Tag Archives: Debt

Should You Pay Off the Car Loan Early?

My son recently bought a car of his own so he can use it when he goes to Rutgers University. The journey began earlier in the summer when he starts hunting for his perfect car. But I brought him down to earth by explaining the process especially applying for an auto loan.

So he started applying for a pre-approval loan through several banks and he was rejected because of his lack of credit history. One bank approved a loan under pre-condition with high interest rate. He was shocked of how difficult it was to buy a car.

I stepped in and helped him to get the loan from the car manufacturer using co-signing. We were able to get the loan with low interest rate. We were quite happy with the loan condition because of low monthly payment and there is no penalty for paying off early. The car dealership finance manager asked if we plan to pay the loan off early. That is a very good question of which I’ve thought of when I had two car loans prior to this.

There are pros and cons when it comes to paying off loan early. The obvious pro is that you get to be debt free early. This is especially true for someone who hates to carry a debt. But that does not mean that you will be totally debt free because everyone carries other debts (i.e. mortgages, credit cards etc.). Another benefit of paying off the car early is that you get to own the car early and you are not required to have a comprehensive full insurance coverage, which is an added saving.

Other Obligations

Let’s address the elephant in the room. The car payment is big chunk of anyone’s budget. Besides our daily obligations such as grocery bill and fixed cost, car payments can be a big portion ofour our monthly expenses because of the condition of the loan. Unlike a mortgage which could be 15 to 30 years loan, auto loan is usually 5 or 6 years loan. That means that monthly payment could be high depending on how much you are borrowing.

You can opt to pay more every month so you can pay off the loan early. A mortgage will reduce its monthly payment when you pay more upfront. BuyAuto loan is fixed every month regardless how much you pay more. The only benefit is that it will reduce the period of repayment by several months. So paying more every month will not likely to make a dent on your monthly obligations.

Affordability

Before going through this point, everyone should ask the question why would they need to have a new car on their driveways. Cars today rarely break down. The quality of the cars have improved dramatically that most will last 10 years before breaking down. Are you ready to absorb another cost when the benefits of owning a car rarely outweighs the costs?

If you can afford to pay for the car then the answer to paying off early makes sense. It is highly recommended that you make a proper budget to ensure you can afford the car payment. Once you are aware that you can afford an extra payment, paying more on the principal will help. However, as I alluded to above it will hardly make a difference in the long run unless you pay extra every month.

The Return

My son was able to get a good rate on the car loan. After paying off the loan in 72 months, it will only cost him $1,500 for the entire loan. If he pays off the loan early, it may lower the cost by a few hundred of dollars. However, he could repurpose the money for something more beneficial. For example, if he invest the $7,200 (assuming that he pays $300 every month for the next 2 years) with an average monthly return of 12%, he would have made a profit of about $2,000 by the end of second year. Obviously this is being optimistic but history shows that it is possible to obtain 10% return annually based on conservative stocks. Keeping the money in investment will continue to grow year on year.

However, if you have a high interest auto loan then it may makes sense to pay off the loan early. This should only be done if you can actually afford to forgo the money otherwise that you can use it for something else. Another option to minimize the cost of the loan is by taking a personal loan from a bank with lower interest rates.

Everyone’s financial situation is different. Paying off the auto loan early may make sense if you have a large outstanding debt or if you have the means to do so. It is important to consider if paying off would benefit in the long run. The best way to manage any auto loan is simply not to have it. If you can continue to use your existing car for a few more years there is no reason to obtain a shiny new car with a large price tag.

How Do You Become Debt Free from Credit Cards

Getting in debt is as common as getting a cup of coffee in today’s modern world. The debt that most people incur continue to be increase at a faster rate that the money that they can bring it. The end results is personal bankruptcy is on the rise, especially in difficult times like these as more people are borrowing more on credit.

