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Guest Editorial:
"Pay Down Car Debt or Credit Debt First?"
by Scott Bilker of DEBTSMARTŪ

Question: I've already organized my debt with the highest interest debt to be paid off first. Only thing is, my car loan is up toward the top and it's getting close to the time when I would need to roll over the payments of paid off debt to the next highest interest rate debt, my car loan.

Does it make sense to start increasing my payments on this loan? Isn't what I will pay on the loan fixed? If this is the case shouldn't I start paying on the next highest interest debt (another credit card) instead? Thanks for any help!

Mike,

Thanks for your positive comments about DebtSmart!

It's great that you've already set up a payment program that pays the highest-interest-rate debts back first. Many financial "experts" advise to pay off the lowest-balance debt first, but that's simply wrong, meaning, more expensive!

Since your car loan is about to become the most expensive debt (highest interest rate) you should "roll" your payments from the last debt into the car loan. This is the most efficient method of repaying your debt.

There are, however, a few details you need to check:

1) Are you allowed to pay off your car loan early with larger payments? There are some loans that have pre-payment penalty conditions, so call the bank to make sure you can send in more money toward the loan principal.

2) When you send in your payments, be sure the bank knows to apply the entire payment toward your balance. There are a few instances when the bank will apply the scheduled payment and hold the extra for the next payment. You don't want that situation.

3) Will you need that extra cash in the near future? If you pay more toward a credit card, you can always get that cash back if you need it by using a cash advance or making purchases with the card. When you increase the payment on the car, that money becomes part of the car and cannot be converted back into cash again until the car is sold.

In summary, you are correct. It makes perfect sense to send the extra payment to the car loan, because it's the most expensive debt on your list. Just be sure there are no penalties for paying off the loan early. If there are penalties, you'll need to consider if the savings from the interest charges are greater than those penalties. Chances are, you can pay off the loan early; if there are penalties let me know.

Keep up the good work!

Scott

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