Debt Repayment Strategies

My husband and I have been really good about paying off our credit cards and saving some money. We’ve also revised our budget for the coming months that will take us into ‘savings-mode’ as we start the new year. Our budget is looking great, we can pat ourselves on the back. However, we still have a couple of really large bills that we now have to tackle.

To begin with, we took out a line of credit a few years back to get our business through the slower summer season. We had recently hired a full-time employee and we really wanted to keep him. We originally thought we’d only use half the amount of the line of credit and pay it back within 6-12 months. Well, sometimes if you open a can of worms, you get a rotten smell, and that ‘s exactly what happened. Instead of only using half the line of credit, we gobbled up the whole thing and at a horrible APR. (Maybe my analogy isn’t the best one, but you get the picture!)

We made the monthly payments in the beginning, which were a whopping $275 a month, then I fell behind. I was able to get them back on track within a couple of months, but with an APR of close to 30%, the finance charges and late fees had added hundreds of dollars to the original loan amount. My husband was able to work out a deal with them and reduce our APR for a limited time, it allowed me to catch up on payments and reduce the total due back to the original loaned amount.

We are now at square one again, meaning I’m looking at a $9,000 loan with payments averaging $275 a month. So, our new strategy is to pay this sucker off as quick as we can. Our first step, which we are taking this coming month, is to pay off $1,000 of the loan. This will reduce the total to $8,000. The $1,000 will most likely be coming out of our savings OR an outstanding invoice that we are waiting on (click here to see our outstanding client invoices.) In November, my goal is to then pay another $500, or close to $1,000 if I can, to reduce the loan amount to $7,500 or less. If we can get this monster of a loan down to a more manageable $6,000 or less by the end of this year, we will be looking pretty good.

Our other two large items that we owe money on, which aren’t that unfamiliar to most people, is a student loan, totaling $10,000, and a car loan, totaling $11,000. Both of these loans have decent APR’s and affordable monthly payments. We’d like to tackle the car loan in the beginning of next year, but this will largely be due to our success on paying down our line of credit. My husband and I both think that we will be able to get approved for a mortgage if we have a car and student loan. Although, a mortgage broker may not look so kindly on the line of credit.

Some readers may think we’re crazy to be thinking of purchasing a house when we still have close to $30,000 in outstanding debt. However, our rent alone is $1,800 a month, which is affordable in Los Angeles. I’ve used a few mortgage calculators and if we can actually find a house for $250,000 – $270,000, our mortgage payment will be less than our rent. Even once I add in property taxes and home owners insurance, our total monthly payment should be close to what we are paying in rent. So, my thought is, “Why throw this money to my landlord, and watch as he uses it to improve his house next door, when I could be paying it toward something I own?” Literally, every time we pay rent, my slum-landlord (who lives next door) does something cosmetic to his house within two days of receiving our payment. That really irks me.

Does anyone have thoughts on my debt repayment plan? Obviously, I still have a way to go over the next few months, but any suggestions are helpful. What about purchasing a home even with our outstanding debt?