Which option would be smarter?

[live-n-learn]

Hello,

I have an opportunity to pay off a good amount of debt.  I'm trying to decide the right move to make.  I have a consolidation loan  and a car loan.  The consolidation loan is for a larger amount at a higher interest rate.  I could either pay off my car loan in full or pay down my consolidation loan significantly and the try to refinance the remainder to get a smaller monthly payment.

I'm trying to decide what would be a smarter move.  Pay off the consolidation loan and refi., or pay off my car loan and then  apply those monthly payments towards my consolidation loan?

Thanks in advance for any advice.

[JM427]

@live-n-learn Conventional wisdom says to tackle the highest interest first.  The other approach is snowballing, in that case you would pay off the car, then take the normal car payment amount and apply it to the principal along with your normal payment on the consolidation loan.  It is hard to say which is the better approach without modeling each scenario.  If you would care to list out the current balances, interest amount, monthly payment, and remaining term for each loan, along with the cash proceeds available to apply immediately, I can run each scenario for you and tell you the outcome.

[live-n-learn]

Auto Loan

  38K balance @ 3.99%  / 39 months left

Consolidation Loan

56k balance @ 9%  / 51 months left

40k available 

[JM427]

@live-n-learn What is the payment amount for each loan, and the original loan term length for each so I can configure the loan model.

[JM427]

Okay, I approximated the loan terms and original balance to arrive at remaining balance, so if my approximation is grossly incorrect then it could change the outcome.  I assumed the car original loan amount to be ~55K @ 3.99% for 72 months, and the Consolidation to be ~64K @ 9% for 60 months

Scenario 1 - Pay 40K to the Consolidation loan, then make normal payments on both loans until the consolidation loan is paid, at chich time you apply the normal consolidation loan payment as an extra payment on the car loan.  Original cost of loans if paid as scheduled, Car $6,937, and Consolidation $15,712.  New cost for this scenario - Car $5,834 and Consolidation $5,261.  This has the Car paid off in 10/2024, and the consolidation in 9/2023

Scenario 2 - Pay 38K to pay off car, and Pay 2K on Consolidation, then make extra payment each month to principal of consolidation equal to normal car payment.  Original cost of loans if paid as scheduled, Car $6,937, and Consolidation $15,712.  New cost for this scenario - Car $3,751 and Consolidation $10,266.  This has the Car paid off in 8/2022, and the consolidation in 11/2024

As you can see in the scenario, the smart choice is to knock the consolidation loan down as low as possible, then pay it out and snowball the car once it is paid off.  Hope this helps.  If my assumptions are grossly off I can remodel if you provide the information.

[SouthJamaica]

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@live-n-learn wrote:

Auto Loan

  38K balance @ 3.99%  / 39 months left

Consolidation Loan

56k balance @ 9%  / 51 months left

40k available 

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I would concentrate on getting rid of the consolidation loan

[live-n-learn]

Thanks for the advice.  Honestly I didn't have all of the data at the time I posted the question.  It's not my personal situation.  I wanted to get more input to make sure I was giving good advice to someone else.  I too thought it would be better to bring down the consolidation loan because of the higher interest rate but wasn't sure if knocking out an entire car loan would make better sense since they have enough money to do so.

thanks.

[babygirl1256]

@live-n-learn I would eliminate the consolidation loan first since you are paying a higher %. Best wishes!!!

[calisig]

Assuming the consolidation loan is still fairly new, (ie. you haven't paid much of the interest yet if it's an ammortorized loan), or especially if it is a more simple interest calculated loan, I would always pay down the higher interest rate loan first. But it depends on your goal; mine is usually to save interest. So my vote goes for paying down the consolidation loan.

Also, 3.99% interest isn't bad for the car loan - especially now that inflation is higher than the 9.5% i think they admit to. With that in mind, I would pay the auto loan as slowly as possible so as to pay it back with cheaper dollars.

good luck