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September 05, 2012

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In a case like this there is logic and there is "feelings." If I'm correct that his "feelings" are to tackle the auto loan first, I'll ask another question first:

Could it be, at the back of his mind, that "no car loan" creates the temptation to buy another car? (Many people are like this, which is why I ask.) Just asking, because it has happened before that lack of logic in one area manifests as the same lack of logic in a different, but related, area.

So step one would be to just bring it out into the open: no new car if we agree to pay off this one. Probably not a problem, but it doesn't hurt to have it out in the open, so it's not a surprise later.

That aside, I can see both sides of the coin. Yes, it's more logical to get rid of the higher interest debt first, but in the end the difference is not going to be earth shattering.

Emotions play a role in the war on debt (and it is a war). And if paying off the auto loan first gets a strong buy-in from him, strong enough to go through the tension 3 months from now when gift buying season is in full swing (and other tension generators of course) then I say go with that.

At the end of the day, unity and strength of purpose are more important and impactful than sheer logic.

Here's one of "those things" in life: perfection not required, only perseverance.

Paying debt like that takes a long time and therefore requires a lot of patience. Like William said keep your emotions in check and don't be rash with decisions as they need to be mutual.

My thoughts are to first establish your base, I.e. emergency fund and insurance policies in place. Then tackle a mixture of auto and student loan debt. Pay extra on high interest student loan and minimums on the others. Then pay extra on the auto debt at least to the point where the loan balance equals the current value of the car.

While interest is important, if you're going to pay this stuff off as quickly as you can, that becomes less of a concern. I would do the Dave Ramsey snowball. Bang out the 6K student loan in 3 months, get a win under your belt and feel like you're making progress. Then take the 2500 + the student loan payment on the 6K loan and throw it a the car every month. Probably get the car paid off in 6 more months. Now, with about 3500/month (include the car payments in the snowball) you can really get to work on the others and probably finish the two of them in about a year and half. So essentially, 2 years to be debt free. Not the worst situation in the world. Then take a few months to build your emergency fund (3-6 months living expenses) and you'll have a nice foundation.

BTW I would make sure you are married first before you combine your finances and start paying off each other's debts. Just keeps things cleaner.

In short, I would consolidate the student loans, then decide what to pay off first.

First, I would suggest that he consolidate this 3 student loans into 1 (this depends on the specific types of loans that he has, but most likely he qualifies for Federal Direct Consolidation). Consolidating the loan means you only have to deal with one payment, and the interest rate will be a weighted average of the 3 loans, so you won't be paying the higher rates that are students taking new loans today do. The process takes about 3 months (he'll need to continue making his regular payments on EACH loan until its final). There are calculators that you can use that will tell you what your monthly payments and interest rate will be BEFORE you submit your application for consolidation.

Next, you have to decide what to tackle aggressively. Given the amount of the car loan vs. the student debt. You could pay off the car first, then once its done take that $415/mo and put it towards the student loans. Also long as you two remain focused, it doesn't matter much if you focus on the car first or the student loans. But you will have a problem, if you pay off one bill and use it as an excuse to spend the money that was going toward payments instead of using it to pay down the remaining debt.

Consolidating might kill you on the fees and reduces your flexibility. If you have that much free income better to just pay them off faster, rather than consolidate. I like ryan's idea. Kill the 6k student loan for a small win and see if that inspires frugality to continue the debt reduction plan or inspires spending cuz hey, we paid off debt. Should tell you a lot if the plan will work long term.

I like the snowball idea. While interest rates are important, it is very rewarding to be able to check the box and have one loan paid off. It is also one less payment to have to remember to make, keep things simple. I keep a spreadsheet on my finances and it tells me how much I have paid off year to date (I have no credit card debt just 3 mortgage loans on two houses that I am working on). It keeps me on track with the goals that I have set for the year.

Good Luck!

I don't get why people always "knee-jerk" and say consolidate the loans... Keep them separate and either:

Pay off smallest amounts first in dave ramsey "debt snowball" emotional win style
or
Pay off highest interest rates first and get real savings when compared to consolidation.

I would follow the advice as to using the Dave Ramsey method. Paying off the 6 grand debt in the first few months will give a strong boost to motivation.

