Hi everyone, Just a quick question. I am considering taking a loan out from my retirement plan to pay off either my current car loan or credit cards. Here is the scenario: 1. Car loan - payoff amount 8500.00 (2 years left on loan) at interest rate of 19.95 (yes, outrageous but I was desperate!) OR 2. Credit card debt totaling 7000.00 with varying interest rates of 9.99 - 29.99 (I did the math, at my current repayment schedule of $100 per month, my highest balance card with highest interest rate would take me 52 months to repay) . I have enough in my retirement plan to pay off one or the other but not both. The loan has an interest rate of 4.00% and can be repaid from 1 - 4 years. Any suggestions? CR
What are your scores? Is it possible if you pay off the cc's your score would be high enough to refi the car at a much better interest rate? IMHO that might be the best of both worlds.
jlynn - At last check somewhere in the high 500's (585 if I recall correctly). Great suggestion on the refi - hadn't considered it. Thanks, CR
I can say this cause I'm right here with ya. With high 5's its gonna be tough to lower that interest rate. Is it utlization that is holding you back, or other derogs?
jlynn Other derogs and of course being at almost the limits on the cards doesn't help. If I pay off the credit cards that should help bring my score up shouldn't it? CR
Jlynn's right. If the derogs are coming off soon or you have a reasonable chance of getting them removed, then go for the credit cards. Do you have any real equity in the car? You might be able to refinance through a bank if the car is still fairly new with low miles and you have some equity. Think of the loan this way--you'll be paying interest to yourself instead of someone else. In this market, I doubt your retirement plan has made much money. Maybe the best way to decide is to add up the total $ in interest payments and pay off the worst offender (credit cards/car). Also, double check your vesting schedule. Some plans will only let you borrow a certain percentage of the total and exclude the employers matching portion completely until you are fully vested (trust--I ran into that brick wall last year).
You should pay off the highest interest rate first. Put everything in a spreadsheet, and sort by interest rate. Start with the highest and pay off as many items as you can with the money. That will probably be one or more cards and the rest on the car. Then take all of the money you were paying on the ones you paid off and add it to the payment on the highest one (maybe your car) until it is paid. Then add that amount to the next highest. To pay off your bills in the shortest possible time, you MUST pay highest interest rate first. But make sure you don't have a prepayment penalty on anything. Taking a loan against your retirement is not really a good idea if you can manage without it. The money won't be growing tax deferred, and if you lose your job or quit, you have to pay that back immediately and in full. If you should, through some unfortunate circumstances, lose your job, you'll need whatever you have to live on, and paying back the loan becomes a double hardship.
boywonder and Hedwig, Thanks for the replies. I work for the federal govt and at this point the chances of losing my job are slim (although we've been temporarily laid off before -- last time in the 80's for a few months). The amount I am considering using for my loan is what I've put into the plan; my employers matching and their contribution stays in the plan. According to the rules of the plan, if for some reason I go into non-pay status, I have up to one year to suspend repayments. After one year, I must make repayment in full or be liable for income tax on the outstanding balance. As far as equity goes, I purchased my Civic in May 2000 and it only has 31000 miles on it. Thanks again, CR
Good luck. I hope you are able to reach your goals. Yes, the federal rules are a little different. The rest of us have to pay it back right away!
Pay the CCs! The car loan will only help your credit reports, while the credit card balances can only hurt them. Additionally, while you may be paying an interest premium for the car, assuming you've been paying for close to three years, you are down to paying mostly prinicple! Loans are front loaded with interest! In the first couple years that is literally all you are paying! To determine how much interest is left on the loan, calculate the total amount of your remaining payments. Then call and ask what today's payoff is. The difference is all interest spread over the two years. Whereas, $7,000 in CC debt at 20% is $1,400/year in interest... without making a ding in the principle!
