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We have earlier applied for a heloc with 10.5% of rate and car loan at 8 % . now that heloc is a revolving account while car loan requires me to pay installments in 6 years. If I have extra money coming from some source, which loan should be pay first?

Guest

Hi Carter,

I think it is better to clear off the Heloc as it is taking up more money.

jenkin7 · Posted: Fri Oct 26, 2007 5:09 am Post subject:

Hello Carter,

Your aim should be to reduce the interest payments after considering the tax benefits.

The interest on your car loan does not have tax benefits and if you are using tax deductions on your mortgage payments then, paying off the car loan is better.
If your heloc does not have tax deduction, then it will be wise to pay that since it is pulling more money from your pocket.

livinginnky · Posted: Fri Oct 26, 2007 9:30 am Post subject:

You would need to discuss the previous recommendation of the tax benefits with whoever does your taxes.

It is usually best to either pay off the smaller bill first or pay off the highest interest rate bill first. Depends on the situation.

What are the loan amounts for both and how far into the 6 years are you for your car loan.

How much do you make or what is your tax bracket?

jameswells · Posted: Fri Oct 26, 2007 4:00 pm Post subject:

It also depends upon how the interest on the loans are figured. Hopefully they are both simple interest loans...

Overall, I doubt the tax advantages are going to be strong enough to warrant putting the extra money on the car loan, but you should discuss with your accountant.

livinginnky · Posted: Fri Oct 26, 2007 4:45 pm Post subject:

Also consider this. If you pay the heloc first it will free up that potential money should the situation arise where you needed it. If you pay they car first you just have a paid off car. If you pay off the heloc you would have that credit available.

Samantha

Hi Carter,

Welcome to the forums.

If you pay your taxes using the itemized deduction method, then you need to bother about the tax savings from your mortgage interest. Since the car loan isn't deductible but the mortgage interest is, therefore you should compare the car loan rate with the effective rate of the Heloc (that is, excluding the tax savings).

However, if you are not itemizing our deductions, then the effective rate of interest on the Heloc is 10.5%. So, then you need to compare the 10.5% rate with the interest rate on the car.

Hope this helps...

God bless you.

Samantha

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Which should I repay first - Heloc or Car loan?