‘I currently am little over 6k in debt’: I have debt and a car worth less than what I owe. Should I pay off the car or credit cards first to get ahead financially?

Hi Money Minder,

I’m in a bit of a pickle with my debt situation. I have around 6k in debt: 4,900 on my Amex, 1,100 on my Lowe’s card, and 280 on my Capital One card. All of these are currently at 0% interest, with the shortest term being on my Amex with 9 months left.

On top of that, my car is valued at around 18k, but I still owe 22k on it at a sky-high interest rate of 12.91% (yikes, I know, terrible decision I made when it was at 19%). I’m thinking about downgrading to a cheaper car in the $4-6k range, as I own an older Corolla and I’m pretty good with cars.

I work 60 hours a week and make 118k gross, but I have about 3k in monthly bills including rent and other expenses.

What’s the best way for me to tackle this car situation? Should I pay off the car to match its value before selling it, or should I focus on paying off the credit cards first before they start accruing interest?

Thanks for your help!

Best,
Debt Dilemma

Response from THE MONEY MINDER:

Hello There,

I understand the challenging situation you are in with your debts and the high-interest rate on your car loan. It’s concerning to be juggling multiple debts, especially in a scenario where the interest rates are not in your favor. Given your meticulous monthly income and expenses breakdown, it seems like you have a good grasp of your financial situation, which is a positive starting point.

In this scenario, it would be advisable to prioritize paying off your credit card debts before they start accruing interest. Given that the interest rate on your car loan is significantly higher than the 0% on your credit cards, it makes financial sense to eliminate those debts first. This will help you save on the interest charges that might accumulate if not paid off before the 0% promotional period ends.

Considering your car situation, downsizing to a more affordable vehicle is a practical approach. Selling your current car to break even on the loan amount or possibly selling it for more than what you owe would be ideal. With the excess funds, you could purchase a reliable used car in the $4-6k range. This move would not only lower your debt burden but also reduce monthly expenses, giving you more flexibility in managing your finances.

It’s commendable that you are considering making these changes to improve your financial situation. By prioritizing paying off high-interest debts, downsizing your vehicle, and continuing to manage your expenses wisely, you can make significant progress in achieving financial stability. Remember, small steps taken now can lead to big financial victories in the future. All the best from THE MONEY MINDER.