Dilemma: Payoff car or student loan first?? Liability vs Full coverage??

[NARFALICIOUS]

Originally Posted by mav1178

Do you have the ability to fix or replace your car on your own if an accident happens? Or what if someone steals it? Or what if a tree fell on it?

If you don't, keep full coverage for your primary vehicle.

Originally Posted by Tcoat

There are at least 6 tales of woe where somebody cancelled their collision and then got hit on this forum alone. It is a false savings to not have it.

Originally Posted by why?

Do you have the cash on hand to pay off the car? The way to pay off debt is to look at the total amount you owe, and like Dadhawk said pay off the lowest amount first. Having one loan is better than having two.

And keep full coverage on your car. It just takes one unlicensed uninsured driver wrecking your car and you lose it all if you don't have full coverage.

There's a difference between risk and fear. According to the industry reports, the average driver files an insurance claim once every 17.9 years.

If someone was diligent, they could put the savings they make from having full coverage insurance into an easily accessible, high interest savings account. If you do this right, you're putting away only the money you would spend on insurance (maybe a bit more), separate from any savings you would put away otherwise.

you could probably just buy a new car in cash every 10-15 years.

Originally Posted by Dadhawk

The difference between a 3% and even a 10% loan isn't your problem, it's getting rid of the total debt. Pay off the lowest balance one first, then roll that payment into the other and pay it off early was well.

That's what I would tell my kids anyway.

This is the debt-snowball method of paying off debt, and works great psychologically. But 3% and 10% is a huge difference on loans that are several thousands of dollars of principal, and thus shouldn't just be dismissed. For someone with experience and can manage the debt, this is not a good way to pay off debt.

Originally Posted by palanza87

always pay off ur highest interest rate first. thats basically it

This.

Originally Posted by Dake

I may have missed it, but there's not enough info to make a true comparison if you want to look at the dollars involved. We need to know how many months (years) remain on both the loans.

That being said, both the car and your student loan are compounding interest loans. Your car has less financed at a lower rate and most likely a shorter term. Your student loans are a higher amount and rate and probably a longer term. That means spending the money now to pay down the student loans will save you quite a bit of money in the long run compared to doing the same with the car, even when factoring in decreased insurance costs (which others have mentioned, includes gambling on no accidents). If you have the money to do so, I'd highly recommend paying off the student loans. Don't zero out your account to do it - leave a grand or so for emergencies - but it will save you a chunk of change at the end. If you really want to go nuts, make it a loan to yourself at the same rates. Once you've paid off the loan, start making the same loan payments back into your bank account. That way YOU are making the money on interest instead of the bank.

The only monkey-wrench in all of this is how far into your loans you already are. Most car loans especially are structured to get as much interest as possible early on. If you look at your statement you'll see that a lower percentage of your payment goes towards lowering the premium. If you're past the half-way mark in your loans, you may not see as big of a benefit because the bank has already collected a lot of their interest (but you should still see it).

As for full coverage vs liability, it's a personal decision. I've always felt it's worth keeping full coverage until I get the car's value down to a point where I could easily replace it. Spending a grand a year on insurance for a car with a $15k value? Sure. A $5k value? Not so much.

This is probably the best advice in this thread. Basically do the numbers and make your own personal decision.



If you do decide to want to go liability only, then even though the car has lower interest, it may save you more money if the amount you'll save on the insurance is significant enough.


Personally, I don't believe in being overly insured (burdened). Not just talking about car insurance but in addition to all other insurances. We can talk about all sorts of anecdotes, someone getting sick, tree falling on house, getting hit at an intersection----but insurance companies exist purely because whatever they're insuring doesn't happen very often. If it did, they wouldn't make money.

If you decide to want to keep full coverage or collision/comprehensive whatever it is, then definitely pay on the student loans.

