At age 22, my son’s become a man. Over lunch he discussed finances like the adult he’s matured into. The question came up regarding loans and payments. He purchased furniture for his apartment on credit a year ago. Now, his finances have changed a bit. We spent time going over a budget and reviewing how to address that loan, while making the best use of his money. As I review other finance sites, and talked to folks about their feelings on interest bearing loans, I realized his questions are quite common. The tendency, when you get a little cash is to pay off loans immediately. I advise against this practice, largely, because I’ve done so, and felt the pain of missing cash in the bank later.
Here are options I gave him:
- With student grants and some money he’s saved he can deplete all his savings and pay the loan off. I did not recommend this, of course. Unforeseen financial events could catapult him into a money mess with no savings. As a general rule, you should have at least three months of earnings in the bank. Since he’s in college full time and living off campus, saving that much money is a hard call. But now it’s even more imperative to hang onto what cash he has.
- He can opt for paying ahead on the loan a few payments, then do an auto draft in the same month to stay ahead of the interest and keep his credit in good shape. If he pays only two payments in advance, he’s saved a bundle in interest and shortened the life of the loan. And he’s hung onto the bulk of his cash at the same time. This is a very good choice.
- As he has a full time job, and excellent credit, another option is to charge the loan on a credit card that offers 6 months “no interest” on balance transfers and new purchases. He can save the interest he’s currently paying for six months and if disciplined, pay the entire loan off in the initial period, interest free. Also, if he chooses wisely, and opts for cash back or rewards card, he’ll do himself a favor by receiving discounts and reward points long term. The important tool with credit cards is the use of discipline. You can’t go on wild shopping sprees or overspend. My son is on a tight budget. Other than his onetime purchase of furniture, he’s been fiscally sound and made great choices. Three other loans he’s had he’s paid off in full already, on time. I feel his best option is to attempt this route. Like anyone applying for a credit card, he’ll need to investigate the terms following the 6 month interest free period to be sure it’s still a deal. I suggested three cards, Citi Platinum Select and Discover More or Discover Student. (With Discover Student’s card he can reap from 5-20% cash back on purchases, even at his local student book store, which is a Barnes and Noble).
If you can’t obtain a credit card, however, paying ahead and securing future payments with an auto deduct, is your best choice. Add an extra $5.00 to the payment to stay way in front of the interest, (on top of your payments ahead) and you’ll pay it off quicker. The one warning- Make certain you keep enough in your bank account to cover these debits. You don’t want a thirty dollar payment costing you $30 more in overdraft fees.
Discover More Card |
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