What would you do with $10k?

welly01 · February 2014

Save it for a new vehicle that you'll have to buy in the next year or pay it toward student loans of $60k?

cecilyandgautam · February 2014

I think it depends on your interest rate. Car loan interest rates are crazy low right now - at least in my area. Whereas our student loan interest rate is the highest rate we have on anything and it's higher than the return we could expect by investing the money in a bond. So for me, an extra 10k would definitely go towards the student loan.

daisy662 · February 2014

I would need more info. What other debt do you have? What is your household income etc. you may not be comfortable posting that, understandably... Generically speaking, the best thing to do is to not buy a new car until your debt is paid off and you can pay cash for the car.

welly01 · February 2014

daisy662 said:

I would need more info. What other debt do you have? What is your household income etc. you may not be comfortable posting that, understandably... Generically speaking, the best thing to do is to not buy a new car until your debt is paid off and you can pay cash for the car.

No other debt besides student loan and mortgage. Student loan is highest interest rate. And by new car, I mean a "new to me" car. We will definitely be buying used. Also, the student loan debt is $60k...not gonna be able to pay that off before we need a new car. We're planning for baby #2 hopefully sometime this year and we'll need a bigger vehicle. Also, DH's commuter car is on its last leg.

MommaP12 · February 2014

That is tough call. I'd probably save it for the car. That's not really going to dent your student loan amount and you could probably buy a car outright for 10K depending on what you get so that your debt stays the same. If you put it toward the student loan, you will still have the student loan payment PLUS a car payment.

I think Dave Ramsey says a car payment is the worst payment you can have or something like that...but of course we can't all live by every rule DR wants! Good luck!!

welly01 · February 2014

MommaP12 said:

That is tough call. I'd probably save it for the car. That's not really going to dent your student loan amount and you could probably buy a car outright for 10K depending on what you get so that your debt stays the same. If you put it toward the student loan, you will still have the student loan payment PLUS a car payment.

I think Dave Ramsey says a car payment is the worst payment you can have or something like that...but of course we can't all live by every rule DR wants! Good luck!!

This is my logic too. If I put it to the student loan, it won't have any impact until years down the road. Ugh!! I can't decide what to do.

Iblamethebeer · February 2014

Do you qualify for student loan interest deduction?

I would save it for the car unless:

1) the student loan is actually multiple smaller loans and you can knock one of them off with $10k, or

2) you had a plan for how to save for the car anyway, this $10k is a windfall, and if it displaces the need to save for the car, you'll end up frittering away $10k worth of other money you had intended to save.

welly01 · February 2014

Iblamethebeer said:

Do you qualify for student loan interest deduction? Nope
I would save it for the car unless:
1) the student loan is actually multiple smaller loans and you can knock one of them off with $10k, or Nope, already consolidated.
2) you had a plan for how to save for the car anyway, this $10k is a windfall, and if it displaces the need to save for the car, you'll end up frittering away $10k worth of other money you had intended to save. We are planning to buy some kind of SUV, so likely in the $30k range. This would just assist in the down payment. We used our tax refund to pay off two small car payments (one was actually a tractor, lol). So we are now saving $700/month that we'll use for a down payment as well.

cecilyandgautam · February 2014

MommaP12 said:

That is tough call. I'd probably save it for the car. That's not really going to dent your student loan amount and you could probably buy a car outright for 10K depending on what you get so that your debt stays the same. If you put it toward the student loan, you will still have the student loan payment PLUS a car payment.

I think Dave Ramsey says a car payment is the worst payment you can have or something like that...but of course we can't all live by every rule DR wants! Good luck!!

I was wondering where this notion that a car loan is so awful - you should only buy a car with cash - idea came from. Now I know it's Dave Ramsey, or he's the propagator at least. Thanks for sharing.

My understanding on smart investment vs accelerated loan payments is that (1) credit cards have the highest interest rate and heavily effect your credit score, so always pay those off if you have a carry over balance (2) all other priorities should be based on the opportunity cost - is the interest rate on your loan higher than what you could get as a return if you invested it? Paying off your mortgage early isn't always the smartest move - if you have a low interest rate, your money could be put to better use elsewhere. ie - you save X thousands by zeroing out your mortgage, but you could have earned 3X thousand by investing it, so you potentially threw away 2X by choosing to pay off your loan early.