Remember that the car loan is a secured debt and if unable to pay would just result in the car being taken back. The student loan is unsecured debt and unable to discharge in bankruptcy. I would pay off my student loan first and then pay off his and finally finish paying off the car loan. I also like the snowball process and used it when paying off my debt. Remember you are not married yet and the car loan is his. That is why I would pay off my school loan first. JMO

If you're not able to consolidate the student loans and get a lower rate, I'd throw as much money as possible at the 7.34% debt and make the minimum payments on the others. Make yourselves a graph that shows total debt each month, and watch it fall over time. What matters is not so much how many individual debts you have but rather how much total debt you have, so keep your focus on that to maintain motivation. As others have clearly stated, by targeting the highest-rate debt, you'll pay off all your debt with the least amount of cash, and that's what matters. Create a plan, make a commitment, and keep your resolve.

My question is are any of these variable rate loans.

After that it is really up to you guys. The interest rate method will save you some money but if you need wins you can start with the smallest dollar amount first.

I personally wouldn't pay the car loan off first though because the interest rate is pretty low and 3.5 percent is a decent sized gap.

Does he want to pay the car off first because it is his debt and the rest is your debt? If so you guys.need to work on a team mentality.

Keep in mind that the debt snowball method does not take into account the changes that comes about with life unexpectancies. Increasing cash flow in the debt snowball MAY be used to make increased payments on other loans, but what about new expenses that will surely come about in many years to come? We are not talking about a couple debts that total up to 20 or 30K here. We are talking about 87K of mostly nondischargable debt. Debt that will take a long time to finish and surely will incur future life issues like home buying, car replacement, repairs/maintenance, accidents/injury etc.

I like the idea of creating spreadsheets that develops vision and then keeps one focused on the end goal. My favorite is the spreadsheet Leigh created in her blog "Leigh's Financial Journey" where the monthly debts are recalculated showing earlier and earlier payoff dates. That to me is a solid method for continuous motivation no matter what road blocks life brings you.

I would pay off the car loan first if he is really adamant about it. As long as you are paying off your debt early, you are doing pretty well. Or maybe pay off the 6k first and then the car loan. You guys need to learn to compromise and work together.

"in order to free up the large monthly payment"

You have $2500 dollars extra per month and he wants to free up a payment of $415?

I doubt it. Based on his car loan and his CC balances it sounds like he is a debt guy and while you have "finally" gotten him "on board" I bet he isn't as on board as you think he is. If he is truly on board then he should not be worried about freeing up a payment that is 1/6th of the free money you already have each month, and he should pay down the student loan debt first. I suspect he has other ideas for that money once it frees up.

Secondly, you are not married yet. Are your finances already combined? If so that's not great. Would you be putting money you make towards his car payment? If so that's not great. I suggest you each pay down your own debts until you are married. If they are all his that's also not great. If you pay down his debts and the marriage doesn't go through you are likely never going to get that money back. In that case I don't think you should pay down any of his debts. You can save your excess and show him how that works and then once married you can pay down a big chunk of the debt.

I know that's not the way you want to think about it but it happens.

I honestly think you probably have a spender / debtor on your hands here. They are not easy to convert. You probably still have work ahead of you on that front. Some spender / debtors can never be fully converted, they have to be managed. Prepare for that possibility.

Here's what I would do, but you will probably do neither.

1) Don't spend lots of money on the upcoming wedding and keep your honeymoon costs to the minimum.

2) Do the sensible, logical thing which is to pay off the debt in the order of highest interest rate first.

I'm not a betting man but in the end I don't think you will do either, emotions will take over.

Hi everyone thanks for the comments. Here is some more info: All of the student loans are private so I don't think they can be consolidated, but I'm not 100% sure. A lot of you are correct in thinking that he is the spender and I am the saver in the relationship. While I don't think he will want another car when the current one is paid off (he loves his car), I do have some concerns that he might want to loosen the budget a bit.

Also, we own a house together so I would say our finances are most definitely combined. We each contribute half to the household bills while he pays all his debts. We have already agreed that all of his credit cards must be paid off (by him) before the wedding.

"While I don't think he will want another car when the current one is paid off (he loves his car), I do have some concerns that he might want to loosen the budget a bit."

