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Last month I was able to pay off my auto loan, about a year and a half early. In addition to the positive effect it has on my credit score, and that I don’t like my hard earned cash going to someone else if I can prevent it, I wanted to pay off my auto loan before my maternity leave started in February.
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I was able to pay it off by following five strategies for paying off debt fast.
Setting up automatic payments means that I won’t forget to write the check and mail it. My hubby once forgot to pay a credit card that he charged a couple of Little Caesar’s Pizza to, and the $15 in pizzas blossomed to $100 once late charges and interest were added in.
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I had my auto loan set up for automatic biweekly payments, which means half the minimum payment is paid every two weeks. Besides that it lowers the interest portion of each payment than if I paid monthly, I actually make an extra payment on the loan, 13 monthly payments rather than 12 monthly payments.
Payments Larger Than Minimum Payments
While the minimum monthly payment was around $220, I actually made biweekly payments of $140, which means I paid $280 a month (plus the 13th payment of $280). Making the bare minimum payments drags out the loan, which is like pulling the band-aid off slowly.
Putting Extra Cash Towards Debt
Anytime I had extra cash, like a bonus or a tax refund, I applied a portion of it towards the auto loan. Anytime I noticed my cash balance was creeping higher, I also put a portion of that increase towards the auto loan.
Large final payment
Once I reach a point in the loan where the remaining balance can be paid off without causing a big disturbance in my cash balance, I make a large final payment. In January, I had $1800 left on my auto loan, so I bit the bullet and made an $1800 payment rather than the usual (automatic) $140 payment. And now, my car is paid off and I won’t have to make payments during my maternity leave. Yey!
These five strategies can actually be applied to any kind of debt, whether it be a credit card, auto loan, student loan, mortgage, etc. I tend to pay my credit card weekly, and I already paid off my student loan using these five strategies. I haven’t been using these strategies on my mortgage because I’m concentrating on eliminating the smaller debts first, and for some reason, the credit union won’t allow me to set up biweekly payments, or automatic payments larger than the minimum amount. I also have a personal loan for repairs on my roof, which I automatically pay biweekly an amount $50 more than the monthly minimum. I’ll start making extra payments once I return to work. That is, if daycare expenses don’t suck my cash flow dry.
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Now let’s see how fast I can pay off my personal loan.
At the beginning of October, I made the decision to pay off my auto loan by the end of January 2018, a month before my expected due date of February 26, 2018. That way I wouldn’t have a car payment to make during my maternity leave and could free up $280 a month.
With about $5,000 left on the loan at that point in time, it would take four monthly payments of about $1,250 to pay off the loan in that time frame.
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But then the contractors working on my roof on an insurance claim put my payoff plans on hold. When they started taking off the shingles to remove the plywood damaged by an ice jam, they discovered that the plywood that was used on my roof before I bought the house was not up to code, and was too thin.
That meant they would have to replace all the plywood on the roof whether or not it was damaged, to remain compliant with town code, which was not covered by my homeowners insurance.
On top of that, the contractors also looked at my concrete side porch that is starting to crumble at the outer corner. The contractor said it’s better to fix it now before winter comes so that it doesn’t further crumble and start moving the post connected to the roof.
The out of pocket cost of the roof repair is about $3,700 and the side porch is about $1,400. In addition to my $1,000 deductible for the original insurance claim, the total comes to $6,100. While I can pay it out of pocket, I’d rather have the cash during my maternity leave since my income for that time period may be negligible.
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I called the credit union where my mortgage is, and they told me my two options are a home equity loan or a personal loan. The home equity loan would require another home appraisal, which also means closing costs, and would take a few weeks to process. Those requirements are not worth the relatively small loan of $6,100. The personal loan, on the other hand, would take a few days, and would have an interest rate around 6.75%.
So my options today are to 1) get a loan at $6,100 at 6.75% and pay off my auto loan, now at $4,700 and 1.99% interest; 2) keep the auto loan as it is and pay the $6,100 out of pocket; or 3) get a loan for $6,100 and keep the auto loan as it is.
According to the loan calculator at Bankrate.com, the monthly payment on 2 year, $6,100 loan at 6.75% is around $275, which is close to the $280 I currently pay on my auto loan. That means my monthly loan payments would be around $555, in addition to my other expenses and the mortgage.
At this point in time, I’m leaning towards a hybrid of 1 and 3, getting the $6,100 loan and making big payments on the car until my maternity leave.
I’ll then see where the auto loan is January 15, 2018, and decide on the next step then, making my regular payments of $280, continue making the big payments, or just pay off the remaining balance.
The end of my maternity leave will land around tax time, so I might be able to apply any tax refund (if I get one), towards the auto loan, which would help too.
It’s been almost two years since I last reviewed my overall household debt, which included my mortgage, student loans for both my hubby and myself, an auto loan, and our two active credit cards.
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The mortgage, which is our biggest single debt, decreased by about $2,500 in that time, down to $73,557.27. The payments are automatic so it’s never late.