One thing I would look at (if you're one of these interested in mitigating risk) is how much your car is worth. I looked up on KBB a 14 FRS in my state at 65000 miles Good
condition 10200-11900 trade in value. Unless you have GAP Insurance(another useless coverage), I would at least pay a little extra into your car to make sure you're not upside down and make sure to stay ahead of the value until you do pay it off.

[max20s14]

Originally Posted by NARFALICIOUS

There's a difference between risk and fear. According to the industry reports, the average driver files an insurance claim once every 17.9 years.

If someone was diligent, they could put the savings they make from having full coverage insurance into an easily accessible, high interest savings account. If you do this right, you're putting away only the money you would spend on insurance (maybe a bit more), separate from any savings you would put away otherwise.

you could probably just buy a new car in cash every 10-15 years.


This is the debt-snowball method of paying off debt, and works great psychologically. But 3% and 10% is a huge difference on loans that are several thousands of dollars of principal, and thus shouldn't just be dismissed. For someone with experience and can manage the debt, this is not a good way to pay off debt.


This.



This is probably the best advice in this thread. Basically do the numbers and make your own personal decision.



If you do decide to want to go liability only, then even though the car has lower interest, it may save you more money if the amount you'll save on the insurance is significant enough.


Personally, I don't believe in being overly insured (burdened). Not just talking about car insurance but in addition to all other insurances. We can talk about all sorts of anecdotes, someone getting sick, tree falling on house, getting hit at an intersection----but insurance companies exist purely because whatever they're insuring doesn't happen very often. If it did, they wouldn't make money.

If you decide to want to keep full coverage or collision/comprehensive whatever it is, then definitely pay on the student loans.

One thing I would look at (if you're one of these interested in mitigating risk) is how much your car is worth. I looked up on KBB a 14 FRS in my state at 65000 miles Good
condition 10200-11900 trade in value. Unless you have GAP Insurance(another useless coverage), I would at least pay a little extra into your car to make sure you're not upside down and make sure to stay ahead of the value until you do pay it off.

I thought insurance usually covers based on private party value in the area the car is located?
Which for me is about 15-16k according to KBB.




I agree with the idea a lot of things are over insured...


Either way the safest thing to do is just pay down the student loan I reckon.

[NARFALICIOUS]

Originally Posted by max20s14

I thought insurance usually covers based on private party value in the area the car is located?
Which for me is about 15-16k according to KBB.

You may want to confirm with your insurance company.


I found this somewhere online, unverified but it's what I've always heard.

Each insurance company has its own methodology for deciding if a car is totaled and establishing its value. Many states also get into the act, further sharpening the total-loss definition.

[max20s14]

Originally Posted by NARFALICIOUS

You may want to confirm with your insurance company.


I found this somewhere online, unverified but it's what I've always heard.

Each insurance company has its own methodology for deciding if a car is totaled and establishing its value. Many states also get into the act, further sharpening the total-loss definition.

I have asked in the past... they will not tell me the $$ amount they value the car.

[Dake]

Also, if you really want to run the numbers, you can use an online amortization calculator. This lets you plug in the info and you can see for yourself how much you'll save paying off one over the other and then factor in potential insurance savings.

[Dadhawk]

Originally Posted by NARFALICIOUS

This is the debt-snowball method of paying off debt, and works great psychologically. But 3% and 10% is a huge difference on loans that are several thousands of dollars of principal, and thus shouldn't just be dismissed. For someone with experience and can manage the debt, this is not a good way to pay off debt.

There are a lot of factors that can play into the decision of what to pay off first, I'm just saying interest should not be the guiding factor.

For example, if you have a loan with a balance of $1,000 @ 3% interest and another of 10,000 @ 10% interest, does it really make sense to focus your efforts on the 5% loan first just because it has the highest interest rate? Adding zeros to the end of each doesn't make the decision make any more sense. (10,000 vs 100,000 etc).

If the balances are equal (or close) then yes it does make sense mathematically to focus on the highest rate first.

