What should I pay off with my bonus?

Question

I have a $3,000 bonus and $9,000 in proceeds from a stock purchase plan. What should I do with this $12,000?

I have a $30,000 student loan at 5% $206 a month
$14,000 car loan at $290 a month / 9% interest.
I also have a $14,000 balance on my home equity line of credit at 15.4%.

I know that's a really high interest rate, but I am a bit conflicted if I should pay off my car loan to free up that extra $300 a month to pay down the HELOC faster or if I should focus on the HELOC and keep the $300 a month payment going?

The stock plan is not in a 401(k) or IRA. It is out of an after-tax stock purchase plan. The only taxes I have to pay are on the investment gain, which ends up being approximately $3,000.

Answer 1

Clark Howard (consumer guru with a syndicated radio show) always says to pay off the higher interest loan first.
Good luck!

Answer 2

How in the world did you get stuck with a HELOC with 15.4%? Are you upside-down on the house?

I'm assuming the $3,000 bonus is what you'll have after taxes. If not, then we're really talking about only $1700. Either way, the bonus should immediately go to the HELOC.

With the $9,000, you need to be careful.
That stock should be part of your retirment fund.
If it's in a 401K or an IRA, I wouldn't touch it.

Answer 3

I think I would pay off the car, because the interest on your Student Loan and your HELOC are tax deductible, and the interest on your car loan is not.

Then I would send the $290 per month that you are saving in car payments to the HELOC every month.

However, so long as you pay off SOMETHING, and don't finance or buy anything else with a loan, you are gaining ground.

Answer 4

Pay off the car. The reason is that the interest rate that you pay on that loan increases in virtue of the loss in value that the car has each year.

Example, say your car loses 20% of its value from the day you buy it new off the lot until a year later. You have to add that 20% loss in value to the interest rate that you're paying on the car loan to get the "real" cost of the car. Then in the second year, the car loses another 10% of its value and you're still paying the same in interest, .. and so on.

As a rule of thumb, never finance a car. It's a double whammy financially.

By the time you do the math, your car costs you more than the high interest HELO because your home does not depreciate with time like the car does.

Let's say your home appreciates by 4% per year in value. Even at 15%, that's still better than the 9% car loan with a depreciation of the car by anywhere from 10-20% per year.

Answer 5

Pay down the HELOC first. Ask for a rate reduction on the last $2,000. Pay that off as quick as you can.

Then take the payment you were making to the HELOC, and add it to your car payment. That will pay off the car ASAP.

Student Loan at 5% is not bad. So now would be the time to work on the rest of your financial plan.

Answer 6

I would pay off the HELOC first. Get rid of that high interest rate, because over time you are going to be paying back a lot more money. Take the money you are using to pay back the HELOC and apply that to your car and you can pay the car off in half the time it would take normally.

Answer 7

Pay off debt with the highest interest rate. In this case, it will be you HELOC. Hope this helps

Answer 8

Pay the home equity line of credit off at the high interest rate and make larger payment on the others. 15.4% interest will eat you alive.

Answer 9

Definitely pay off the highest interest rate loans first.

Answer 10

Suze Orman also says to pay off highest interest rate first.
...and don't forget that after every six months of ontime payments you can call your creditors and ask for a lower interest rate! It works. Best of Luck.