Increase in debt can be attributed to several factors. If we dig deeper we can all point out to the creation of credit cards as the major factor. Credit cards was introduced by Diners’ Club in the 1950. The premise of credit card is it allows consumers to purchase items by borrowing short term from the issuer of the cards with the agreement to repay back in the near future.

Most adult consumers today have at least 3 or more credit cards. If each card carries a credit limit of $5,000, a person can easily be in $15,000 debt or more easily in a very short time. The major problem with credit cards are that they allow the borrowers to carry forward the balance to future dates as long as the borrower continue to pay a minimum balance every month. The interests that credit card carry is usually high and the more the person borrow the more the person will have to pay in the future due to compounding interests.

As more and more adults continue to borrow from credit cards, the likelihood for the borrowers to pay off the debt becomes more and more difficult. This post is to touch on several strategies on how to become debt free. There are a lot of articles out there describing how one can be completely debt free in a very short time. However, I can tell you from first hand experience that this is close to impossible unless you are very discipline in your expenses.

I remember when my son was growing up he told me that we will never borrow money from the banks and will be debt free forever. In an ideal world this is possible. However, in today’s modern world, being totally debt free is a dream. Regardless how well we plan our finance, carrying certain debt is unavoidable. The question is how do we control our debt before it becomes out of control.

Get to Know Your Own Finance

Before we incur any debt, you need to be aware of your current finance. That includes if you have any outstanding debt, your current income and if you have any disposable income. Based on you current asset, you can easily determine if you are able to purchase the shiny new car you always dream off or if you can treat yourself to a vacation in the Caribbean. One way to find out if you can afford to make such purchase is by doing a detail monthly budget. Keep in mind that it is a budget and it should be used as a guide. My past experience showed that budgeting rarely work because there is always unforeseen circumstances that make sticking to the budget impossible.

Pay Off Credit Card First

Credit card debt is considered short term debt; mortgages and car payments are considered long term debt. Long term debt must always be paid off first; any leftover money that you have should go to credit card debt because they have high interest rates. The longer the debt the more expensive it is. To prevent from incurring any more debt, I recommend that you place the credit card with the highest balance in the drawer so you are not tempted to use it again. Once you finish paying off one card, continue paying off another card using the same strategy.

Consolidate Balance

One other option to managing paying off credit card is by consolidating the balances of the credit cards into one. You may consider using some of the debt consolidation services available online. Some do carry some fees so it is important to do some research and try to understand the terms and conditions. Consolidating the debt in one account allow paying off the credit card manageable. Some services allow you to negotiate a lower interest rates depending on your credit history. This will allow you to save thousands of dollars in the long run.

Use Cash Only

Credit cards are necessary evil. They are convenient especially for emergency use or if you need to purchase something very expensive. However, more and more people use credit cards to make all purchases; carrying cash around is no longer a practice. Using cash allow us to limit our purchase because we can tell how much cash we have and if we are able to afford the purchase.

Cancel the Credit Cards

Don’t be tempted by all the freebies or low interest rates that credit cards offer. They are designed to entice consumers to open an account. Instead of opening more credit card accounts, you should close or cancel the accounts as soon as you pay off the debt. Keep only one or two the most for any purchase that require a credit card. The added benefit is it allows managing monthly payment easier too.

There are a lot of apps out there which will help you manage your finance and expenses. However, I find that most require personal information and require a considerable amount of time to manage all the inputs. While they may help, I believe the time investment is too high to worth the effort.

There is no real magic bullets when it comes to managing finance. Reducing debt simply falls into two main categories, avoid temptation and be discipline in paying any outstanding debt as soon as possible.

Do These 5 Things to Ensure You Don’t Get into Debt

For the last several decades the rates of Americans become more in debt have increased dramatically. With the creation of plastic money (credit cards) the debt ratio continue to climb higher year on year. The pandemic also accelerated a lot of consumers who continue to spend on credit to seek relief from the unfortunate worldwide event.

