hand wrote:Prioritize the car loan - cash flow improvement from paying off early comes in less than 56 months vs. 20+ years for the mortgage.
jda wrote:Why car loan when mortgage interest is 1.01% higher?
Even assuming you can deduct all the mortgage interest at about 30% marginal rate, the mortgage rate is slightly higher than car loan (3%*(1-0.3)-1.99%) = 0.11%
jda wrote:Why car loan when mortgage interest is 1.01% higher?
Even assuming you can deduct all the mortgage interest at about 30% marginal rate, the mortgage rate is slightly higher than car loan (3%*(1-0.3)-1.99%) = 0.11%
ks289 wrote:jda wrote:Why car loan when mortgage interest is 1.01% higher?
Even assuming you can deduct all the mortgage interest at about 30% marginal rate, the mortgage rate is slightly higher than car loan (3%*(1-0.3)-1.99%) = 0.11%
I also favor tackling the loan with the highest interest rate first. While the car loan has a shorter term and lower balance and will be paid off faster, using funds to pay down the higher interest loan first will SLIGHTLY decrease the time required to pay all the loans and the total interest paid.
hand wrote:ks289 wrote:jda wrote:Why car loan when mortgage interest is 1.01% higher?
Even assuming you can deduct all the mortgage interest at about 30% marginal rate, the mortgage rate is slightly higher than car loan (3%*(1-0.3)-1.99%) = 0.11%
I also favor tackling the loan with the highest interest rate first. While the car loan has a shorter term and lower balance and will be paid off faster, using funds to pay down the higher interest loan first will SLIGHTLY decrease the time required to pay all the loans and the total interest paid.
You need to specify that this approach reduces nominal interest paid (which is really only of academic interest).
Without knowing future inflation rates, it is impossible to determine which approach will minimize real interest paid (what real people care about) and therefore which approach would be optimal over the long term.
hand wrote:ks289 wrote:jda wrote:Why car loan when mortgage interest is 1.01% higher?
Even assuming you can deduct all the mortgage interest at about 30% marginal rate, the mortgage rate is slightly higher than car loan (3%*(1-0.3)-1.99%) = 0.11%
I also favor tackling the loan with the highest interest rate first. While the car loan has a shorter term and lower balance and will be paid off faster, using funds to pay down the higher interest loan first will SLIGHTLY decrease the time required to pay all the loans and the total interest paid.
You need to specify that this approach reduces nominal interest paid (which is really only of academic interest).
Without knowing future inflation rates, it is impossible to determine which approach will minimize real interest paid (what real people care about) and therefore which approach would be optimal over the long term.
ks289 wrote:
However, when the discussion is limited to which debt to pay off first, please help me understand how paying off lower interest debt first can ever come out ahead - if we are strict and consistent about the dollar amounts that are being used. I'm not talking about cash flow/flexibility.
I don't see how you can avoid have a longer period of time paying off debt and more interest paid.
jda wrote:
So basically it's a coin toss then?
The reason I asked the original question is because I fail to see why the car loan is the overwhelming favorite among the members here. To me the difference is pretty marginal and if op's goal is paying down debts then the end results should be fairly similar whichever route op choose to go with.
hand wrote:jda wrote:
So basically it's a coin toss then?
The reason I asked the original question is because I fail to see why the car loan is the overwhelming favorite among the members here. To me the difference is pretty marginal and if op's goal is paying down debts then the end results should be fairly similar whichever route op choose to go with.
The disconnect is that you are looking strictly from a "which approach results in more money in 30 years " point of view (and possibly ignoring the impact of inflation).
Posters who advocated paying off the car loan are likely looking at this decision from an overall personal finance point of view and recognize the importance of cash flow / minimizing fixed costs.
In real life, people lose their jobs, have emergencies and other bad things happen - the lower their fixed costs and the better their cash flow, the more likely they are to be able to weather the storms.
This is why paying down the car loan and freeing up an extra $287 a month is such a slam dunk.
Note, this entire thread appears to assume a fixed rate on the 30 year mortgage even though this detail is not specified, though 3% seems almost too good to be true.
If the mortgage is an ARM, the decision gets more complicated...
hand wrote:Prioritize the car loan - cash flow improvement from paying off early comes in less than 56 months vs. 20+ years for the mortgage.
ks289 wrote:However, when the discussion is limited to which debt to pay off first, please help me understand how paying off lower interest debt first can ever come out ahead - if we are strict and consistent about the dollar amounts that are being used. I'm not talking about cash flow/flexibility.
grabiner wrote:ks289 wrote:However, when the discussion is limited to which debt to pay off first, please help me understand how paying off lower interest debt first can ever come out ahead - if we are strict and consistent about the dollar amounts that are being used. I'm not talking about cash flow/flexibility.
Because you will use the money faster, and thus avoid interest-rate risk. If you pay down your mortgage, you won't be adding to your cash flow, so you'll have to take out another loan (at a possibly higher rate) when you buy your next car. If you pay off your car loan, and then invest the money that would have otherwise gone to car payments, you will be able to pay cash for your next car.
In addition, if interest rates fall in five years (or you can afford a shorter-term loan at a lower rate) you can refinance your mortgage, and any prepayments will decrease the benefit from refinancing.
grabiner wrote:ks289 wrote:However, when the discussion is limited to which debt to pay off first, please help me understand how paying off lower interest debt first can ever come out ahead - if we are strict and consistent about the dollar amounts that are being used. I'm not talking about cash flow/flexibility.
Because you will use the money faster, and thus avoid interest-rate risk. If you pay down your mortgage, you won't be adding to your cash flow, so you'll have to take out another loan (at a possibly higher rate) when you buy your next car. If you pay off your car loan, and then invest the money that would have otherwise gone to car payments, you will be able to pay cash for your next car.
In addition, if interest rates fall in five years (or you can afford a shorter-term loan at a lower rate) you can refinance your mortgage, and any prepayments will decrease the benefit from refinancing.
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