Got hit hard on interest rate, best way to pay this down?

[BailOut]

I have some advice that is different from what others have given, and I'll explain why. I recommend saving up the funds to pay the car off as a lump sum in a high yield savings account that is wholly separate from your checking account, meaning it is at a different institution altogether. Here is the reasoning:

- Overpaying on an installment loan is the riskiest and silliest option one can take. A payment is due each month regardless of anything else. For example, you can double pay in January but a standard payment is still due in February, and even if you'd double paid every month for a year, if you miss February's payment you are hit with fees and the possibility of repossession as if you'd never overpaid at all. This leaves open the possibility of losing even more equity in the vehicle later on if you miss payments for any reason.

- Keeping your savings account wholly separate from your checking account places at least a 2 business day restriction on accessing the funds due to the timing of the Automated Clearing House (ACH). This is a great impulse interrupter as it provides a reality check any time you want to spend. Take any extra money that you would like to overpay the auto loan with and place it in this high yield online bank (I used to use ING but recently switched to AMEX FSB due to ING's parent company's issues).


A more advanced and highly helpful format of handling money is to set your direct deposit to be placed into your online high yield account, then only transfer the funds you need to pay your monthly bills to your checking account for bill pays, etc. When combined with only paying bills around your own pay cycle you'll find that you spend much less time paying bills each month, and there is the wonderful side benefit that you really are paying yourself first with the DD going into your savings account, which means you get to see your money move back out of that natural home to pay bills each pay period. This will help you to further curb your spending and manage your funds better as you'll want to see more funds remain in the savings account.

Once the car is paid off continue in this format to build an emergency savings fund, and then to plan more long term things such as investments and "wish list" items.

[djct_watt]

Originally Posted by BailOut

I have some advice that is different from what others have given, and I'll explain why. I recommend saving up the funds to pay the car off as a lump sum in a high yield savings account that is wholly separate from your checking account, meaning it is at a different institution altogether. Here is the reasoning:

- Overpaying on an installment loan is the riskiest and silliest option one can take. A payment is due each month regardless of anything else. For example, you can double pay in January but a standard payment is still due in February, and even if you'd double paid every month for a year, if you miss February's payment you are hit with fees and the possibility of repossession as if you'd never overpaid at all. This leaves open the possibility of losing even more equity in the vehicle later on if you miss payments for any reason.

- Keeping your savings account wholly separate from your checking account places at least a 2 business day restriction on accessing the funds due to the timing of the Automated Clearing House (ACH). This is a great impulse interrupter as it provides a reality check any time you want to spend. Take any extra money that you would like to overpay the auto loan with and place it in this high yield online bank (I used to use ING but recently switched to AMEX FSB due to ING's parent company's issues).


A more advanced and highly helpful format of handling money is to set your direct deposit to be placed into your online high yield account, then only transfer the funds you need to pay your monthly bills to your checking account for bill pays, etc. When combined with only paying bills around your own pay cycle you'll find that you spend much less time paying bills each month, and there is the wonderful side benefit that you really are paying yourself first with the DD going into your savings account, which means you get to see your money move back out of that natural home to pay bills each pay period. This will help you to further curb your spending and manage your funds better as you'll want to see more funds remain in the savings account.

Once the car is paid off continue in this format to build an emergency savings fund, and then to plan more long term things such as investments and "wish list" items.

True, but it depends on the yield of the savings account and how long the term of the loan is. If it is a 6-7 year auto loan, a change of $20-30/month can save you $1,000's of dollars. Just to recoup that much from an interest bearing savings account would take decades. But in terms of having emergency cash available, you are right.

Also keep in mind that anything over the minimimum payment goes straight towards bringing down the principle. But in terms of debt reduction plans, the first target should be the credit cards. . . compounded interest on top of variable rates (even if it is fixed, if your credit rating drops, they have the right to jump your rate to 30%) will be most effective. Not only does paying off your credit cards reduce your debt, it will improve your credit rating too.

In terms of debt management, people with high debt seldom have the discipline to keep the money IN a savings account once it's there. . .

If you do take my route, the method suggested to clients is to start with the smallest credit card balances and pay them off first. Pay minimums on everything except that one card, and make the biggest payment you can. Eliminate the payment completely and move on to the next biggest card. Once you get the ball moving, this process picks up steam about 1-2 years down the line, when you have eliminated several payments and have more disposable income to work with.