Debt vs Deposit

[Hamster]

First off, apologies if this question has been asked already.

I'm expecting a bonus from work in the next month or two. These are generally in the region of 2-3x monthly salary. The question is what to do with this money. Do I:

1. Settle the debt on my car?
2. Save the money towards a deposit for a house?
3. Something in between those two options.

The money i owe on the car is slightly less than the amount I expect to be getting. I do pay very little towards it per month though (+/- R2000 with 9% interest ). My rent every month is R7500 (excl. utilities) and come September it will probably increase.

Of all the people I've spoken to only one of them is suggesting that I pay off my debt (basically just the car) first and then start pushing the freed up monthly car payments into the deposit. This person happens to be my financial advisor though.

On the one hand the maths sort off makes sense and she is a financial advisor (so she must know what she is talking about) but on the other hand she is using this "formula" that basically states that you first cover your risk, then pay off your debt and then save. I'm just a bit concerned that that is a clever "formula" she learned when she studied that is more like a general guideline than an actual rule.

So, what would you do?

 

[Chevron]

Of all the people I've spoken to only one of them is suggesting that I pay off my debt (basically just the car) first and then start pushing the freed up monthly car payments into the deposit. This person happens to be my financial advisor though.

This.

 

[Velenoso]

Pay off the car, you'll save on interest. However, it's not a hell of a lot of money to pay per month and a property is THE best investment you can make (ask me, I know). So it may be worth it in this case to ignore the advise and go ahead and buy the property.

Depends on your age as well. If you're young, pay off the car, you've got the time, if you're getting on a bit, buy a property ASAP.

 

[Alton Turner Blackwood]

September next year you mean?

Anyway, I'd pay of the car first.

 

[TehStranger]

Pay off the car, you'll save on interest. However, it's not a hell of a lot of money to pay per month and a property is THE best investment you can make (ask me, I know). So it may be worth it in this case to ignore the advise and go ahead and buy the property.

Depends on your age as well. If you're young, pay off the car, you've got the time, if you're getting on a bit, buy a property ASAP.

Bit of a blanket statement don't you think?

Hamster - Listen to your FA.Pump the cash into your car, settle it now while you can. Then start saving the car payments for a house, makes the most sense IMHO.

 

[Pearson6]

Well my opinion would be to but the house if you can afford too pay it which I doubt will be a problem as your spending quite a bit on rent, by next year this time or September 2014 you would be almost a year into your bond payments. The thing is your dalready paying your car and rental, so why not just pay your car and still the bond.

 

[Velenoso]

Bit of a blanket statement don't you think?

Hamster - Listen to your FA.Pump the cash into your car, settle it now while you can. Then start saving the car payments for a house, makes the most sense IMHO.

Sure, but show me something better? Unless you're willing to play with the stock market or invest in startups. Risky.

 

[froot]

Pay off what's costing you the most in the long run. Iow the car. Just inform them though, otherwise you may be liable for an early settlement penalty. Then you can try and save up some of the money you would spend on paying off the car monthly, and put that towards a house or other paying off other debts.

 

[saturnz]

property is also risky, it all depends on what you know in terms of how to mitigate the risks, if you have knowledge on equity markets you can make quite a bit and if you have a strong knowledge of real estate you could make a bit there too

basically put your money into areas where you have knowledge of how the various vehicles work, if you don't then no matter which vehicle you choose you will lose big money.

 

[Ecco]

Which gives the best savings? The interest saved in terms of paying off the car, or this interest saved in terms on paying off the house.

The car is short term, the house longer term. However paying off the car means you have that extra money to pump into the house.

Very complicated for my simple mind. I wonder if someone can work out the numbers for the scenarios for you.

 

[Centronix]

Pay off the car. Save for a house deposit and buy one asap. 7.5k on rent is too much. You can bu a R1m house if you add the 2k you are paying for your car on your installment

 

[F1 Fan]

So normally I would say pay off the car, but the interest rate is 9% which is ok, not bad.

Now, perhaps that money could be used as deposit for a house, to help get a lower rate from the bank? Im assuming the OP has no savings for the house. Pointless having no car installments but then getting a homeloan at prime +1 right?

