Put savings toward a Home Loan or Car Loan?
GoCuse09 asked:
I have a few thousand dollars saved that I was planning to use for a home improvement project. However, I also currently have a couple grand of home loan debt and a car loan. I’ve been making more than the regular payment on both loans and we have no credit card debt.
This entry was posted
on Tuesday, April 27th, 2010 at 6:52 am and is filed under Home Improvement.
You can follow any responses to this entry through the RSS 2.0 feed.
Both comments and pings are currently closed.
I have a few thousand dollars saved that I was planning to use for a home improvement project. However, I also currently have a couple grand of home loan debt and a car loan. I’ve been making more than the regular payment on both loans and we have no credit card debt.
Should I keep the money in savings and eventually use it for the home improvement project? Or, should I take the money and pay off the home loan and use any left over money towards the car loan?
Thanks!
Caffeinated Content
April 28th, 2010 at 3:54 pm
Caffeinated Content for WordPress
That’s a very good question, and the fact that you have managed to put some money aside in savings suggests you have the discipline to make the right decisions with your money.
My personal opinion is that I would do about anything to eliminate a car payment. Depending on your needs, you could save money on insurance by driving a paid off car, and, typically, the interest on a car loan is higher than a home loan rate.
Also, keep in mind that home loan interest is usually tax deductible, whereas a car laon is not.
That said, I would use the money to pay off my car.
May 1st, 2010 at 9:07 am
Caffeinated Content
In almost all cases, you are better of paying the auto loan off. That is because auto interest is not tax deductible, while mortgage interest is. Furthermore, traditionally the interest on a car loan is higher than on a home loan. Even if they were the same the tax savings on the mortgage would be an effectively lower rate.
Paying the auot loan will also improve your credit score.
May 4th, 2010 at 12:35 am
Caffeinated Content
Generally, I would prefer reducing debt. If you plan on doing the home improvement project anyway and will need to borrow the money if you use the funds that you have saved then I would not pay anything off. It doesn’t make sense to pay off a loan only to borrow shortly thereafter. Most of the time I would pay off the highest interest rate loan first. We spend a fortune on interest. Most people don’t consider the actual cost of borrowing money. We are much better off paying cash for what we want. If you borrow to buy a car you may wind up paying almost double for the car after interest payments are added, depending on the interest rate. If the home improvement project is something that can wait then I would suggest paying off the loan which has the highest rate of interest.
May 5th, 2010 at 11:38 pm
Caffeinated Content
It is always best to pay off debt. Money in savings has the “potential” to grow based on the interest rating. Paying off debt “does” save you money interest. So, you should pay off your debts. However, it is always best to have a minimum of 6 months worth of all your expenses in savings. Now, if you have a stable dual income, you could probably realistically make it 3-6 months not strictly 6.
So, only make this move, if you have enough to cover your expenses in the event of an emergency.
Once you make the choice to pay off the debt. Then you always pay the most expensive debt first. In most cases, between the two that will be the car loan. Unless you had a dealer special of some sort. Select the one that has the highest interest rate and pay that one off first, then use the difference for the other loan.