0% balances

Marquettefan1 · October 2013

What are your thoughts on paying off debts with 0% interest early? Husband and I think differently so I thought I would ask here. Thanks.

hoffse · October 2013

For me it depends on the following:

1) Monthly payment - is it high or low, compared to your overall take-home?

2) Do you save what you don't spend or do you fritter it away?

3) How much time is left on the debt? Is it ongoing (revolving) or is there a term?

4) How stable is your job? And if you lost your job, how easy would it be for you to find another?

5) What are your other savings like?

Without knowing anything about this debt or your personal situation, I can't answer it for you. I will answer it as though this were me, though, so you can see what I mean (while making a few assumptions along the way).

1) Monthly payment - probably low-ish compared to our take-home, especially at 0%. I'm a lawyer and H is about to be a lawyer, so once that happens we'll be bringing home a good bit each month. It's not going to feel high for us until we're looking at $500+ per month. So assuming this is less than $500/month, I would be inclined to not pre-pay.

2) We save every last dollar of what we don't spend - H and I allow ourselves some small luxuries (pedicures for me, golf for him, usually once or twice a month) and that's it. We aren't big shoppers, except for Black Friday. At the end of the month, I put away everything extra we don't spend into savings, and I invest it. Recently, that's been giving me about a 20% return. Since 20% is a lot more than 0%, I would be inclined to put extra money we have leftover into our investments as opposed to toward this debt.

3) If the loan term is 10 years or less, I would be inclined to hold onto it instead of pre-paying. Longer than that and I would be inclined to pre-pay just because it gets annoying. 10 years is about as long as I can go, but that's a personal preference.

4) My job is quite stable. So is H's (he hasn't started yet but he has one lined up). In the event that one of us lost our job, we know enough people in the legal market here that we could probably get another job without a huge amount of trouble. So that would make me less inclined to pre-pay.

5) H and I have an emergency fund. We also have been saving for a house. We fund our retirement accounts to 15% or the maximum federal limits, whichever applies any given year. Once we buy a house, we will be saving for a baby. Our savings are pretty secure, so that would make me more inclined to pre-pay because we don't really need to be saving more than we are, we just choose to.

So for us, we probably wouldn't pay this early. But your answers might be different.

I am curious how you have 0% interest though - unless it's just a promotion period? If it's a promotion period then you should absolutely pay it off before the 0% period expires because your contract probably has a balloon built in at the end. If it's a private loan between a family member or something, you might have some tax issues associated with this because it's a below-market loan.

Marquettefan1 · October 2013

The 0% is through a promotion period on 3 of the accounts and 2 are for medical bills in which if we pay the agreed upon amount each month there will continue to be no interest. Total being paid to these accounts each month is $650. 3 of the accounts will complete in the next 3 months. All 5 of these accounts will be payed in 2 years. Our job situation is stable and the only other bills we have are mortgage and a home equity line. I have never paid interest on a credit card and don't intend to start. If we snowballed these debts we could pay them off 6 months sooner.

I feel if you snowball we would have more money available sooner, just in case. Husband thinks the 6 months doesn't matter and to save the money now. Guess I was just looking for others opinions.

FYI: the last and largest of the bills cannot be pre-payed. I can pay more and finish the amount sooner but the monthly bill will not change.

hoffse · October 2013

Well I wouldn't pre-pay the ones that are going to be done in 3 months anyway. If you wanted to snowball, you could shift payments from those three over to your final one (or two? I'm confused by your last point) once the those short-term ones are done. That changes your bottom line $0 while you have this debt but it does enable you to utilize a snowball three months from now. The monthly payments are high enough that for me I'd probably do that as a compromise.

This is how H and I are going to pay down law school debt. Once he graduates we will have a lot of debt combined. Mine is owed to my parents, and I will be done with that sooner rather than later, so we will start our snowball at that time - we will simply shift what we have been paying my parents over to his highest interest loan. That way we are eventually pre-paying his loans without changing the amount we pay out each month. If I've calculated the interest right on his, we should be done about 8 1/2 years after he graduates. We will be paying the same in year 8 that we're paying in year 1, and by then one or both of us should have partnered. They're not crazy-high interest (so mathematically we'd probably do better if we didn't snowball and invested that money we could use for a snowball instead), but the monthly payments are high enough that we'd like them to be out of our lives before buying a second house or sending kids to school (we will need to go private in this area). This strategy works well for us because if we can afford it in our first year, we can certainly afford it every year after that.

anssett · October 2013

I want to be out of debt. All debt! I don't care what promotional rates I can get.

SusanH. · October 2013

the 2 times I was faced with that I just made monthly payments till paid off. I made sure I was paid off one month before the interest would kick in (I know some one who waited till the end to pay the full shot and was late by one day....they owed interest for the whole time!)

Apollo11235 · October 2013

We put about $2k on a promotional 0% credit card a couple years ago. The promotion is for 48 months with a minimum payment of $49. I definitely wanted to use this as a way to earn interest on that $2k in the mean time, but I didn't want the debt to disappear *that* slowly, so I decided on a happy medium of $100/mo. Now, it's down to $300 and I'm considering just paying it off... It almost doesn't feel worth it to keep that around for the interest we're "making" - that is, saving on student loans by paying more to them - (it'll be less than $3 over 3 months, I think).

Anyway, can you do a "half-snowball" maybe? Each time you pay off a loan, start adding half the monthly payment to the other loans and save the other half? You'll feel good about paying down the loans faster, and your husband gets to save some too.

MommyLiberty5013 · October 2013

Only worthwhile if you stay on top of it and read the fine print.

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