 

[MKFrost]

If you can afford a property then rather go for that as you are currently putting R7.5K into somebody elses pocket for a zero return. If you cannot afford it now then rather invest that bonus towards a deposit and get the property as soon as you can.

I'm not sure how much you will be saving if you settled the debt on your car but judging from what you are saying I doubt whether its going to be that much as they will only let you settle in around 3 months time which does not leave much of the financing term and thus not that much of a saving on interest.

 

[Hamster]

Pay off the car. Save for a house deposit and buy one asap. 7.5k on rent is too much. You can bu a R1m house if you add the 2k you are paying for your car on your installment

The rent is getting ridiculous. I know owning a house will cost more (levies, maintenance, taxes, loan interest etc) but surely all of that (ie. money being "thrown away") combined doesn't add up to what I am paying for rent right now.

So normally I would say pay off the car, but the interest rate is 9% which is ok, not bad.

Now, perhaps that money could be used as deposit for a house, to help get a lower rate from the bank? Im assuming the OP has no savings for the house. Pointless having no car installments but then getting a homeloan at prime +1 right?

I want to move out of the Northern suburbs anyway as traffic is starting to really piss me off. I'll probably rent somewhere closer to where I want to buy for another year or so (East or West Rand is my current thinking) which might lead to lower rent and/or fuel costs.

I have some savings for the house (and actively saving some amounts per month for it - although far less than I want to ). I don't expect to buy to buy a house Sept 2014 (I might decide to change jobs and location is important) but I don't want to have to rent into 2016 if I can buy in 2015.

If you can afford a property then rather go for that as you are currently putting R7.5K into somebody elses pocket for a zero return. If you cannot afford it now then rather invest that bonus towards a deposit and get the property as soon as you can.

I'm not sure how much you will be saving if you settled the debt on your car but judging from what you are saying I doubt whether its going to be that much as they will only let you settle in around 3 months time which does not leave much of the financing term and thus not that much of a saving on interest.

Maybe paying off the debt is better if I consider the waiting another 22 months. I won't make up the bonus in that time with the extra R2k per month but will save on quite a bit of interest (the loan period is for another 30+ months). I'll have to go sleep on it.

 

[F1 Fan]

If you only looking at buying in two years...then paying off your debt now is definitely a no brainer...

 

[MKFrost]

If you only looking at buying in two years...then paying off your debt now is definitely a no brainer...

Agree, if you still have 30 months left then you should be saving quite a bit in interest. Settle the car debt but keep the payment going i.e. into an investment/saving to help build that deposit quicker.

 

[Hamster]

Agree, if you still have 30 months left then you should be saving quite a bit in interest. Settle the car debt but keep the payment going i.e. into an investment/saving to help build that deposit quicker.

Makes sense. Thanks guys.

 

[supersunbird]

Agree, if you still have 30 months left then you should be saving quite a bit in interest. Settle the car debt but keep the payment going i.e. into an investment/saving to help build that deposit quicker.

Not only do you save on interest but also that R57 monthly admin fee they charge, which is another R1710 saving.

 

[Dr Who]

Hi Hamster

Also just remember the following:

1) Interest rates are low now but I am sure that all your rates are linked to Prime, so pay off the car now, as they could go up.
2) If you saving for a Bond the bank looks at all your finance so the less debt you have the better.
3) I did the exact same as you 2 years ago ( paid off car ). At the time I wondered why i should do it, but just last week I found this amazing flat to purchase and funny enough had I not paid the vehicle off I would never have been able to afford it.

Its funny how it all works out. 9% interest is also not low by any means. And if all else fails you can always put 1/2 on Black or red ( Joking ).

 

[Hamster]

Hi Hamster

Also just remember the following:

1) Interest rates are low now but I am sure that all your rates are linked to Prime, so pay off the car now, as they could go up.
2) If you saving for a Bond the bank looks at all your finance so the less debt you have the better.
3) I did the exact same as you 2 years ago ( paid off car ). At the time I wondered why i should do it, but just last week I found this amazing flat to purchase and funny enough had I not paid the vehicle off I would never have been able to afford it.

Good to know. Kinda forgot about the interest rates.

Its funny how it all works out. 9% interest is also not low by any means. And if all else fails you can always put 1/2 on Black or red ( Joking ).

I have the worst luck with those kind of endeavors