To save or pay down debt?

[PrincessFiona]

Oh wise ones ... what say you? DH and I are in a little battle about how best to handle this. We accumulated a small amount of debt (already a done deal, so even though it would be great if we hadn't gotten it ... we do). We are aggressively paying it down. My van has 202,000 miles on it though and is on borrowed time. I feel like we should pay down the debt less aggressively and put some cash aside for the inevitable. DH disagrees. He feels like we just need to focus on the debt. His argument? Why save money when you are paying interest on debt. I get that it makes little logical sense, but at the same time, we have exhausted our resources for another vehicle. This makes me very nervous.

Would you 1. pay off debt and take the car's death as it comes?
2. pay off less debt but put some aside for the new car too?

Saying don't go into debt isn't the answer. Done deal.

Kris

[Meenah]

What is the interest rate on the debt, and what would the interest rate be on a new car loan? Also, what is the interest rate on savings?

[HouseofWool]

I guess it really depends. Personally, I would pay off debt, but save a bit as well.

If you are currently paying 50% more into debt repayment than you have to, I would reduce it a bit and put the difference into savings.

[spaz]

Yes, I think it would depend on the interest rates on all of those things. Do you have an emergency fund of at least say 1,500 dollars somewhere? If so, then I am with your husband and would pay off the debt as quickly as possible. If you car breaks down, then you fix it with what is in the emergency fund. Once the debt is paid, then you save for a substantial downpayment.

Once you get your next car paid for, keep making care payment into the savings account. We have 30,000 in the car fund right now that we keep adding to each month. We haven't had a car payment for at least a decade. We keep adding because middle one is going to need a car at some point. Plus both my car and hubbies car have over 125,000 miles. They are running fine,however. Hopefully we won't need to buy one for another 3 or 4 years.

[SuzySunshine]

Yes, interest rates are key.

[Pollyanna]

I know the correct and logical answer is to strictly pay down the debt. BUT, there is something to be said for piece of mind. I would likely still aggressively pay down the debt but at the same time take a little of that money and set it aside for a new car and at the same time review your insurances (auto/home/liability) and see if you can save money there. If you can add that to the car fund.

This will not be the correct answer but I think it can be an answer that provides a win win for you and your hubby.

[Vishenka69]

If you're pretty certain that the new car loan would be at a lower rate than your current debt, then 1. If not, then 2.

[SoonerTexan]

I agree with comparing the interest rates

Small hijack: I've thought about this some too from our own situation. Assuming we stay, we will have extra income to start paying down debt. The car loan is 3.9% and the student loans will be 6.8% (ugh). In theory, it makes sense to go after the student loans first, but the fact that those can go into forbearance or be paid off over a much longer period of time makes me more comfortable with paying off the car, which is due when it's due for X amount no matter what.

Even though it might not be the 100% textbook answer, I sort of feel like I want to build a pretty large nest egg in advance of foreseen (fellowship interviewing, boards, etc.) expenses and unforeseen expenses til we finish training. My worry is once X student loan is paid off, it's gone, I cant re-borrow, and if I've spent all my cash/savings paying off loans, my only option is credit cards or private loans, which will be a lot worse interest rate-wise. Thoughts?

I need to start another thread on paying off student loans. So many questions. I don't know what our options are. (though thank you Scrub-Jay for your recent insight)

[MsSassyBaskets]

Agree with the others that it's all about the interest rates... my last car loan had 0.9% interest. If possible, don't wait until your van dies and you have to rush out and buy a car right away. Take some time to look at what deals are out there, and if you do end up financing give yourself time to find the best rate. Panic-purchasing a car is going to lose you more money than anything.

[OrionGrad]

I agree with comparing the interest rates

Small hijack: I've thought about this some too from our own situation. Assuming we stay, we will have extra income to start paying down debt. The car loan is 3.9% and the student loans will be 6.8% (ugh). In theory, it makes sense to go after the student loans first, but the fact that those can go into forbearance or be paid off over a much longer period of time makes me more comfortable with paying off the car, which is due when it's due for X amount no matter what.

Even though it might not be the 100% textbook answer, I sort of feel like I want to build a pretty large nest egg in advance of foreseen (fellowship interviewing, boards, etc.) expenses and unforeseen expenses til we finish training. My worry is once X student loan is paid off, it's gone, I cant re-borrow, and if I've spent all my cash/savings paying off loans, my only option is credit cards or private loans, which will be a lot worse interest rate-wise. Thoughts?

I need to start another thread on paying off student loans. So many questions. I don't know what our options are. (though thank you Scrub-Jay for your recent insight)

I hope I don't get stoned for saying this, but we did something very similar recently. I paid off a smaller loan from DH's med school in full even though the interest rate was lower than his 6.8% fed student loan. I realize that logically we should have put the money toward the higher interest rate, but emotionally it was just nice to see the first loan completely knocked out.

[SuzySunshine]

I hope I don't get stoned for saying this, but we did something very similar recently. I paid off a smaller loan from DH's med school in full even though the interest rate was lower than his 6.8% fed student loan. I realize that logically we should have put the money toward the higher interest rate, but emotionally it was just nice to see the first loan completely knocked out.

That's not a bad thing - in fact Dave Ramsey says for the emotional response that is not a bad thing at all. He would say then you take the money you were putting toward that one and add it to what you were already paying on the next biggest rate one.

[ides]

ST- Dh and I add an additional factor to consider. We have saved an emergency fund, then we are paying off a high rate but smaller student loan then we are paying down the house before the big ass student loan. Our reason: if things go sideways it's better to own your house and/or car than not and loose those but have less student debt.

Re: the thread question- I would probably do what Pollyanna is suggesting. You know you will need a newer car soon so you should start preparing.

There is nothing easy about juggling financial needs.

[Meenah]

Pay first what can be taken away!!!! When things were really lean we always paid what could be taken away or shut off first!!!!

[PrincessFiona]

Hmm. I think the percentage would probably be a wash I guess. I think that I have this psychological thing about car loans. We bought this van outright years ago without having to make a payment and it just felt so good. I was sort of hoping to do it again, but we just made different financial choices. At the end of the day, I think DH is probably right (crap!). I definitely lean towards making emotional financial decisions.

[SuzySunshine]

You might also be able to get a 0% loan though if you buy new - keep an eye on that. Both of my last two cars have had payments but they are/were 0% loans so we didn't really consider it debt even though we know technically it is.