Seeking financial/debt advice

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Hello everyone, first time posting here.  Thank you in advance for any advice or assistance you provide.

I am seeking some financial advice.  I am married and have some debt, and am looking to make the best moves possible towards becoming debt free so my wife and I can pursue purchasing a home.  We have no children and do not want them.  Here's my current financial situation and the option(s) I have available to me.

My wife and I both work full time.  Combined, we make around $55,000 a year.  Not much, I know - but we're still young.  We have 1 working vehicle that we still owe $4,000 on @ $250 per month.  Side note: as I write this, it's February 2017.  By the 1st of June 2017, we must have a 2nd reliable vehicle due to work requirements.  Now onto the debt:

We currently have $11,000 of debt spread across 6 different accounts/creditors.  Medical expenses, credit cards.
As previously mentioned, we still have $4,000 left on our vehicle loan.
Not an ideal scenario we've gotten ourselves in, but we pay everything on time every month.

Here's where I need some advice:

Should we attempt to acquire a consolidation loan for the $11,000?  It would hopefully reduce our monthly outgoing and would be convenient to have only one bill to pay.

I am considering taking $7,000 out of my 401k.  This would be as a loan from my employer that I would be paying back via an automatic deduction on my pay checks.  I have been told that since this is basically a loan I'm taking out on myself and paying back, I will not have to report it on my taxes.

As previously stated, we require a second vehicle within 3 months.  I am considering using the $7,000 from my 401k on a reliable vehicle.

What should I do?  What's the best move, you know?  Should I take $7,000 from my 401k and pay off the car I currently have and spend $3,000 on a semi-reliable car?

Should I take my $7,000 401k and put it all on my $11,000 debt pile?  That would surely reduce my monthly outgoing, but I wouldn't have an option to purchase a second vehicle.  I don't want to juggle $4,000 of acquired debt, a $4,000 remaining car loan, automatic deductions from my 401k loan AND THEN be looking at having to finance another vehicle.

Over the last 18 months my wife and I have developed very proper and disciplined spending habits.  We do not spend frivolously anymore.  We just need some advice on how to fix the previous damage.

Thank you all very much for reading and for any suggestions you may have, we truly appreciate you!

John

 

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congratulations on having the discipline to recognize your debt situation and being willing to address it. that alone co... (more)

crabbing (Feb. 23, 2017 @ 8:09a) |

how about new credit card offer with no fee transfer, intro 0% offer? I thought citi double and few others offer 18 mont... (more)

prozario (Feb. 23, 2017 @ 8:28a) |

Not really they have 15k in debt, soon to be more with a new vehicle.  So say 20k debt on 55k of income pretaxed for two... (more)

gotpong (Feb. 25, 2017 @ 8:26a) |

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What are your interest rates on the different loans?

$2300 @ 12%
$4700 @ 19%
$4000 @ 20%

Interest on the remaining $4000 vehicle loan is 6 or 7%, I forget.

If you take a loan from your 401k, the loan will be due in full the moment you leave your company, and you will pay fees taxes and penalties if you can't pay it back. You are usually only able to borrow half of your 401k balance.also, if you are young you want to keep the money in the 401k because if you are young, time is your greatest advantage and lost time can't be replaced.

Now, to the car: if the two of you are making $55k, then one of you is not making enough for the job to require a car. if the job pays less than $28k and requires a separate car, put in your notice.

fellowhuman said:   $2300 @ 12%
$4700 @ 19%
$4000 @ 20%

Interest on the remaining $4000 vehicle loan is 6 or 7%, I forget.

  
Definitely dont pay off yur car loan. Try to pay off the $4000/$4700 loans first. Can you get a convenience check from the $2300 loan to go pay odd the other two loans? 

At these interest rates, it is worth taking the 401k loan to pay off the high interest loans. 2nd car - avoid if you can.

Make sure that your irs withholdings are on the conservative side - you dont want to pay penalty but you dont want to give irs free loan either. 

 

Unfortunately, 2 people working full time requires 2 vehicles. We've been sharing 1 vehicle for 18 months already. Due to recent scheduling conflicts with our jobs, it's time to get another vehicle by June.

I'm not sure what a convenience check is. What do you think about a consolidation loan? I have offers from the same company that I owe the $2300 to for another loan. Would a consolidation loan of $11,000 at around 12% interest be a good move?