Some of us got that suspicion just by reading what you wrote. Given that you have that same suspicion and you know him and we don't, you have answered your question. I think you already knew this and that is why you said you are "more comfortable" paying off the student loan debt first. You didn't say you thought it was best you said you were more comfortable. Because you are not comfortable paying off the car because you already know why he wants to pay that off first. He is not truly on board with the debt plan. If you pay the car off first he will attempt to loosen the budget as you say.

He will likely always want to loosen the budget every chance he gets. As such you should pay the car off last as that one allows loosening the budget the most which is why he wants to pay it off first.

This is only half your battle by the way. If you are able to get him to actually pay this debt all down, once its paid he will want to get off the island and start spending. Converting him from paying down debt to saving will be challenge number two.

@Steph M
You should realize that the best and most long lasting marriages are between two people that are both savers. We have been happily married for 56 years and dated for 6 years prior to that, but in our generation that was quite typical. We were also both from the working class in the UK and grew up living within a mile or two of each other and emigrated 3 months after our marriage. Marriage for us has been a real team experience since our personal skills complement each others perfectly. In our case, all of our relatives lived thousands of miles away so we had no choice but to become very dependent upon each other.

I wonder if decades from now you will be able to look back and feel that your upcoming marriage was the best decision that you ever made. It needs to be since divorces can be very expensive and very damaging emotionally.

I know you specify the loans above, but what is the balance of the credit cards? To me, that is an important part of this story.

Also, if he doesn't clear out his credit card debts by next year, are you willing to postpone the wedding?

My fiance and I are in a similar debt and extra money situation. We put together all of the debts in a debt reduction calculator excel sheet I found here: http://www.vertex42.com/Calculators/debt-reduction-calculator.html. It allowed us to put all of our debts in the sheet and experiment with different orders of repayment as well as snowball and "snow flake" payments such as tax refunds or bonuses. The sheet does a great job showing the repayment timeline and the total interest cost of the different options.

We are both engineers, so seeing the results of the different payment options really helped. I am guessing seeing the additional interest payments will help you make your case.

@Apex- My fiance and I discussed paying off our car loan (biggest monthly payment) to free up cash flow despite and extra monthly $2k as a way to have extra security in case of a job loss or a drop in commissions. Steph's fiance may be looking at it from that standpoint as opposed to being a horrible debt enthusiastic consumerist spender as you implied.

The process of learning to deal with money improves with maturity and I think we should be supportive of these two learning how to work things out and make decisions together, rather than warn Steph away from bettering their financial situation ASAP and implying she is about to marry a financial hazard. People can change and I have found most financial mistakes are made out of ignorance (lack of information or clarity of view point) not stupidity (low IQ or psychological predisposition).

@Werty

"The process of learning to deal with money improves with maturity"

I think this can be the case but for a large portion of America, they never learn how to manage their money. This may be due to not maturing, but I believe it's more of a case of "I want this or that and you can't tell me otherwise". If the average non-mortgage debt of an American is between $15-20K, does that mean that we as a country are not maturing?

I think Apex is correct in warning Steph that this situation may never get better. I also agree that combining finances and buying a house before getting married is a bad idea. If the marriage is called off, she is on the hook for half of the house.

Another detail missing from this story is the age of Steph and her fiance. If they are 23 vs 33 vs 43, I believe the answers from everyone here could change drastically.

@Werty,

You have ascribed a number of judgements to me about Steph's fiance that I did not make. I never said he was horrible as you used in describing what I said. I also never said she was about to marry a financial hazard nor did I in any way imply he was stupid.

I did make judgements about him based on guesses about his behavior, not his character or his motives. It appears based on Steph's comment that my guesses were fairly accurate.

Trying to free up extra cash flow as an extra safety measure is valid but I said I doubted that was the case and after Steph's comment's it is pretty clear that she doubts it too.

While your situation is similar you should not assume that my comments apply to everyone in that situation. They were directed specifically at Steph's situation based on clues I gleaned from what she wrote.

