I’m not sure I understand her thinking either. The car payments and the credit card debt are the same thing. They’re both debt payments, and you’re being charged interest on both of them. The only difference is that one is attached to a car and one’s not.
Car loan at 2% interest and credit card at 12%. Plus, if I pay off the card and it gives me $15,000 of available credit, if I lose my job and have no savings yet (because I’m paying off all that debt) I can “live off it” for a bit. If I pay off the car loan and lose my job, leaving a hefty balance on the card, I’m outa luck.
It’s one reason life insurance is better than mortgage insurance. Which would you rather have if your spouse dies: The $200,000 remaining balance paid off on your house, or the house payment to continue, but $200,000 in the bank?
Of course there are differences between secured and unsecured loans, and Dave mentions that. However, the point he is making is that they are both debt. And, they are. One of Dave’s mantras is the Proverb that the borrower is slave to the lender. So, in that way of thinking, interest rates, collateral, terms, etc., do not make much difference in the big picture. Many people point out that, contrary to Dave’s debt snowball plan, paying off the highest interest rate first makes the most financial sense. And, on paper, they are right. However, much of his advice is geared to folks that are not the most responsible financially. If they were, they would not be in this place to begin with. So, he encourages one to pay the smallest debt off first. That gives people a sense of accomplishment and can quickly make the number of payments they face each month a little less daunting. Then, they take the money they were paying on the debt they just paid off and apply it to the next smallest debt. Once again, not necessarily the cheapest in the long run if they are paying off the low interest debts first, but if it helps pay them all off versus giving up, it is much better overall.
The $15,000 of available credit is not needed with a fully funded emergency fund. Which is the idea with Dave. But, you are right; mortgage insurance is a waste. Besides depriving the beneficiary of the options when receiving cash, the premiums are much more than term life. Dave points this out in his advice, too.
My car loan is 0%. But I still hate the monthly payment!
:-D
Mortgage insurance is a bad bet. Buy term life insurance and never mix insurance and investments.