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I've searched for this answer for a while, but my loans are set up in a different way and I'd love some advice. (FYI I don't live in the USA)

Loan 1: Personal loan. It was $200,000 with a 4.95% Fixed Interest
Loan 2: Student loan. It was $80,000 with a 3% Reducing Balance interest
Loan 3: Car loan. It was $ 38,000 with 2.96% Fixed Interest

Minimum payments :
Loan 1 : $ 1806
Loan 2 : $ 446
Loan 3 : $ 389

Currently I am paying
Loan 1 : $ 1810
Loan 2 : $ 1500
Loan 3 : $ 389

At this point, my outstanding balances on the loans are
Loan 1 : $ 285,190.11
Loan 2 : $ 47,639.15
Loan 3 : $ 33,786.84

  • Question 1 : I decided to work on the loan with the reducing balance first, but I am wondering if that's the right move. Some articles I've read say I should work on the loan with highest interest (Loan 1, personal loan), but that is a Fixed Interest Loan. Am I doing the right thing?
  • Question 2 : I have $ 10,000 that I can pump into one of my loans. I initially planned to put it into Loan 2 (student loan with reducing interest) but again is that the right thing to do?
  • Question 3 : My initial plan was to pay off Loan 2 (student loan), then Loan 3 (Car loan) and finally Loan 1 (personal loan). However, the car is almost 2 years old. I may consider selling it in another 2 - 3 years, and it will have a moderate resale value. Is it a good idea to pay extra on a car, that you will eventually sell? My loan for the car is a 9 year loan (hence the low minimum amount)

Any other advice is appreciated. After taxes I make $ 7500 a month. A large portion of it is going into loans. I do not pay rent and my monthly expenses are kept low (I don't eat out often, and I don't shop much). What's a better way to clear my debt?

Thanks in advance!

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    Is it a typo. Outstanding on Loan 1 is 285,190 greater than initial loan of 200K. Should this be 185,190 ? Also is there a part payment penalty on any of the loans? – Dheer Dec 10 '15 at 4:36
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    What is a "reducing balance interest" loan? Not familiar with the term. – keshlam Dec 10 '15 at 5:29
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    @keshlam I guess Reducing Balance is Reducing Principal loan where interest is calculated on the outstanding balance. Typical Mortgage type calculation. – Dheer Dec 10 '15 at 8:42
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    Somewhere on this site will be a canonical 'order of paying off debts' qa, which will cover your situation. I can't find it, but meanwhile read Why would anyone want to pay off their debts in a way other than “highest interest” first? and other high-voted questions in debt-reduction – AakashM Dec 10 '15 at 8:56
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    @Dheer: What's "typical" for a mortgage loan may vary from country to country. Here in the US, mortgages are amortized so payments are the same from month to month, by continuously shifting the percentage of the payment which goes to principal versus interest.. I'm told that elsewhere the payment may be allowed to change so other variables can be held constant. – keshlam Dec 10 '15 at 15:15
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Are loans 1 and 3 NOT reducing balance interest? I have never, ever taken out a loan where interest was not calculated on the reducing balance. Though you don't say where you live -- other than "not U.S." -- so maybe practices are different in your country.

Assuming that all three are fixed interest and that in all three the interest is calculated based on the current, i.e. reducing, balance:

In general, you want to pay off the loan with the highest interest rate first.

Sometimes special considerations apply. For example, in the U.S., home mortgages are usually tax deductible, so the "effective interest rate" is less than another loan with the same nominal rate. Mortgages also often require you to pay for "mortgage insurance" until you get the balance below a certain point, so the cost of that insurance should be added to the interest rate to see what it's really costing you.

I don't know if there are any such considerations in your case. I don't know of any that routinely apply to these types of loans.

When the interests rates are close, some people advise paying off the smallest one first. This gives you once less bill to worry about, which simplifies your book-keeping and may save you from forgetting to make a payment and racking up penalties. And getting a loan paid off can give you a feeling of progress that can be encouraging.

If you're in danger of not being able to pay the debts, maybe you're better off to pay off the debts where the lender has a lien, like on a car loan. If you miss payments on, say, a student loan, they can't repossess your education.

