Plan of action

**Preston** · 07-22-2009, 06:07 AM

My next step in my debt reduction has got me somewhat stumped and I was wondering if someone can do the math for me or give me advice.

A few years ago we bought a timeshare (not our wisest financial decision). This is at 10.9% APR and is tax deductible interest.

However, I have a credit line open now where there will not be a transfer fee and will be 7.9% non-tax deductible interest.

The balance is about $12000.

**AmyBoz** · 07-22-2009, 07:11 AM

Preston, I'm not too good with the whole tax deductible, non-tax deductible numbers game, however, Greebo should be on soon, and I'm sure he'll be able to help you with this!

**a.nonymous** · 07-22-2009, 07:14 AM

The basic question is:
How much tax would you pay on $1300?

If it is less than the difference in interest (current loan @10.9: ~$1300, credit line @7.9: ~$950), namely less than about $450, then it is at first glance better to switch.

Having said that, there are some potential pitfalls. If the interest on credit lines are flexible, you may end up paying more. So you may have some risks buried there which you should assign a $ number to.
There are also minimum payment considerations to be made regarding future cash flows. It all depends on the differences in policies on the loan.

Overall, I'm not sure if it is worthwhile switching around if the difference is miniscule on a month-to-month basis. For example, if you could save, say, $100 in the first year, that'd be $8.33 per month. So you'll have to carefully think whether that is worth a potential risk of interest modifications or other policy changes down the line.
The further you go into the future, the less your monthly savings will be (hopefully).

It's probably better to express the potentially saved amount in percentage terms to your overall principal. Then decide if those savings reflect your estimated possibility of getting bitten by policy backdraws down the line.
Again, in our example above, if you could potentially save $100 in the first year, that'd be savings of 0.83% on the principal amount ($100/$12000 = 0.833333..%), basically meaning it's the factor by which you could improve reducing your principal - if you keep your repayment amounts constant.

I hope that's more or less clear. If not, don't hesitate to ask some more questions.

**Greebo** · 07-22-2009, 08:35 AM

Originally Posted by Preston

My next step in my debt reduction has got me somewhat stumped and I was wondering if someone can do the math for me or give me advice.

A few years ago we bought a timeshare (not our wisest financial decision). This is at 10.9% APR and is tax deductible interest.

However, I have a credit line open now where there will not be a transfer fee and will be 7.9% non-tax deductible interest.

The balance is about $12000.

A.non was quicker than me, but I have different questions, so

1) Where are you in your baby steps?
2) How long until you start paying extra on the timeshare or line of credit?
3) What is your current snowball size?
4) How large will your snowball be by the time you get to the timeshare/LOC?
5) Do you intend to keep the timeshare? Has it been worth it to you? (May not affect much - selling timeshares is, as I understand it, something that only happens at a big loss anyway...)

**a.nonymous** · 07-22-2009, 11:59 AM

Originally Posted by a.nonymous

If it is less than the difference in interest (current loan @10.9: ~$1300, credit line @7.9: ~$950), namely less than about $450, then it is at first glance better to switch.

Erm, clearly the difference between $1300 and $950 is $350 and not $450. D'oh!

But the rest holds true.

**Preston** · 07-22-2009, 05:38 PM

Originally Posted by Greebo

A.non was quicker than me, but I have different questions, so

1) Where are you in your baby steps?
2) How long until you start paying extra on the timeshare or line of credit?
3) What is your current snowball size?
4) How large will your snowball be by the time you get to the timeshare/LOC?
5) Do you intend to keep the timeshare? Has it been worth it to you? (May not affect much - selling timeshares is, as I understand it, something that only happens at a big loss anyway...)

1) I'm still on Baby step #2 -- I have an EF in place which currently holds about two months living expenses in it. It grows every paycheck and I'm leaving that as is since it is working.

2) The timeshare will be the priority by the end of the year -- worst case scenario. More likely November all the CC's will be paid off and cut up.

3) My current amount I am able to apply toward debt is about $1500/month. Beginning of the year about $825 of that was minimum payments. Currently my minimum payments equal $400. The time share represents $250 of that $400.

4) When I get down to the timeshare my only debts (non-mortgage) will be that and my student loan ($60/month). So I will have at least $1400/month to attack timeshare debt with.

5) I plan on keeping it for the time being as the market is crappy right now anyway and we do get use out of it. However, I am working to rent out half our use next year to offset the maintenance fees. However, if we find ourselves in dire straits this will be the first thing to go. I do know it will be easier to sell it outright if I don't have a 'take over payments' scenario.

**Greebo** · 07-22-2009, 07:54 PM

$1,400 a month into $12,000 = 9 months, rounded up.

A.Non already showed you the annual savings. All told, for the trouble of switching, you'll save *ABOUT* 300, before taxes.

Not worth it - you won't have the debt all that long.

Close the LoC and remove the temptation to ever use it again.

**Preston** · 07-31-2009, 07:32 PM

Well, I think I found a better way.

I figured out a way that I'd be paying $500 principal payment on top of the regular payment every month -- this would save interest but talked to the company today and there is no fee to us a CC (hear me out) and I'd get my 1% rebate and pay it in full so I'd get immediate savings right away.

Once I really get cooking on this debt I will be making bi-weekly $500 payments until this thing is paid off, all while getting the cashback.

So there is no reason for me to use the credit line. It remains open and unused. I'm keeping it open so I can refinance down the line. I almost never use it.

**Greebo** · 07-31-2009, 07:50 PM

Originally Posted by Preston

I almost never use it.

Almost?

If you had not said "almost", I'd say there's no harm in saving a few dollars of interest while you're getting out of debt.

But...I don't understand the need to keep the Line of Credit open to refinance later?

Are you sure you're not finding it maybe just a little hard to let go?

**Preston** · 08-01-2009, 12:45 PM

The package I have through my bank requires me to have a line of credit open to get a higher yield on my savings account. It does not say I have to use it.

From time to time, I will use the line as a 'payday loan' to bridge the gap between when the bills are due and the paycheck arrives... but this is rarely.

Also, I went to apply for refi and my credit score lowered since I was closing so many credit accounts. My debt to available credit ratio was too high and disqualified me from refinancing with optimal terms. So I will just have this be a line open that I hardly ever use.