Paying consumer debt or investing with new capital?

Question

I have about 25k in cash available. I also have about 45k in non-real estate debt. Credit cards, car loan.

I really want to refinance my current residence to get it rented and look to buy a new home. Both the refinance and new loan get held up by my debt to income due to the bad debt.

The question is, should I dump all the cash into those debts, hold on to it, or look to invest it?

A little back ground.

I’m active duty Army, own two rentals and a primary residence.  One rental is on a VA loan the other two mortgages are conventional. The hope is to refi the Va loan into a conventional so free up my entitlement. But I don’t believe it would appraise with  20-25% equity. I appreciate any words of wisdom. Thank you in advance.

Chris Thomas · Answer

So I know the MO around here seems to be leverage, leverage, leverage, but when it comes to consumer debt I am hoping that isn't the case.

MY WAY, is to keep personal debt at $0 if at all possible. Meaning anything attributable to my personal life. My car, my house (not always easy for everyone), my cc's, student loans, etc.... Pay all of that off first before doing any investing. Regarding RE, in my head, regardless of the law, there are two of me. The family me and the LLC me. I want no debt on the family side, but will leverage a certain percentage for property on the LLC side because saving $_______k to pay cash for properties isn't always feasible.

Regardless, unload the debt first. You will be shocked how much simpler life becomes. And just for reference, my only debt is an investment I put on a cc a year ago...which in the grand scheme is tiny compared to cars, student loans, or a mortgage. Regardless, I need to follow my own advise and knock that out!!!

And I have to add, MY WAY proves its merit anytime s&*t hits the fan..... World falls apart? Markets collapse? Job loss? Probably gonna be ok....and thats worth a fortune.

Joe Splitrock · Answer

Pay off all three credit cards and stop using the credit cards to finance your life style. If you don't have cash to pay the credit card bill, don't buy it. Cut up the cards if you are unable to stop yourself from using them.

The car loan is fine. The short term and small loan amount means most all your payment is going to principal.

The good news is without these credit card payments, you will be able to save up cash for your next purchase.

Bill F. · Answer

If I were in your shoes this is what I'd do:

1. pay off the 17% credit card.

2. find an online high yield savings account to dump the remaining  $9,300 into. That will only get you around $8/month since they are paying around 1% right now, but it beats earning nothing.

3. Wait 12 months; by then you'll have around $9,400 in the savings account and dump the balance of the savings account onto the 1.99% card right before the intro rate expires.

Sure, you'll have paid the interest on the car for 12 months, which is about $1000, but assuming that 1.99% intro rate goes up to 17% like your other card, it only takes around six months of paying the full rate on the $12k to more than erase any savings from paying off the car.

These are all rough numbers and we don't have enough info on specific payment amounts and savings rates to do a discounted cash flow model to arrive at a more precise answer, but I'm fairly confident the DCF will say a similar thing as the back of the envelope math.

4. In the intervening 12 months save as much as you can, but at least $6k, to pay down the two card with the intro rate. If you can save over $6k in 12 months to pay off the 1.99% intro rate card, then anything left over I would put toward the car.

Good Luck

Jason Avila · Answer

@Joe Splitrock

I appreciate the feed back. The cards weren’t used to finance a life style they were actually used to make renovations on some of the properties. In prep for refinancing. But that was the idea of paying them off, to stack the cash that would normally go to the monthly payments.

Sean McCluskey · Answer

@Jason Avila

Another option is to pay off the 17% credit card, and sell the car to pay off that loan. The interest cost of the car loan is low, but car payments are a large impact on a DTI, because of the short term amortization.

Buy something used with low mileage with cash. Then you might qualify for the refi.

Also, a tip: Your lender should be able to tell you if that will work before you make any moves.

Michael Giangiordano · Answer

@Jason Avila

As others have mentioned I’d get your debt down to zero before investing further. Pay off those credit cards and then I would sell the car if possible and buy a cheaper one with cash. I’m currently debt free besides the mortgage and it’s just a great feeling, your savings rate will increase exponentially and you’ll have that cash reserve again in no time.

Stephen Spradley · Answer

If you hate seeing that interest charge as much as I do every month I would say get rid of that ugly debt first.

Jason Avila · Answer

@Bill F.

Thank you so much for the break down. The 17% will be paid. And I’ve already been able to throw 1k at the 12k card every month. That was a planned move. It was a balance transfer and consolidation to take advantage of the promo. I’m on track to have it paid by the end of the promo. I’m hoping to apply any spare cash to the car, including the monthly payment that was going to the 17%. Somewhat of a snowball strategy.  I appreciate the help and confirmation that paying the debt was the logical step.

Jason Avila · Answer

@James Hamling

I really appreciate the words. It is a step. And I’m sure I’ll look back and see the sacrifice as more than worth it.

James Hamling · Answer

@Jason Avila Don't get down on yourself or feel like it's loosing or giving anything away by dumping cash into those high consumer debt's, it's just the "RINSE" phase your in which comes right before "REPEAT". Your in the game, have properties going, now eliminating some of the debt hurdles, it's a lot of steps forward and you deserve a big pat on the back.

Keep killing it!

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