  • Loans 1 and 3 are not reducing balance interest. They're fixed. Loan 1 is from the bank. The initial sum of loan was 200,000 but with 4.95% over 20 years, the final amount was 360,000. I've been paying it off for a few years so the current balance is as above. I live in Malaysia and yes, the practices are a little different. None of my loans are a mortgage. I'm not in danger of not paying my loans, but I'm just wondering if I'm going about it the right way. Thanks for the comment! – Steph M Dec 14 '15 at 0:57
  • Okay, if you pay off the fixed interest loans early, do you stop paying interest? Or do you have to pay interest for the full term of the loan regardless? If the latter, then there's nothing to be gained by paying them off early, throw every spare dollar at the declining balance loan. If the former, then that's double reason to pay off the highest interest loan first. The answer depends on details of your loan agreement. – Jay Dec 14 '15 at 5:15
  • For the fixed interest loans, the only way to stop paying interest is if I pay off the principal amount in one go (but I don't have the funds to do that right now). Thank you for your answer, it was very clear and helpful :) – Steph M Dec 15 '15 at 6:25
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There is something, in my opinion, you are clearly doing wrong: Your life style is out of control in light of your debts and expenses. You said your income is 7500/month, with 3700 going towards debts. That might be pretty good, but your rent is zero. Where is the other 3800 going?

A nine year loan on a car? Hopefully the insanity of such a decision strikes you as you read this answer.

If I was you, I'd do the following: 1) Sell the car tomorrow. 2) If you need a car buy something very basic. Like less than 5K.
3) Find more money in your budget, with zero rent you can probably pay 6000/month towards bills pretty easily. Can you get to 7000?

Then start paying. Some feel that paying the smallest loan off first helps keep you motivated. Obviously paying on the personal loan will be more mathematically efficient. However, you have a long way to go with an austerity approach. If you can get to 7K/month, you are looking at over 4 years. At 6K, close to 5 years. And that is if things go well (you can sell your car for what you owe, and no major repairs on your basic transportation.)

Another option is to continue as your are going. If you don't borrow anymore, your car holds up, and live this life style you will be out of debt in like 11 years. However, I hope you understand this is very unlikely. People that tend to be comfortable with debt, tend to keep it around.

  • My life style is not out of control. I actually put away 2000 into savings every month. I live in Malaysia, and things are not as cheap as you'd like to think. A basic car is at least 35,000. That was the car I bought. To put things in perspective, a Honda City is 90,000 and a Mercedes Benz C class is 200,000. So no I did not make a bad choice in terms of cars. I've been very frugal. The 9 year loan was taken because I wasn't making 7500 2 years ago. I was only making 5800. I cannot sell my car because I need it to get to work. – Steph M Dec 14 '15 at 1:01
  • I'm definitely not comfortable with debt. I actually also work part time, at nights and over the weekend, to supplement my income. I make an extra 1000 a month from that. The rest of my money is spent on fuel, on food, my phone bill, entertainment. In total I would say my monthly miscellaneous spending is around 1,500 to 2000, depending on the month. My student loan (Loan 2) is actually a 20 year loan. I am planning to clear it up within 2 years. I think I will go ahead with pumping in the 10,000 into it and pay off that loan first. – Steph M Dec 14 '15 at 1:04
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My understanding is: You are paying 4.95% on $200,000 on the personal loan until it is completely paid off. You are paying 2.96% interest on $38,000 until it is completely paid off. And you are paying 3.00% interest on a $80,000 student loan which goes down as you pay back that loan.

I would recommend you find out what kind of loan you can get to repay the first loan. If you are able to get say a $120,000 loan, pay back the $200,000 loan as fast as possible, paying the minimum amount on the other loans, until you are able to get finance to pay off that loan completely.

I would also recommend that you find someone who is really good with a spreadsheet to do the actual numbers.

(My reasoning: If you paid off $80,000 of the $200,000 loan and then found say a $120,000 loan with the same awful 4.95% fixed terms, then you would save 5% of $80,000 or $4,000 every year. Paying off the $80,000 student loan would only save you 3% of $80,000 or $2,400 a year. )

On the other hand, check if there is any way to refinance the $200,000 loan if at all possible. Or maybe you can refinance it once the $80,000 is out of the way. The important thin is to refinance it as soon as possible.

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