm not sure what that means. But I can describe what the effect is. Basically, the interest for your loan is calculated at inception and the pay back schedule is figured out, just like a mortgage. However, should you request a payoff amount, you will be paying off the same amount that you would have paid off, had you simply continued with the original payment schedule. You will not save any interest, and the financing entity will not lose any interest in an early payoff. It is the reason why so many car loans can be written at low interest rate financing, because the financer is guaranteed to get all their interest regardless of payback schedule.

On the other hand, paying down the balance on a credit card can save you a significant amount of interest because finance charges are calculated monthly based on remaining balance.

If your car loan is written to adhere to the rule of 7/8s, then paying it off early will not save you any money. You should pay off the credit card first. If it isn't written that way, and interest is calculated monthly, then paying if off first will save you more in interest than paying off the credit card.

 

[Stacy's a freak]

Another vote for pay off of the CC first. I agree with the previous posters who said that you've already paid the interest on that car loan (essentially) and that interest is still accruing on your CC.

But another thing to think about is your FICO score. This score is based upon your entire financial portfolio and it likes to see several types of debt. Ideally you have a mortgage loan, a car loan, and some type of line of credit/credit card with a relatively small balance-to-credit limit. If you pay off your car loan, you eliminate that "good" debt and you throw off the FICO calculation a bit. I learned this the hard way. I have good credit and just before I paid off my old car loan I had a FICO score of about 780. As soon as my car loan was paid off, my FICO scored fell to about 740. Nothing else changed ...

Just a word of warning if you are watching your FICO score. HTH!

 

[richmond282]

You need to discover the amortization schedule for the car loan. If you accelerate repayment of your car loan, you may not reduce the amount of interest paid.

Some car loans are similar to a mortgage, in which case, the PP post describing how you can pay it off sooner and save interest is accurate.

Some car loans adhere to the rule of 7/8s, which is how my mother described it, I'm not sure what that means. But I can describe what the effect is. Basically, the interest for your loan is calculated at inception and the pay back schedule is figured out, just like a mortgage. However, should you request a payoff amount, you will be paying off the same amount that you would have paid off, had you simply continued with the original payment schedule. You will not save any interest, and the financing entity will not lose any interest in an early payoff. It is the reason why so many car loans can be written at low interest rate financing, because the financer is guaranteed to get all their interest regardless of payback schedule.

On the other hand, paying down the balance on a credit card can save you a significant amount of interest because finance charges are calculated monthly based on remaining balance.

If your car loan is written to adhere to the rule of 7/8s, then paying it off early will not save you any money. You should pay off the credit card first. If it isn't written that way, and interest is calculated monthly, then paying if off first will save you more in interest than paying off the credit card.

Tanks for this explanation. I knew my car loan interest didn't work like a credit card's interest.

 

[riley2008]

I didn't think that car loans worked that way anymore.

Has ANYONE had one like that in the last 10-15 years? I just called a friend who is a bank officer and she said she hadn't seen that since the early 80's.

 

[TxRabbit]

I didn't think that car loans worked that way anymore.

Has ANYONE had one like that in the last 10-15 years? I just called a friend who is a bank officer and she said she hadn't seen that since the early 80's.

It varies. They may not be common in all areas, but they exist. It's something to research before making a decision like the OP is asking about.