Paying of debt

[Dr Who]

Dear ALL

In the below example what would be the best way to pay off the debt?

Monthly payments ( Interest ) {Remaining years}
House: R 10,000 ( 8.5% ) {20}
Flat: R 8000 (6.5%) {4}
Car: R 3000 (5.7%) {3}

Now logic would say the most expensive debt first, but if it just so happens that the cheap debt is of lower value and hence can be settled faster?

Surely mentally its better to end one finance type and thus feel like you are making faster inroads vs the most cost effective. ( Lets exclude the nature of the asset and the impact of tax )

Regards

 

[Hectic]

As far I know i is normally recommended to pay off the smallest debt and once that is payed off, add the monthly amount to the next account in line and pay that till finished and move on to the next account and add the monthly payments of the paid up accounts to the next account, etc.

 

[xrapidx]

Depends on whether you're interested in saving money or feeling mentally better

 

[ToxicBunny]

Short term debt should be paid off first, and the savings from that plowed into long term debt.

 

[AlmightyBender]

Short term debt should be paid off first, and the savings from that plowed into long term debt.

This one. Always good to factor in good old fashioned risk into the equation instead of just looking at what will maximize your money in x years.

You never know what might happen in the future and having fewer debts is always a good thing.

PS: you get super low interest rates!!! :wtf:

 

[Durken]

I would get all the short term debt done then take that extra money and put that into the home loan saving a lot of money on interest in the long run.

 

[guest2013-1]

As far I know i is normally recommended to pay off the smallest debt and once that is payed off, add the monthly amount to the next account in line and pay that till finished and move on to the next account and add the monthly payments of the paid up accounts to the next account, etc.

It's not the most expensive debt or least expensive debt, it's what can you pay off the quickest and what has the most benefit for you in the long run.

A car, for example, isn't much of an asset because it depreciates quite a bit. So pay that off as quick as possible and then push the R3000 into your Flat bond. This should reduce the number of years on it significantly so that should be done in half the time, then push the R11000 straight into your house and it should be paid off within 5 years instead of 20. You'd save a **** ton of money in terms of interest like that.

Don't be tempted to buy a new car during that period. You should be debt free in about 7 years if there's no big expenses from your side. Quicker if you push your 13th cheque and any additional pay rises into it as well.

 

[creeper]

I'm going to throw a spanner into the works.

Firstly. Your car interest is really low, so don't worry about that. The interest paid on vehicle finance (unless you do the idiot thing and have a balloon), is minimal compared to the house. I'm also assuming that the flat is rented and the rent covers the payment, rates etc. So, in effect, the tenant is paying your rent. This interest is also tax deductible from the rental income. The house should be your target. If you pay 10% more per month on the house from the beginning of the term, your number of periods to pay will be reduced to 162 months. This is due to the fact that the beginning of term, the payments are mostly interest. By adding 10%, you reduce the capital outstanding.

Regarding paying off short term loans. It should rather be, pay off short term HIGH INTEREST loans, aka revolving loans, unsecured loans, credit cards, etc.

Edit: Saw AcidRazor was ahead of me. Only difference in my argument is the vehicle.

 

[Priapus]

It's not the most expensive debt or least expensive debt, it's what can you pay off the quickest and what has the most benefit for you in the long run.

A car, for example, isn't much of an asset because it depreciates quite a bit. So pay that off as quick as possible and then push the R3000 into your Flat bond. This should reduce the number of years on it significantly so that should be done in half the time, then push the R11000 straight into your house and it should be paid off within 5 years instead of 20. You'd save a **** ton of money in terms of interest like that.

Don't be tempted to buy a new car during that period. You should be debt free in about 7 years if there's no big expenses from your side. Quicker if you push your 13th cheque and any additional pay rises into it as well.

Definitely the best way of doing this.

 

[Cius]

Its less about what to do first than it is about actually paying things off faster by putting in that extra.

 

[Dr Who]

I'm going to throw a spanner into the works.

Firstly. Your car interest is really low, so don't worry about that. The interest paid on vehicle finance (unless you do the idiot thing and have a balloon), is minimal compared to the house. I'm also assuming that the flat is rented and the rent covers the payment, rates etc. So, in effect, the tenant is paying your rent. This interest is also tax deductible from the rental income. The house should be your target. If you pay 10% more per month on the house from the beginning of the term, your number of periods to pay will be reduced to 162 months. This is due to the fact that the beginning of term, the payments are mostly interest. By adding 10%, you reduce the capital outstanding.

Regarding paying off short term loans. It should rather be, pay off short term HIGH INTEREST loans, aka revolving loans, unsecured loans, credit cards, etc.

Edit: Saw AcidRazor was ahead of me. Only difference in my argument is the vehicle.

Hi Creeper

Looks like you and me think alike, Yes if I wanted to I could pay off the vehicle. But the question I Still ask myself is - Why would I pay off a debt that year on year gets cheaper? Seeing as the financed rate is lower than inflation. All other things being equal.

Regarding the Flat - I will keep quiet...

It was good seeing all the comments and plans.

Thanks

 

[Dlamaqhinga]

Taking notes

 

[creeper]

Hi Creeper

Looks like you and me think alike, Yes if I wanted to I could pay off the vehicle. But the question I Still ask myself is - Why would I pay off a debt that year on year gets cheaper? Seeing as the financed rate is lower than inflation. All other things being equal.

Regarding the Flat - I will keep quiet...

It was good seeing all the comments and plans.

Thanks

I didn't mention the inflationary aspect, but yes. Whoever have you a 5,7% loan is losing money. Unless the car purchase price have the loss included.

The flat. Hope the mistress is paying rent

I have a spread sheet developed that made my live quite easy answering your question. I use it to determine the best combo to minimise interest between debts.

 

[saturnz]

In the example accelerated payments of debt should be focused on the one incurring the highest interest rate.

To illustrate the example, reverse the situation and ask yourself where would you put your additional money if that was the interest you would earn.