The question posed is basically asking which debt to pay off first. He wants to pay off the car and she wants to pay off high interest student loan. Theres 2 schools of thought on this and I don't think either is 'right' overall. Paying the highest interest rate loan first will of course save some interest. Paying the smaller balance loans will free up more cash flow and give you you some positive reward by hitting a intermediate goal. Paying off the car first versus the 7% student loan will end up with about $300 difference in interest over a year. That assumes you put all $2000 excess towards one or the other. You can tell your fiance that it will cost $300 more in interest, maybe that will change his mind. If not, then step back and let him pay off his loans the way he feels best. That will help keep him onboard with the idea. You can point out that paying higher interest debt first will save money overall. If he still wants to go the other way then thats his choice.

I do have to concede that financial compatibility is important in marriage but there are a million other factors involved. I think with some of these comments I have to remember that this is a finance blog not a relationship blog :)
I also want to clarify our reasoning-
I say that I am more comfortable paying down the student loans first because I feel like I am directly benefiting from that (in the form of his income).
He wants to pay off the car first for cash flow purposes. Once the car is paid off, we could live off of either his or my salary in the event one of us loses our job. When I said loosen the budget I meant things like dine out a little more or go to happy hour on occasion (I know- still bad)
To answer some questions: I am 24, he is 27. His credit card debt is around $6k, about half is my ring (can’t wait for the commentary on that). He gives me periodic updates on his progress. He will get a second job if something unexpected derails the plan.

If you have a budget of $2K-$2.5K for your debt payment each month, I would suggest that you pay off the $6K student loan at 6.6% first. You should be able to pay it off in 3-4 months, while paying the car loan at its minimum. Within that time frame, you have taken off one debt on your list. Following the snowball effect, use the same amount to pay off your car loan. If you do this, you should be able to pay it off within 7-8 months. In less than a year, you have paid off two of your debts. Continue rolling off your budget to pay off the next loan and you will be free from debt within the next 3 years.

Snowball the debts as Ryan detailed in the third comment. We did this to pay off our debts and the momentum you gain is amazing. Good luck!

@ Cherleen

2k per month times 3 years is 72k.... not the 87K + interest needed to be free from debt, add in credit cards and wedding costs.

I recommend getting a joint account and volunteer yourself to become the accountant of the family. You give him the allowances to keep him happy and you control debt repayment strategies to keep yourself happy, issue solved.

6K for diamond ring is not bad. Keep the costs of the wedding is in moderation for better or for worse. Good luck.

@Luis

She said half of the $6K was for the ring, so that's very reasonable nowadays :)

Personally, I would pay off the 6k loan and then the car. If you're able to put 2k - 2.5k each month towards those debts, you could have them both paid off in a year.

You mentioned that you've got your FI "on track" for paying down debt, and that's great! Do you feel he has really changed his spending habits as well so you can avoid getting in debt again?

In terms of his possible desire to loosen the budget, I would recommend setting a specific reward for paying off each loan. It's much easier to control that when you say something like "When we pay off the car loan, we'll go out to a great dinner at XYZ" as opposed to just eating up the new "extra" in the monthly budget.

Wait a second... who do the student loans belong to? How much income do each of you make?


@jim All the loans are his. I make $47k, he makes $65k now (just got promoted)

OK, I had assumed it was all his debt from the start, and you didn't imply otherwise. I just wanted to make sure.

I think your fiance's idea about paying off the car loan to have the cash flow down so you could live off one of two incomes is a smart thing to consider. What happens if one of you loses your job? How would the two of you pay your bills? With the car loan paid off you could do so and wouldn't risk losing the car in the process. They can't repossess your education.

What do you mean by : "I say that I am more comfortable paying down the student loans first because I feel like I am directly benefiting from that (in the form of his income). "

How are you directly benefiting from him paying off his student loans that you wouldn't benefit from him paying off his car loan?

As these student loans make up the bulk of your overall debt – a grand total of 67k, not including the combined high interest rates compared to that which comes with the car loan – it would be a good idea to prioritize student loan payments. What would otherwise go to interest can be channeled towards savings that can eventually help you cover any emergency expenses and/or help you eke away at your car loan after you’ve paid off your student loans. Although it may seem to take a huge weight off your shoulders to clear up the car loan and thus check one loan off as “done,” you’ll probably end up saving more money if you fix the said student loan issue first via a consolidation loan that also comes with reduced interest.

Just my two cents worth. Best of luck to you both.

Give up the car. It's killing his finances.

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