I had noticed that people seem to make an exception for car loans - that the math was use to guide our financial decisions don't apply to cars - even though car loans don't weigh on your credit score the same way CCs do - it's just like any other loan - and the interest rates are so low, it's like throwing away free money to pay the full rate up front - you could earn so much more by investing that 15k over 6 years, rather than paying it all up front on this one thing that will depreciate as soon as you drive it off the lot. I still don't understand why people treat car loans as a special case when it comes to financial planning. Does Dave Ramsey have an explanation for his aversion? I'd like to understand his thinking since so many people seem persuaded by it.

sugarbear0524 · February 2014

I definitely wouldn't spend $30k on a car! You can get a good, used SUV for half that. Just save a bit more on top of the $10k and you'll have a paid for car. Then you can turn your attention to your student loans.

I don't know if you're considering a new SUV, but the value will drop like a rock as soon as you drive off the lot. Let someone else take that hit and get one that's a few years old. Cars go for so long these days, you'll still have a lot of years of wear left. My 2004 Toyota Highlander has 180k miles and runs like a dream. It has been very reliable.

mlee116 · February 2014

If you really, really need a new car, I'd put it towards that. But I agree with sugarbear in that I would not be spending $30K on a car. No way. I'd use the $10K plus anything I got for selling the old car(s) and buy something for around that amount. I wouldn't add another payment if I didn't have to.

Then I'd estimate what you would've been paying per month on the $30K car and add that money to your current student loan payment.

jc&cat · February 2014

I would pay down the already existing student loan. You will knock more interest off in the long run so you will make out in the long run. Or you could split it if you feel the need for liquid funds now to put toward the car. Chip away at that loan debt since you are paying way more than 60k in the grand scheme.

MommaP12 · February 2014

@cecilyandgautam I've never read or followed anything Dave Ramsey, but ironically, I just saw something online somewhere the other day where he was cited for saying "never have a car payment" I'm not sure what the rationale behind it is for him.

cecilyandgautam · February 2014

@MommaP12 - ah, this is going to drive me crazy now! Surely he must have a reason, but I just don't get the math when interest rates are 0-2%. I want to know!!

jf198400 · February 2014

I totally don't get the DR no car loan argument. We could pay off my car but we are saving the money for a down payment on our next house. I know myself well enough to know that I would end up spending, not saving that extra $400/month.
Also having a good reliable car is an investment in a way, b/c DH and I could not get to work without a reliable car. I commuted an hour each way for years. I couldn't have done that in some beater car that we paid cash for.

SunAndRain · February 2014

My guess on the Dave Ramsey stance on car loans is that people reading and/or needing his financial advice are trying to pay down debt and get on their feet financially. These may not be the folks who are qualifying for the0-2% car loans.

OP: I'd put it toward the car. But that is based on my financial situation which is that my student loads are low interest rates...even though we don't qualify for tax breaks on them. If your SL are high interest rate then I'd try to accelerate the payoff. We purchased both our cars used, each for about $20K and paid cash; one crossover and one SUV. It is really nice not to have that monthly payment.

Iblamethebeer · February 2014

welly01 said:

Iblamethebeer said:

Do you qualify for student loan interest deduction? Nope
I would save it for the car unless:
1) the student loan is actually multiple smaller loans and you can knock one of them off with $10k, or Nope, already consolidated.
2) you had a plan for how to save for the car anyway, this $10k is a windfall, and if it displaces the need to save for the car, you'll end up frittering away $10k worth of other money you had intended to save. We are planning to buy some kind of SUV, so likely in the $30k range. This would just assist in the down payment. We used our tax refund to pay off two small car payments (one was actually a tractor, lol). So we are now saving $700/month that we'll use for a down payment as well.

Same question, then -- if you use the $10k for a bigger downpayment and thus have a smaller car payment, will you end up "wasting" the leftover money from the smaller car payment, or will it go to some specific goal?

It sounds like you guys are in a pretty secure place financially, in which case I think you should gift your future selves and throw the whole thing at the student loans.

What we do sometimes when we are using bonus money for something really boring is choose a small portion to spend on whatever we want. Like if we had $10k and knew we needed to put it in long term savings, we might take $500 and each pick one thing off the top of our wishlists, and that would scratch the spending itch so that we could feel good about sending the other $9500 off into intangible grown-up land. In some ways getting to choose how to spend $250 is more fun and feels more decadent than spending $10,000.

justjinny · February 2014

I'd put it towards which ever option would have the higher interest rate. Personally, I wouldn't want to pick up another payment each month if I can avoid it.