[Syche]

Originally Posted by Jordanwolf

That six month grace period isn't real because they accumulate interest on each of those months while not having to make payments.

oh when I went to school, it was literally called and intrest free grace period, the only stipulation was you had complete the program not drop out but probably changed since then to be honest.

[Jordanwolf]

Originally Posted by Syche

oh when I went to school, it was literally called and intrest free grace period, the only stipulation was you had complete the program not drop out but probably changed since then to be honest.

It has definitely changed, and it is currently in the process of changing again. I think though, that students are getting more money in the form of a grant with tuition now, as opposed to when you attended post secondary, which I suspect may be within 5-15 years ago. Even just 5 years ago, the amount I received in a grant was much smaller than the amount I was receiving last year; a difference of about 500$, my application never changed, I had a part-time job and my mature student status remained the same.

So I think with the government front-loading more money to students, they kind of entrap them with the idea that they have money to spend, when they really don't and hit them with stealth fees hidden in plain sight. I know a ton of people who spend the grants they receive because they are just silly amounts of money (talking like 3000$+ in grants)...

[Dake]

Originally Posted by Dadhawk

There are a lot of factors that can play into the decision of what to pay off first, I'm just saying interest should not be the guiding factor.

For example, if you have a loan with a balance of $1,000 @ 3% interest and another of 10,000 @ 10% interest, does it really make sense to focus your efforts on the 5% loan first just because it has the highest interest rate? Adding zeros to the end of each doesn't make the decision make any more sense. (10,000 vs 100,000 etc).

If the balances are equal (or close) then yes it does make sense mathematically to focus on the highest rate first.

I think you maybe mis-typed your numbers (not sure where the random 5% came from)? Because with your example, assuming the same terms yes, it makes sense to pay off the higher interest first from a purely monetary standpoint.

A loan for 1000 at 3% for 12 months will pay out [s]$16[/s] $30.47 in interest.
A loan for 10000 at 10% for 12 months will pay out [s]$550[/s] $1047.13 in interest.

So paying off the larger loan sooner will save up to [s]$534[/s] $1016.66. Obviously, that may not be entirely practical, but money is money and the OP gives the impression he's in a position to pay off one or the other.

I'd really love to see the remaining terms on both the loans. It would make the answer obvious.

[Dadhawk]

Originally Posted by Jordanwolf

So I think with the government front-loading more money to students, they kind of entrap them with the idea that they have money to spend, when they really don't and hit them with stealth fees hidden in plain sight. I know a ton of people who spend the grants they receive because they are just silly amounts of money (talking like 3000$+ in grants)...

Don't know about Canada vs US, but back when I went to college during the Reagan era student loans and grants were just that, loans for you to go to school. My experience was the most you could get was what matched your college costs, and the money went straight to the school. It wasn't money freely available to do whatever the heck you wanted to with it.

Seems to me, as I put my 3 three sons through college, "student loans" have basically become lightly veiled signature loans that have no direct correlation to the actual cost of attending college. Fortunately for them, they will all graduate without college debt because I insisted they attend colleges "within their means".

[Dadhawk]

Originally Posted by Dake

I think you maybe mis-typed your numbers? Because with your example, assuming the same terms yes, it makes sense to pay off the higher interest first from a purely monetary standpoint.

A loan for 1000 at 3% for 12 months will pay out $16 in interest.
A loan for 10000 at 10% for 12 months will pay out $550 in interest.

So paying off the larger loan sooner will save up to $534. Obviously, that may not be entirely practical, but money is money and the OP gives the impression he's in a position to pay off one or the other.

I'd really love to see the remaining terms on both the loans. It would make the answer obvious.

No, what I'm saying is if I had $1,000 extra to throw at a loan I'm going to pay off the $1,000 loan and owe $0 in interest on it, rather than reduce the balance on the bigger loan and continue to pay interest on both.

