Money and Finance Because you have to save money to spend it on new paintball stuff!

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Old 01-03-2014, 06:04 PM   #1 (permalink)
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Loan or Line of Credit-which to pay off first?

I'm slowly working my way out of the financial hole I put myself in a few years ago-between school, unexpected job changes and a lot of stupid, irresponsible spending, I've amassed a loan of about $9,500 and a line of credit for around $10,000.

Fortunately, I've got my **** together a bit now, and I'm slowly chewing through both.

Right now, the line of credit stands at about $8500/$10000 and the loan at $3600/$9500. Monthly payment on the loan is about $235, and has 17 months left. Interest on the loan is 8.99, LOC is prime + 3% (About 6% right now).

My question is, assuming I want to keep my credit card empty, plus at least $1000 on the LOC for emergency expenses, should I put any extra money on the LOC or the bike loan? Straight math leads me to the bike loan-it's a higher interest rate, and getting a monthly payment off gives me a lot more financial freedom. However, from a credit score POV, I've always heard that keeping a loan open longer and always making the payment on time, and keeping any more liquid borrowing assets below 50% is better.

So, thoughts? Depending on how quickly I get working after school, I can either have the bike loan paid off before summer, if I dump all extra income on it, or I can leave it to carry out until next June and have the LOC paid off before the fall. Which method is the best bet?
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Old 01-03-2014, 06:11 PM   #2 (permalink)
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I would do the higher interest loan first. If your credit score is decent you are not going to hurt it too much by paying off a loan.
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Old 01-03-2014, 08:07 PM   #3 (permalink)
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Originally Posted by The Flounder View Post
I would do the higher interest loan first. If your credit score is decent you are not going to hurt it too much by paying off a loan.
I agree, 2 things to look at:

1. highest interest rate

2. cash flow, sometimes paying off a loan with a small balance and a larger payment is better. Paying off the smaller loan will free up $235 that you can either save or apply to the LOC

What is the payment on the LOC?

Another option my be to payoff the bike and use the bike as collateral (depending on what it is worth) to pay off the LOC, assuming you can get a better rate.

IMHO, for the size of your loans, the difference in interest rates is pretty minimal.

What are your credit scores? If you are trying to build credit, what are you paying monthly besides the LOC and the bike. It may be a good idea to keep both.
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Old 01-03-2014, 08:32 PM   #4 (permalink)
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Pay off the one with the highest interest rate first and make minimum payments (at the least, so you don't wreck your credit) on the other one.

Or, take $1500 more out of your line of credit (max it to $10,000), and put that towards the loan so you only have $2100 left to pay on it. Then pay off the Loan because it has the highest rate of interest and then tackle the line of credit.
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Old 01-04-2014, 04:07 PM   #5 (permalink)
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Originally Posted by The Flounder View Post
I would do the higher interest loan first. If your credit score is decent you are not going to hurt it too much by paying off a loan.
Always pay off the highest interest first, makes life much easier.
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Old 01-04-2014, 04:22 PM   #6 (permalink)
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The loan is both higher interest and a lower amount kill it first there's no reason to let it run to term.

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Old 01-04-2014, 05:43 PM   #7 (permalink)
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There are two ways to consider paying off loans. One of them makes sense financially and one of them gives you a psychological benefit.

The first is to pay off the highest interest loans first. Make min. payments on everything and direct any excess payments to the highest interest rate. In the long term paying less interest means you pay less money.

The second is to pay off the lowest debt first. This allows you to see progress more readily and keeps you psychologically on the program. As you pay off one debt you roll that payment into the next lowest one so by the time you get to the largest debt its the last one and you are making large payments on it. This is, I believe, the basis of Dave Ramsey's debt snowball.

If you are going to succeed the first makes most sense. If you question your ability to stay with your plan the second seems to give the most motivation. In your case its a moot point because the highest interest rate is also the smallest balance. Pay it off first.
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Old 01-04-2014, 06:30 PM   #8 (permalink)
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Loh is right about the snowball. How much are you putting into payments per month?
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Old 01-04-2014, 07:52 PM   #9 (permalink)
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Pay off the line of Credit. I am assuming that the Loan has a fixed value and regardless if you pay it off faster or not it will still cost you the same in the end.

One very good option is sell the bike and put it money on one of the debts. It's only going down in value anyway being a vehicle/toy.
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