Thank you very much for your input, looking forward to your reply.

fellowhuman said:   Unfortunately, 2 people working full time requires 2 vehicles. We've been sharing 1 vehicle for 18 months already. Due to recent scheduling conflicts with our jobs, it's time to get another vehicle by June.

I'm not sure what a convenience check is. What do you think about a consolidation loan? I have offers from the same company that I owe the $2300 to for another loan. Would a consolidation loan of $11,000 at around 12% interest be a good move?

Thank you very much for your input, looking forward to your reply.

  
Getting that loan is definitely better than paying the 19/20% interest. But do not pay the car loan since that is only 6-7%. 

(Convenience checks: my credit card companies keep sending me checks encouraging me to take a loan).

Btw - i believe that the interest that u pay on 401k goes back to your account. In that case, it would be better than a 12% loan (i think - havent done the math).

soundtechie said:   If you take a loan from your 401k, the loan will be due in full the moment you leave your company,.. .

This is not a law and varies by company. My employer does not call the loan balance when you leave.

If you truly have changed your spending habits and are disciplined enough to live on a strict budget, I would recommend applying for a credit card that offers 0% interest, $0 balance transfer fees for 15 months.  (They do still exist.....such as the Chase Slate card.)  However, this would only be wise if you could pay off the $11,000 within the 15 months, which means you'd have to allocate approx. $733/mo to paying off the balance transfer.  Do you have that much extra in your monthly budget?  If so, getting a 0% loan with no fees is the way to go......but you HAVE to be disciplined to pay it off within 15 months.  (And you have to be approved for the card....or a similar card).

To go one step further, if you are serious about paying off your debt and getting a car this summer, this is what I would do:
1.)  Create a strict monthly budget (if you haven't already) and free up $1,100/mo.
2.)  Apply for a credit card that offers balance transfers at 0%, $0 fees for 15 months or more.
3.)  Save the $1,100 for 5 months (March-July) to pay cash for a used car....if you have to have one. ($1,100 x 5 = $5,500)
4.)  Make minimum monthly payments on the new credit card (balance transfer) with the money you're saving on the loan payments you no longer have to pay (since they've been consolidated into the 0% balance transfer)
5.)  Once you get to August, the $1,100/mo goes all towards paying off the balance transfer (August 2017 - May 2018, 10 months x $1,100 = $11,000)

If you could pull this off, you'll be feeling great next May.

Is the debt in your name, DW or joint?

What are your and your wife's FICO scores?

Any negative items on your credit report? Missed payments, chargeoffs, etc?

With the debt to income ratio you have, you are not in a strong position to get 0% balance transfer money from a credit card.

If the debt is in your name or your wife's name (not joint), then the one without the debt will look a lot stronger on an individual credit card application (going for the 0% or low interest rate convenience check, balance transfer). The one with the lower debt might apply for two cards with different issuers at the same time. You can typically use household income on the application even if it is an individual application.

With two cards, you might be able to transfer some or all of your high interest rate debt to the CCs.

Similarly, if you do the 401 loan, you might consider paying off some of your debt ahead of getting a car loan. If your FICO score pops up (give it at least 30 days to bounce up after you pay down any debt) you might be in a good place to get a low interest rate car loan -- 3%? 4%? 5%?

Any way you can juice up your income? Overtime? Good high paying job on the side? (not delivering pizzas) Ruthlessly pay down those high interest loans however you can!!!!!

You might look at creditboards.com They are the go-to group for this kind of thing. FWF is more of the sneaky underhanded shenanigan outlet for making money on the side...

Good luck and stay in touch!

jerosen said:   
soundtechie said:   If you take a loan from your 401k, the loan will be due in full the moment you leave your company,.. .

This is not a law and varies by company. My employer does not call the loan balance when you leave.

  
If the loan isn't called when you leave it is treated as an early distribution with an additional penalty 10% tax on top of your taxable rate.  https://www.irs.gov/taxtopics/tc558.html

jbmittermaier said:   
jerosen said:   
soundtechie said:   If you take a loan from your 401k, the loan will be due in full the moment you leave your company,.. .

This is not a law and varies by company. My employer does not call the loan balance when you leave.