I look at taking out loans as adding cost to whatever you're buying. If you can pay upfront with cash for expendable things (cars, furniture, appliances, whatever...) you spend far less in the long run than if you have to take out a loan and pay someone interest. Have you ever looked at the final expense on a 30yr mortgage if you don't make any early payments? People easily ignore what the end cost is on the things they buy with borrowed money. Your $30K car will end up costing much more than that after you finish paying your 5 year loan off.

thedash · February 2014

If you are buying a used car I would put it towards that. If you may get a new car with 0% interest on the loan then put it towards the loans or savings.

mlee116 · February 2014

I commute and drive an old beater that I paid $2000 for over 10 years ago. It looks like shit on wheels but it works fine for now so I'm going to keep on driving it until I can afford to pay cash or mostly cash for one.

This is my thinking: A car is a non-appreciating asset. They lose most of their value within the first four years of their life. Also, the point of a vehicle is to get you from Point A to Point B safely. Yes, if you work, you need a reliable car. That's why I said if the OP has a legitimate need for a new car (hers is unreliable, not big enough), then by all means she should get one. But I think you can get a reliable car for less than $30K. I get that not everyone can pay cash for a car, but I think you should try to be sensible and not add more debt than necessary.

shannm · March 2014

Are you planning to lease or do payments on the car? I would save enough for a respectful downpayment, one that keeps your interest rate low and then put the rest towards the loans.

daisy662 · March 2014

Dave Ramsey doesn't believe in acquiring any debt for anything, except a mortgage. I agree with this thought process - though currently we do have some debt. It is more than manageable for us though and will be paid off soon. OP, based on your response to my post, if I were in your shoes, I would use the 10k for a car. However, 10k would be my max amount purchase price. Whatever was left over I would put toward the SL. I would prefer you to not spend that whole amount on a car. Please don't lease a car and don't buy brand new. Those are 2 terrible financial decisions!

spotco2 · March 2014

I'd put it on a car.

We just bought a new to us minivan and paid cash for it. We looked at a 07 Honda Odyssey and a 06 Toyota Sienna Limited. Both had about 120,000 miles and in very good condition. They should both go another 100,000-150,000 miles before needing anything major. Both were around $12k and my wife chose the Toyota to replace her 03 Accord that had 290,000 on it. We sold the Accord for $4k the next day.

It's nice not having a car payment. The only payment that we have is a mortgage that can easily be paid by either of our salaries, so if one of us has to be out of work it will not create a strain on our finances or relationship. There is no logical reason to purchase a brand new car (or even one that is less than 5 years old) unless you just want to and can easily afford it. If you must finance it to drive it, then in my opinion you can not afford it.

Student loans are important to pay back, but if you don't make your car payment they will repo your car. If you miss a student loan payment, they are not going to come take back your intelligence.

shannm · March 2014

Regarding car payments, I get why it is much better not to have one. However, we have always looked at it kind of like renting an apartment. No, I can't afford to buy the apartment but I can afford the rent. Does that mean I shouldn't live there? Because I financed my house does that mean I cannot afford it?

Many people can't get to work without a car. 15-18 years ago, this was the case for me. But I already had several experiences with cars that were dirt cheap. And trust me, it wasn't fun driving lemons. At that time, I didn't have 8K in the bank but I needed a reliable vehicle. So I did payments on a used car. I paid it off in about 3-4 years. I drove it for over ten years. I then gave it to my dad. It is still running! I think sometimes the investment is worth it. Yes I had interest but it was worth enabling me to work and finish graduate school.

And I'm going to duck for cover on this one….but we have chosen to lease our car for the past six years. We intend to eventually finance to buy (or pay cash) but in our situation, we decided we were willing to lose some in the end to enable comfort and convenience in the present. We were both in training positions with low salaries. Paying for two in full time daycare. Living in a relatively HCOL area, trying to save for eventual private school, trying to fix up our "fix-er-upper" for eventual resale, etc.. We knew (assuming no tragedies) that our gross income would quadruple within that decade when we made the call (I understand this situation is not typical). Not trying to argue that it is the most money-wise decision but it was a decision that will work well for us and wanted to give that perspective. For us, it was an investment that enables us to get where we want to go and allows us to spend present money on things that matter to us more.

laurakaz13 · March 2014

Car.

bcnoelle · March 2014

Depends on the student loan interest rate and if you 100% need a new car. The vehicle interest rate would probably be higher than the student loan.

jlaOK · March 2014

I would put it towards the car and definitely not pay $30k for a vehicle. If it were me, I'd save the $700/month and use whatever I save plus the $10k to buy a car for cash. Then I'd get to work paying off the student loans.

FWIW, we did the DR plan and payed off all of our debt except our mortgage. I don't always agree with DR and we can't say that we will never be in debt again. What I will say, however, is that our stress level and quality of life have greatly improved since paying off the debt. It is so nice to know that we don't *have* to make payments on stuff anymore. Because of this we will try very hard to live (mostly) debt free because it is just nice.

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