thunder04

iTrader: (1)

I recently bought a new bed & accessories, and the place I bought it gave me 3 years financing at 0%.

After doing some number crunching, I can most likely pay it off in 5 months (although I love my Tempur-Pedic...it' was NOT cheap!). A part of me wants to pay it off ASAP, because it bugs me! However...it is interest free until 02/04/2013...should I drag it out as long as I can (making even payments so that it's paid off by the time interest gets tacked on)?

Normally, this would be a no-brainer and I would stretch it out the length of the 0% term, but...my student loans are going to be entering repayment in December and I'm going to want to move them around (consolidate/refinance). If this loan will affect my options here (since it impacts my debt to income ratio)...I'm going to want to pay it off ASAP.

Thoughts?

Malayalee King

iTrader: (1)

let it ride or pay it off over the term instead

svtmike

If cash flow is going to be an issue for you when your student loans come around, pay it off ahead and close the account. When you go to refinance it will be better to have that account paid off and closed.

Anachostic

Sounds like the difference between my wife and I. I pay debts off ASAP because I feel I never know what the future holds. She holds debts (free or low-cost debts) to their limits and keeps the money in savings.

Logically, making minimum payments and banking the money for interest is the better route. But psychologically, I would get less enjoyment of a purchase if I knew there was a massive balance outstanding on it. It would not feel like it was "mine". Then making that big balloon payment at the end feels worse. It's like the creditor saying "Thanks for the $2000 payment on your 3-yr-old crap." instead of you saying to the creditor, "Here's your last $400 payment, 16 months before you thought I could pay it off."

Moog-Type-S

In todays interest market, your savings account is pretty much making you zero interest....so you are not really "saving/making" any money.......pay off bad debt.

thunder04

iTrader: (1)

Well...my checking account earns 2.5% APY (great little local credit union)...not that it's much.

I don't anticipate there being any cash flow issues come student loan time...but who truly knows what the future holds.

I think similarly to Anachostic in that the idea of owing money on my bed for 3 years isn't great...as I won't truly "own" it until it is 3 years old...but, I am borrowing money for free.

I may end up paying it off early. Other than my mortgage and student loans, it's my only other debt.

LaCostaRacer

There are good loans and there are bad loans. Obviously a 0% loan would be considered a good loan since it's costing you nothing and a 10% bed loan would be bad based on today's interest rates. You are paying no interest and with inflated dollars as the term runs. Why stress if you have a good loan?

You should pay 1/36th of the balance each month or make quarterly payments so the loan is paid off by its term. That's how the stores make their money betting that people don't actually pay the loan off in time- don't fall into that trap. Here's how I would do this if I were you :

1. open up a new separate MoneyMarket or savings account at your bank
2. if you have direct deposit paychecks, have an automatic transfer of 'bed payment' from checking to this new account.
3. on a quarterly basis, make a payment equal to 1/12th of the outstanding loan from this account.

The separate account is a good tool for tracking how much you're making in this process because any money left at the end of the term is interest accrued. It's nice also because the money is less apt to be spent because you really don't see it in your checking account. Not to mention, this cash could come in handy if there is an unexpected expense that you need extra cash for. As interest rates go up, you'll see better returns in the coming months.

It really doesn't matter that the bed is worth less than you owe on it because this would also be the case if you paid cash as well. Beds are not investments just like houses are not investments.

I also wouldn't worry too much about debt/income because a bed payment at ZERO % interest is nothing like a car payment or a house payment. Each month 100% of your payment goes to paying off principal so you're decreasing debt 1/36th each payment. It would be shocking if a bed payment is even 10% of a mortgage payment.

Probably the smartest thing is to pay more on the student loans since those probably do have interest and the interest rate is greater than a return on a CD or MM account.

I'm buying Silver coins with my extra $ these days and expect a high rate of return this next 5 years. I have paid off all loans in the past using the technique outlined and it works very well. This technique has worked for loans of all sorts: cars, houses, etc.

I only have one loan on a house rental and that is getting paid down using extra principal payments each month since the 5.8% loan is ungodly high for today's market and it's difficult to REFI a non-owner occupied investment property. Saving 5.8% is really like a 10% CD for me and that is next best game besides silver. Once CD rates get past 7%, I'll change my tactics and not pay the extra principal.

Sorry for the long post- got a little carried away on this one.