  
If the loan isn't called when you leave it is treated as an early distribution with an additional penalty 10% tax on top of your taxable rate.  https://www.irs.gov/taxtopics/tc558.html

Ctrl+F "loan": 0 results

A 401k loan is not a general distribution. I had one and left the company (indirectly, a small division separated in a corporate level transaction). I still had about a year to go on a 401k loan, and was able to just continue making monthly payments directly through the usual term. While employed, payments had been 2x per month via payroll deduction. I'm sure if I had missed a payment, I'd have been at risk of early distribution tax and penalty. I did need to keep that old 401k account in place of course, but since paying off the loan I've transferred it to a consolidated IRA account.

No more loans, especially a 401K loan. No more credit. Use cash.

Pay your debts of using a method that has proven itself time and time again: http://www.daveramsey.com/blog/how-the-debt-snowball-method-work...

I do not agree with everything Dave says, but the debt snowball helped me out tremendously years ago.

If your current car is reliable & it's just that it's a few years old. Then give it to your wife.

You get a Crown Vic j/k. You get an older (7-20yrs old) car that's reliable but might break down. Change your oil, all the regular maintenance, & learn cheap easy repairs like brakes, change trans fluid etc. And tough it out if you break down a couple times a year.

The thread is seeking financial advice, so I think this qualifies...

$55k/2=$13/hour per person, but you have a 401K, so I am guessing you're making more. If that's true, then your wife is making close to minimum wage.  

Instead of trying to save more money... I'd find a new job and make more money.  Every extra $1/hour increase = $2080 more in annual income.

fellowhuman said:   $2300 @ 12%
$4700 @ 19%
$4000 @ 20%

Interest on the remaining $4000 vehicle loan is 6 or 7%, I forget.

  
Normally I'd never endorse a 401k loan but I would in this case.  You only come out short if your 401k would have grown at more than 20% over the life of the loan...doubtful.

LAwoodtiger said:   The thread is seeking financial advice, so I think this qualifies...

$55k/2=$13/hour per person, but you have a 401K, so I am guessing you're making more. If that's true, then your wife is making close to minimum wage.  

Instead of trying to save more money... I'd find a new job and make more money.  Every extra $1/hour increase = $2080 more in annual income.

  
Good catch.

OP... Where do you live? What do you do? What does your wife do?

randyfee said:   If you truly have changed your spending habits and are disciplined enough to live on a strict budget, I would recommend applying for a credit card that offers 0% interest, $0 balance transfer fees for 15 months.  (They do still exist.....such as the Chase Slate card.)  However, this would only be wise if you could pay off the $11,000 within the 15 months, which means you'd have to allocate approx. $733/mo to paying off the balance transfer.  Do you have that much extra in your monthly budget?  If so, getting a 0% loan with no fees is the way to go......but you HAVE to be disciplined to pay it off within 15 months.  (And you have to be approved for the card....or a similar card).

To go one step further, if you are serious about paying off your debt and getting a car this summer, this is what I would do:
1.)  Create a strict monthly budget (if you haven't already) and free up $1,100/mo.
2.)  Apply for a credit card that offers balance transfers at 0%, $0 fees for 15 months or more.
3.)  Save the $1,100 for 5 months (March-July) to pay cash for a used car....if you have to have one. ($1,100 x 5 = $5,500)
4.)  Make minimum monthly payments on the new credit card (balance transfer) with the money you're saving on the loan payments you no longer have to pay (since they've been consolidated into the 0% balance transfer)
5.)  Once you get to August, the $1,100/mo goes all towards paying off the balance transfer (August 2017 - May 2018, 10 months x $1,100 = $11,000)

If you could pull this off, you'll be feeling great next May.

This is a strategy for people who know what they are doing, are extremely disciplined with their spending, and stay on top of all their account payments over the long term. I agree it'd be the ideal scenario to minimize interest payments but I'd be cautious about OP's situation based on previous behavior, changes in work (instability in work as evidenced by June changes), credit score, and maybe general financial savvy.

Also that assumes the availability of that 0% balance transfer with 0% fees which is unlikely for OP based on their debt to income ratio and probably credit score connected to that. If that's not available, then paying cash for the 2nd car may not be the best move depending on APR of that 2nd car loan.

So my plan would highly depend upon OP's credit score check and what available debt consolidation offers they can get. The lower the APR and fees, the longer the term, the better.

I'd consider the 401k loan only if OP's job is very secure due to penalty/tax owed if he loses his job. But definitely not use that money for a new car loan unless OP's credit score is so low that the APR on that loan would be above 12%. Take care of the highest APR debt first regardless of what it's for.

