Canadian Money Forum banner

1 - 20 of 33 Posts

·
Registered
Joined
·
7 Posts
Discussion Starter #1
Hi guys!
So I'm a Registered Nurse who worked through the pandemic. I'm about to receive my pandemic pay soon and wanted some advice on where I should place this money. So I will roughly be getting between $3,000-$4,000. So should I be putting this money into my OSAP which has high interest and has $23,000 left to pay? Or should I put all the money into repaying my dad for the car I just got (he paid $8,000 for it, I have paid back $2,000 so far, I have $6,000 left to pay back) which one should I do?
 

·
Registered
Joined
·
3,079 Posts
Highest interest is first from the best financial decisions. Talk to your dad to make sure he is okay with it, from best way to manage a relationship when you have borrowed money from someone personally.
 
  • Like
Reactions: Amna578

·
Registered
Joined
·
17,648 Posts
Highest interest is first from the best financial decisions. Talk to your dad to make sure he is okay with it, from best way to manage a relationship when you have borrowed money from someone personally.
I agree, you should consider your dad's perspective (and emotions). If he seems pretty relaxed about your personal loan, then paying down the higher interest rate loan first makes "technical" sense.

On the other hand, if he seems to be in a hurry to be repaid, I would try to do that for the sake of your relationship with him.
 

·
Registered
Joined
·
13,007 Posts
Paying down the highest interest is one preferred way to pay down debt. However it isn't the only way.

If you have $4000 (as an example) and you pay it off your $23,000 student debt, you still owe $19,000 student debt and $6000 to your dad.

There is no immediate improvement overall in that situation, except for lower debt costs long term. (which you can fix later with additional payments)

But, if you apply the "snowball" method of paying down debt, you could pay the $4,000 to your dad and would owe $23,000 student debt and only $2,000 to your dad. Then concentrate on paying your dad right off for the final $2,000.

The advantage to this method is that you can pay off your dad sooner and add that payment to your normal student debt payment.

You would "retire" the car debt and own more "equity" in the vehicle. You could focus on the student debt after that.

Both methods have pluses and minuses. Higher interest costs you more, but many people like the satisfaction of eliminating entire debts first and then adding the "savings" to the next smallest debt. If you add the savings from not paying your dad to the student loan......you will negate the additional interest costs.

That is why they call it "snowballing" the debt.

I think you have to choose which method you prefer, but the question you should ask yourself is this.

Will I feel more personal satisfaction by spending my hard earned pandemic money paying off my car......or applying it to the student loan.

The answer should guide your choice.

PS........thank you for your service to us all !
 

·
Registered
Joined
·
393 Posts
If you add the savings from not paying your dad to the student loan......you will negate the additional interest costs.
No, you really won't negate anything. You will be paying higher interest on the amount you gave the dad until the other loan is paid back. That does not mean you shouldn't do it for other reasons (ie. stay on good terms with dad) but that one is plain wrong.
 

·
Registered
Joined
·
7 Posts
Discussion Starter #8
Well my dad isn't charging interest, only OSAP is, so I think what they meant by that statement is that if I put the money towards my OSAP payment, that's less interest in the long run that I will have to pay
 

·
Registered
Joined
·
7 Posts
Discussion Starter #9
No, you really won't negate anything. You will be paying higher interest on the amount you gave the dad until the other loan is paid back. That does not mean you shouldn't do it for other reasons (ie. stay on good terms with dad) but that one is plain wrong.
 

·
Registered
Joined
·
13,007 Posts
If you pay off your dad and add your regular payment to him to your payment to the student loan, you will shorten the life of the OSAP loan and thus the overall amount of interest.
 

·
Registered
Joined
·
13,007 Posts
No, you really won't negate anything. You will be paying higher interest on the amount you gave the dad until the other loan is paid back. That does not mean you shouldn't do it for other reasons (ie. stay on good terms with dad) but that one is plain wrong.
You are missing the additional payment to the OSAP loan once dad is paid off, which will shorten the amortization period and thus lower the overall interest.
 

·
Registered
Joined
·
393 Posts
You are missing the additional payment to the OSAP loan once dad is paid off, which will shorten the amortization period and thus lower the overall interest.
I'm not. It is still overall more expensive than if you had put the money on the higher interest loan. The only benefit of paying off the smaller, no interest loan is psychological. And it might not be a benefit if one thinks they now have fewer debts and should spend more of their income.
 

·
Registered
Joined
·
3,079 Posts
You are missing the additional payment to the OSAP loan once dad is paid off, which will shorten the amortization period and thus lower the overall interest.
@off.by.10 is correct. If you run the numbers, you pay more snoballing if the smaller loan is the lower interest rate. The overall interest rate is higher. The ONLY advantage to the snowball approach is if you can completely eliminate the smaller loan, there is a potential for increase cashflow with the reduction of minimum payments. This cashflow comes at a higher cost of more interest charge.

to keep it simple, if you want to lower overall interest, pay off the highest interest loans. If there are relationship involved, that consideration comes first.
 

·
Registered
Joined
·
13,007 Posts
If you run what numbers ?

How do you run the numbers if you don't know the exact loan balances, interest rate, amortization schedule, amount of loan payments to each loan, how long it will take the OP to pay off the residual loan to her dad so that the additional payment can be applied to the student loan. You don't know how many extra additional payments would be involved or how much it would shorten the loan amortization which would lower the overall interest paid.

There would be no "increased cash flow" if the payment to dad is directed to the student loan instead.

The OP may very well pay more interest by paying off her dad, rather than the student loan....but for all we know the extra interest may be insignificant.

A comparison of the snowball versus avalanche methods of debt reduction.

 

·
Registered
Joined
·
13,007 Posts
Dave Ramsey is the author of the debt snowball method, and is supported by many in the world of finance and economics.

He provides a lot of information here.......including a debt reduction calculator.

 

·
Registered
Joined
·
393 Posts
How do you run the numbers if you don't know the exact loan balances, interest rate, amortization schedule, amount of loan payments to each loan, how long it will take the OP to pay off the residual loan to her dad so that the additional payment can be applied to the student loan. You don't know how many extra additional payments would be involved or how much it would shorten the loan amortization which would lower the overall interest paid.
Pick any numbers you like. As long as the interest for the dad loan is lower, you'll get the same result. The facts won't change no matter how many words you use.
 

·
Registered
Joined
·
150 Posts
I prefer sags way of doing things with the snowball effect. (yes Dave Ramsey way). It allows you to get some wins under your belt and gets you focusing real hard to pay off the smaller ones first and get some wins. Worked well for me.
 

·
Registered
Joined
·
1,020 Posts
Each debt represents mental energy and time that must be devoted towards paying it off. The sooner you can remove one debt from the pile, the less time and energy is devoted to paying off all remaining debts.

If the debts are similar in size, you may want to focus on paying the highest interest, otherwise it makes more sense to pay off the smallest ones first.

Math will always favour paying the highest interest first, but math doesn't account for the value of your time or psychological benefits of paying off debts.
 

·
Registered
Joined
·
13,007 Posts
There is also a student debt forgiveness program in Ontario, and I imagine all Provinces, whereby there is no interest or payments due until September 30.

It may extended or it may not, but now would be a good time to take advantage of the program and pay the dad right off.

Increase the payment to the student loan when it resumes and pay down the debt faster so it accrues less interest.
 
1 - 20 of 33 Posts
Top