My hubby’s student loan is our second biggest loan at $31,946.33, which is about $2,700 less than last time. His payments are also automatic so there’s a never problem with paying on time. My student loan was the next biggest loan back then, but with large monthly payments and refinancing to a lower interest rate, I was able put more than $14,000 to it and pay it off entirely by early May 2017.
It was great timing too because I got laid off on May 22. I have since found a new job, with higher pay, and I don’t have to pay any student loans. Woohoo!
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The auto loan for our Chevy Malibu was the next biggest loan after my student loan. My auto loan is set up for automatic payments at $60 more than the minimum monthly payment. It’s also biweekly, so I actually make 13 payments rather than 12 at $60 more than the minimum payment.
With this payment plan, I was able to pay a little under $6,000 towards the loan, lowering it to $5,700.42.
Our second to last debt is our credit cards, totaling $3,295.12. We tend to keep running balances on our credit cards to maintain activity on our credit histories, as well as collect credit card points that I use at Amazon.com. During the 6 weeks that I was laid off, I made smaller credit card payments to ease the cash flow, so my part of the credit card balance is a little higher than normal.
Lastly, we actually added a little debt to our financial situation. My hubby had the displeasure of getting a root canal earlier this year and financed it with a loan from WellsFargo, which is now at $2,282.08. We could pay it off now, but with interest free payments for 18 months, it’s better to put that cash towards his credit card and student loan for the time being.
Our total debt sums up to $116,781.21, which is $22,318.31 less than my last analysis almost two years ago.
My name is Emilie Chang, and I am the wife of Aaron Jackson. We have been married for over 5 years, and I still have not changed my name. When I do change my name, I will become Emilie Chang-Jackson.
While I love the idea of being called Mrs. Chang-Jackson, I do not look forward to the monumental effort it will take to update all of my loans and records. As the financial person of the household, I am a little concerned about the possibility of fixing any errors that might result from changing my name. Plus, I don’t feel like waiting in line at my local Social Security office for an ungodly amount of time. And as much as I’d like to pretend that I’m preserving my self-identity as a Korean American woman, I’m really just procrastinating. I also don’t want to deal with the possibility that the IRS doesn’t handle my name change smoothly. I don’t want to be the accountant that gets audited by the IRS on her own personal taxes.
When it comes to our financial accounts, my hubby and I have kept everything separate, including our checking accounts. Both of our names are on the mortgage and the house, but everything else is kept separate. Both he and I each have a couple of credit cards, savings and checking accounts, a student loan, a car loan, an IRA, and a 401(K) plan. Besides the fact that I don’t want to keep track of another bank account, we felt like it wouldn’t serve us an additional benefit from the bank accounts we already have. The biggest joint cash outflow is our mortgage, and we have automatic monthly transfers set up that transfers money from my husband’s bank account to my bank account every month, and then the entire monthly mortgage amount from my bank account to the mortgage, so that we each pay a portion.
We’ve also kept our finances separate to keep the grubby hands of debt collectors out of them. We both have student loans, his much higher than mine. Separate accounts helps prevent debt collectors from claiming a stake in the other’s money if something were to happen to us and we could no longer pay the debt. A joint account with both our names could entice a debt collector to collect as much as they can out of both of us, even if only one our names was on the debt. In addition, it gives each of us the right to do whatever we want with our money. In exchange for that, we each allow the other to read each other’s financial information to keep us financially healthy, and to keep communication open. Finances is one of the more common reasons marriages end in divorce.
After I paid off my car loan in September, I put those big payments towards my Mohela student loan, which was $14,141.08 at the time. Last month, at $12,074.43, I refinanced the loan with my credit union, GHS Federal Credit Union. The old loan was 6.55% interest, $258.13 a month, with a scheduled payoff date of August 7, 2021
The new loan is 5.00% interest, $329.64 a month, and a scheduled payoff date of December 6, 2018.
Since I had been making monthly payments of $1000.00 to Mohela, and plan to continue that with the new loan, the change in my minimum monthly payment doesn’t affect my monthly cash flow, and my planned payoff date is December 2016.
I had previously said that I wouldn’t refinance my student loan because I didn’t want to lose the leniency of the lender, just in case I couldn’t make the loan payments for any reason. But with a planned payoff date of December 2016, I expect that I won’t need to ask for leniency. In addition, I don’t want to deal with the possibility that my student loan could be sold to another lender without my knowledge.
I borrowed $11,000.00 from GHS rather than the full $12,074.43 amount to lower my monthly payment, and to force myself to pay off the remaining $1,074.43 right away, since the first payment of my new loan is due in January. I also set up automatic biweekly payments from my GHS checking account, so that I never have to worry about late payments. And since the loan for my other car is with GHS as well, it is so convenient to be able to log into only one account online to see my bank accounts and both loans, rather than having to log into multiple websites. I always have trouble remembering my password for my Mohela account.