In the end (in my simple way of looking at it) your debt is one big number with some composite interest rate against it. So in your example, you have $11,000 in debt with a combined interest payment of $566 a year. Anything you are comfortable in doing to reduce the overall amount owed quickly is a good thing, so there is not real bad answer. That was my primary point.

[Jordanwolf]

Originally Posted by Dadhawk

Don't know about Canada vs US, but back when I went to college during the Reagan era student loans and grants were just that, loans for you to go to school. My experience was the most you could get was what matched your college costs, and the money went straight to the school. It wasn't money freely available to do whatever the heck you wanted to with it.

Seems to me, as I put my 3 three sons through college, "student loans" have basically become lightly veiled signature loans that have no direct correlation to the actual cost of attending college. Fortunately for them, they will all graduate without college debt because I insisted they attend colleges "within their means".

This is pretty spot on when it comes to the current state of student loans, and unfortunately a lot of people who aren't good with money or have no desire to really complete post secondary get fooled by it :/. A large portion of students that currently attend post secondary are fresh out of high school and just lack the literal experience of money and what it should actually mean besides a tool to help them party.

Much like your sons, I am probably of the small percentage of students that will have little to no debt after leaving post secondary. It's not hard to have no debt when you know how to avoid it, but many of today's students are blindsided and inexperienced.

Avoid school debt like the plague, it will creep up on you much like buying a car that is greater than your annual profits.

[Yardjass]

Originally Posted by Dake

I think you maybe mis-typed your numbers (not sure where the random 5% came from)? Because with your example, assuming the same terms yes, it makes sense to pay off the higher interest first from a purely monetary standpoint.

A loan for 1000 at 3% for 12 months will pay out $16 in interest.
A loan for 10000 at 10% for 12 months will pay out $550 in interest.

So paying off the larger loan sooner will save up to $534. Obviously, that may not be entirely practical, but money is money and the OP gives the impression he's in a position to pay off one or the other.

I'd really love to see the remaining terms on both the loans. It would make the answer obvious.

Am I missing something here? 10% APR on ten grand for a year is $1000. If you pay off $1000 at the beginning of the year and pay interest on the remaining $9000, you've saved yourself $100. For the 3% loan of $1,000, it is $30 for the year.

Originally Posted by Dadhawk

No, what I'm saying is if I had $1,000 extra to throw at a loan I'm going to pay off the $1,000 loan and owe $0 in interest on it, rather than reduce the balance on the bigger loan and continue to pay interest on both.

In the end (in my simple way of looking at it) your debt is one big number with some composite interest rate against it. So in your example, you have $11,000 in debt with a combined interest payment of $566 a year. Anything you are comfortable in doing to reduce the overall amount owed quickly is a good thing, so there is not real bad answer. That was my primary point.

See above. Always pay off your highest interest loans first, especially if you're talking a difference of 3% to 10%. If you go in the wrong order on something really expensive like a house, you will end up costing yourself thousands in the long run.

[Jordanwolf]

Originally Posted by Yardjass

Am I missing something here? 10% APR on ten grand for a year is $1000. If you pay off $1000 at the beginning of the year and pay interest on the remaining $9000, you've saved yourself $100. For the 3% loan of $1,000, it is $30 for the year.






See above. Always pay off your highest interest loans first, especially if you're talking a difference of 3% to 10%. If you go in the wrong order on something really expensive like a house, you will end up costing yourself thousands in the long run.

This is incorrect information as to how interest is calculated, it's not quite as simple as that. It's more like a month to month percentage on what is remaining annually. I can't remember the exact calculations, I just know it's not super simple.

Go to a car website, Subaru for example and attempt to replicate the way the calculate interest on a vehicle. It works something like the first few months of payment, the amount of interest that is being paid is visibly lower, but then as the months go on, the payments to the actual car get smaller and the payments to interest begin to grow. It's kind of why you can save money by putting lump sums down on a car, at least, this is how I understand it, I could be wrong though, someone much more intelligent should correct me :P