Taking the 401k loan effectively kills the earning power of that money and forces you to pay interest - what is the rate?  I would see if you can work with a local credit union and get a consolidation loan or refi your car fully under them at a better rate if possible and if there is equity in the vehicle.  Those two loans and 19 & 20% are killers, what is your FICO?  The good news is paying all this down on time and without issue will help your credit.  You should also pull your credit from (https://www.annualcreditreport.com/index.action) and dispute any and everything to try to get it off regardless if valid.  Obligatory get a late 90's Crown V police cruiser for your second ride so you are doing it right. 

fellowhuman said:   $2300 @ 12%
$4700 @ 19%
$4000 @ 20%

Interest on the remaining $4000 vehicle loan is 6 or 7%, I forget.

  

Most likely you wont earn 20% on your 401K ... so definitely pay off those 3 loans at 12%,19%, 20% - if you can with your 401K.  Remember u can only borrow upto 50%, and since it will be a general purpose loan (not home purchase related loan) .. it might be a 5 or 6 year loan.

Only down side is - if you lose your job, you'll have to pay your 401K loan in full or pay penalty.

Even the car loan at 7% i may pay off using a 401K loan which should be much lower interest% .. but in that anyhow you're borrowing from yourself

Nominally i would say  don't borrow against 401K .. but paying 20% or so in interest rate is insane.  You wont make that kind of money even in stock market.   

Have you tried calling your CC companies and asking for a lower interest rate? It would take you 5 minutes and would be an immediate cash flow boost if they agree to lower your rate. Considering you make payments on time your FICO may not be all that bad (I'm guessing your utilization is high but timely payments is somewhat of a mitigant).

You have been given good advice here so I don't want to re-hash but you should definitely do this, the worst they can say is no.

S197 said:   Have you tried calling your CC companies and asking for a lower interest rate? It would take you 5 minutes and would be an immediate cash flow boost if they agree to lower your rate. Considering you make payments on time your FICO may not be all that bad (I'm guessing your utilization is high but timely payments is somewhat of a mitigant).

You have been given good advice here so I don't want to re-hash but you should definitely do this, the worst they can say is no.

 Exactly. This is the best advice--call the current creditors directly and nicely ask them to lower the rates.
 

congratulations on having the discipline to recognize your debt situation and being willing to address it. that alone counts for something.

out of curiosity, how closely are you tracking your finances? a good first step for anyone is to make a complete spreadsheet that lists all of your income, outlays, savings, and debts. for most people, keeping precise track to the dollar works (no need to itemize pennies). it's a good way to catch "hidden" expenses, like buying lunch or coffee, eating out, or things you buy that you don't really need. it can also help you visualize your debt reduction as you pay it down.

about that medical debt: is it something likely to happen again? look at your health insurance situation. if you're dependent on the ACA, you could be wiped out if it's repealed. look into whether you should shop for better insurance, or create a separate savings for medical expenses.

finally, about that 2d car. only you can know whether you truly MUST have one, but be absolutely honest with yourself and your spouse. if public transit exists in your area, calculate how much it would cost, in both dollars and time, vs. the cost of another car (including gas, ins, fees, and maintenance).
as others have said, call to negotiate a reduction in the interest on your debts. the worst that can happen is if they say no, and it only takes a few minutes. one thing i've heard mentioned (but never tried myself) is to ask if they have a "payoff challenge" - something where they give you an incentive to pay down/off the debt in a fixed amount of time. of course, it only works if you actually can do it.

normally, using retirement funds like a 401k is a bad idea to pay off debts. remember, you expect to live off those funds later.

how about new credit card offer with no fee transfer, intro 0% offer? I thought citi double and few others offer 18 months or 12 months 0% transfer.

kriskos4 said:   
fellowhuman said:   $2300 @ 12%
$4700 @ 19%
$4000 @ 20%

Interest on the remaining $4000 vehicle loan is 6 or 7%, I forget.

    
Normally I'd never endorse a 401k loan but I would in this case.  You only come out short if your 401k would have grown at more than 20% over the life of the loan...doubtful.

  Not really they have 15k in debt, soon to be more with a new vehicle.  So say 20k debt on 55k of income pretaxed for two people.  This is getting to be borderline bankruptcy territory.  Since its debatable on what it is and since at this level theres less of an opportunity to catch up for retirement I wouldn't touch retirement money.



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