Card Payments vs. Auto Loan

[Biffman49]

Hi all,

I posted this in the "rebuilding credit" section, but I actually think it's better suited to this forum. 

Hoping for a little guidance. I'm in the process of refinancing my auto loan with a local credit union that will bring my interest rate from 10.45% to 4.99%. This means that I can keep the same length of the loan and lower my payments by about $50/month, decrease the term of the loan by 8 months while keeping my payment the same, or extend the loan 9 months while dropping my payment by $100/month.

The rub is that I have some credit card debt that I really need to tackle, so that extra $100/month would be very useful for helping to pay that debt off. My thinking is that because the interest rate on the auto loan is way lower than the interest rate on the credit cards, I should take the longer loan period and use the $100/month savings to help pay off credit card debt faster.

I don't like the idea of extending my auto loan an additional 9 months, but my credit/debt limits are my biggest ding against my score at the moment, so paying off my credit cards quicker would allow me to earn a better credit rating even faster. Additionally, from the auto payment calculator on my credit union website, extending the payments by 9 months means I'll pay about $800 more in interest over the life of the loan than if I reduce the length of term by 8 months. Either way, I'm paying a lot less in interest than I am today, I'm just trying to figure out how to make this as advantageous as possible.

Can anyone provide advice/opinion as to whether or not this plan seems like a good course of action? Thanks!!

[parakleet]

Can't you just apply that extra $100/mo to your CC debt and once you finish paying off your CC, apply the same $100 back into the car loan? That way, even though you took the longer term, you could pay off earlier by paying more than required.

[Biffman49]

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@parakleet wrote:

Can't you just apply that extra $100/mo to your CC debt and once you finish paying off your CC, apply the same $100 back into the car loan? That way, even though you took the longer term, you could pay off earlier by paying more than required.

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Thanks for the reply - It's possible that would work. Based on a payment plan I came up with today, however, it would take me just shy of two years to pay off all my CC debt. At that point, I'll still have a number of years left on the auto loan, so I could put it back into the car. I'm not sure however, if that would balance it back into my favor, or if I'd still be behind. 

It's probable, in an event, that I won't hold onto this car long enough to pay it off entirely, so that may factor in as well.

[coldnmn]

The extra interest you would pay on credit cards by paying your car off earlier, that money will be gone. By paying less interest and paying off the principal debts money in your pocket. The key keeping your cards paid off and not racking up more debt. As the previous poster said once the cards are paid make larger payments to your car. You could pay more then $100 extra with the cards paid off. It would be a win all the way around just my opinion.

[Biffman49]

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@coldnmn wrote:

The extra interest you would pay on credit cards by paying your car off earlier, that money will be gone. By paying less interest and paying off the principal debts money in your pocket. The key keeping your cards paid off and not racking up more debt. As the previous poster said once the cards are paid make larger payments to your car. You could pay more then $100 extra with the cards paid off. It would be a win all the way around just my opinion.

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Yeah, that's pretty much what I'm thinking - by freeing up the cash now (while still paying a much lower rate of interest - ~5.46% less) to pay down my credit cards, I can pay them off, and then put the money that I was paying cards with into the vehicle and get that paid off. 

Thanks for the help everyone, I think I have a course of action. Thanks!

[maiden_girl]

Debt consolidation loan?

[Biffman49]

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@maiden_girl wrote:

Debt consolidation loan?

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No - my local Credit Union is running a "special" (their words, not mine) with really low interest rates on auto financing. They're willing to let me re-finance my loan down to a 4.99% rate. I am currently paying 10.45% with Carmax.