I remembered one proverb that my mom told me when I was in my teens. I’m not sure if this is a Chinese proverb but it definitely applies to getting into debt and how to get rid of debt. It goes like this: “It takes 3 days to learn bad behavior but it takes 3 years to learn how not to be bad.” Debt is very similar – it takes a very short while to spend money and get into debt, but it takes years to pay it off.

No one likes to get into debt but there are certain circumstances that force us to assume the debt. As an example, no one has the upfront money to buy a car or a house. Naturally we take out a loan or a mortgage so we can afford the shiny new car or the big house. Some of these debts are perfect rationale, but there are others that you should always avoid.

I’m going to list several ways on how to avoid getting into too deep of the debt. However, I’m not going to provide you the magic bullet on how to get out of debt as this is a different subject altogether.

Check Your Credit Annually

At a minimum you should check your credit score annually. Credit score (or FICO score) is what creditors such as banks use to make sure you are a reliable and trustworthy borrower. Additionally, the credit score also measure if you have the means to pay off any debt by checking if you have any revolving credit – the more revolving credit you have the riskier you are. Checking the score is important because it could put you in the “risky” bracket which makes borrowing money from banks or lenders more expensive. The costs of borrowing that money could be thousands to tens of thousands depends on the amount that you need to borrow. As an example, when I bought my first car I did not check my credit score. Unbeknownst to me my credit score was terrible because of a store credit that I opened hand the wrong address. Because of the non-payment of $200 that I put on credit, I was put in the “bad credit” group and received a high interest rate. A $200 dollar purchase ended costing me almost $7,000 in extra interest that I have to pay.

Pay Off Balance

Always pay off any balance on the credit cards. Believe it or not credit cards carry the highest interest rate of any borrowing. If you have a balance on your credit cards, never pay the minimum. The interest from the credit card will continue to compound and the ending balance will continue to go up. Paying off the credit cards not only help your credit score, it also builds good habit of controlling your spending, which brings up the third point.

Buy Only What You Can Afford

We should only be buying things that we can afford. Never buy anything that is beyond your means. For example, if you work in retail store and make only less than $30,000 a year it would be a bad idea to purchase a car. Not only a car will need to be paid monthly, you have also need to consider the cost of the insurance and regular maintenance of the car. The total cost will exceed what you could afford based on your annual income. A good example is my neighbor who bought a Mercedes SMG seven years ago. The price of the car was $150,000. My neighborhood is the regular suburb and no one was a millionaire. His Mercedes started to have problems and was always in a shop. He sold the car 5 years later. And two years ago he was found guilty of failing to file $600,000 in income. He drives an 8 year old used sedan today.

Save First Spend Later

I can’t stress this enough. The money you earn every month is not free money and it is not bottomless. Once it is used up, it is gone forever. To ensure you do not get into debt, I highly recommend that you “pay yourself” by saving it in a high yield savings account or investing it in reputable stocks that pay dividend. Once you have those money saved, they are out of sight and out of mind, which creates a mindset that you no longer have those disposable income available to spend and thus creating less debt.

Don’t Treat Yourself

This is very different from “paying yourself”. I’m referring to spending unnecessary because you feel you deserve it. I’ve heard and read of how one spends lavishly on a vacation or buys a brand name handbag because he believes he earns it after working hard for the past year. I’ve even heard this from my younger sister when she said she wants to treat herself well. Well enough that she got herself into $40,000 in debt. It took her almost 10 years to pay off the debt. In the same 10 years if she invested the same $40,000 in Apple stock 20 years ago, she would be a millionaire today.

Debt is a good thing if it is being handled correctly. For example, without carrying a debt you won’t be able to build your credit score to demonstrate that you are trustworthy among the creditors eyes. However, if you start building too much debt that you can’t afford to pay off the consequences could be harsh. Not only you will not longer able to borrow the money that you desperately need you could lose everything that you own today.