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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.
There are three major habits that I practice to keep my credit score high, in the high 700’s to low 800’s, depending on which credit agency you check.
Check Credit History Regularly
The first habit is to regularly check my credit history to make sure nothing weird or incorrect is showing up, like a loan or a credit card that I don’t recognize. To check my credit score, I have a free account at Credit Karma, which I log into at least once a quarter. I recently took out a personal loan to cover the cost of a roof repair, so I checked my credit score when I applied for the loan to make sure the loan officer wouldn’t have a reason to decline my loan application.
Related post: Pay Off Auto Loan Or Roof Repair
Frequent Credit Card Payments
My second habit is to make frequent payments on my credit card, usually every week or so. I time it around my weekly payday so that I know I have incoming cash. Paying frequently makes it easier on my cash flow, keeps the credit card balance from getting too high, and allows me to regularly monitor my expenses and determine if I’m spending too much money.
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Pay Off Debt Early
My third, and probably most effective, habit is to pay off loans early, which I do by using three specific methods.
Firstly, I set up biweekly loan payments whenever possible so that I pay less in interest and pay an extra months payment.
Over time, that extra payment every year adds up. There are two loans, the mortgage and my hubby’s student loan, that for some reason does not allow automatic biweekly payments. But my other loans, my personal loan for a roof repair and my auto loan that I just recently paid off had no problem with biweekly payments.
Payments Larger Than The Minimum Payment
Secondly, most of my loan payments are larger than the minimum payment. It’s easy to do when you make automatic biweekly payments. Just pick an amount higher than half the minimum payment that the bank should deduct out of your bank account every two weeks, and voila, you’re paying more than the minimum payment.
Large Final Payment
Lastly, I pay off the entire remaining loan balance when I reach a point in the loan where doing so won’t cause much disturbance in my cash flow. Most recently, I paid off the remaining $1800 on my auto loan a few weeks ago so that I wouldn’t have any payments during my upcoming maternity leave.
In addition to these three main habits, I’ve noticed that when I carry a credit card balance that is larger than normal for more than a month, my credit score tends to dip a little. It’s probably because my credit card utilization increases during that time, which can affect your credit score.
My maternity leave is quickly approaching now. With 3 weeks left until my scheduled C-section, I should probably figure out how much cash I’ll need to make it through a 12 week maternity leave.
Our largest cash outflow is the mortgage, which is around $820 a month. It covers the mortgage, taxes, and homeowners insurance. It is automatically deducted out of my second credit union account, so I will have to periodically transfer cash from my main credit union account to the other once my direct deposit paychecks are halted to those accounts during my maternity leave.
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The next largest cash outflow is my hubby’s student loan, around $300. It is automatically deducted from my hubby’s credit union account. While we have one more forbearance available to us, we don’t plan on using it.
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Our third largest cash outflow is the loan to get the roof repaired. We just got the loan last month, and the $200 payments are automatically deducted out of my main credit union account. Since I am actually paying more than the minimum payment of $150 a month, I can actually lower my payments by $50, but I’ll only do that if there is a shortfall in cash.
Related post: Pay Off Auto Loan Or Roof Repair
The fourth largest cash outflow is the car lease for $185 a month. The payments are automatically deducted from my hubby’s account.
The second smallest cash outflow is our auto insurance. About $90 is automatically deducted out of my main credit union account. We are currently shopping around for auto and homeowners insurance to see if we can get a lower amount.
And the smallest cash outflow is the internet for $44, which is also automatically deducted out of my hubby’s credit union account. If you can’t already tell, I love automatic payments.
These six payments are ones that I either cannot easily change, such as the loans, lease, or auto insurance, or live without, such as the internet. These items total $1639.00 per month.
There are several additional expenses that, with some changes, I can either decrease or cut all together. The highest of these adjustable expenses is my hubby’s health insurance, a whopping $400 a month, which he picked up this year through the health care exchange. If needed, we could just cut the expense entirely.
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The second largest adjustable expense is our food and household items, which I estimate to be around $350 a month. It includes anything we use on a daily basis, from food and drinks to hygiene to clothes.
The third largest dispensable expense is my daughter’s before and after school care, which is $345 a month. While I could pull her out of the program while I’m on maternity leave, which would cut the expense for three months, she would be placed at the bottom of the waiting list for the program once I return to work, which poses a problem.
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The fourth largest adjustable expense is our electric and gas bill which is $165 a month. We are on budget billing, where the utility company estimates our annual cost and spreads the cost over an 11 month period. That way, 11 of the 12 bills are always the same at $165 per month, and the last bill is either higher because we underpaid or lower because we overpaid.
Gas is our next largest adjustable expense, which is usually around $80 a month. My commute to work is about 20 miles round trip, while my hubby’s commute is a nonexistent 6 miles round trip. I’m sure that the gas expense will decrease a little bit while I’m on maternity leave.
The second smallest adjustable expense is our cell phones, at $65 a month. We both have prepaid, with 250 minutes and unlimited texting each and data on my line. If need be, I could lower the expense to $50 a month and not have data on my line, but I love the convenience of having data.
The smallest adjustable expense is my daughter’s health insurance, at $60 a month. We could cut it entirely, but it has covered almost everything we’ve needed for her, so the benefits of Child Health Plus has greatly outweighed the monthly cost.
The total of these seven adjustable expenses comes to $1465.00. Adding it to the $1639.00 brings our total monthly cash outflow to $3104.00. If I take the full 12 weeks leave, the estimated cash outflow during my maternity leave is $9312.00. To balance the cash outflow, my hubby will take four weeks of the new Paid Family Leave at birth while I take eight weeks of Paid Family Leave. During the last four weeks, either my hubby will work and I will stay home unpaid, or I’ll return to work and my hubby will take his remaining four weeks of Paid Family Leave.
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.