Can you help me solve an argument im having with a guy in my office!? Here is the scenario…
You have a $200k home loan at 7%. You also have a $40k car loan at 9%. One day you come across $40k in cash. Do you A) put it into the home loan or
wipe the debt on your car?I suppose the argument is weather you should own your car or finance / lease it? And I know the answer is “you need to consider your individual circumstances blah blah”. But… in 5 years time when you look back, what you are better off doing? having a lower mortgage AND a car loan, or a higher mortgage and no car loan?
Cheers
JoelHi Joel,
This is one argument there may not be a right answer to but I'll give yo my 5 cents worth. If the debt does not have a tax deductable component IE. The car loan cannot be claimed. Then a rule of thumb should be to pay off personal debt with the highest interest first, in this case the car loan. THEN, the smart thing to do would be to continue making the payments that were going to the car loan into the mortgage. That woul be how to gain the biggest overall benefit.
Not financial advice, just a humble opinion.
Hope this helps
Thanks for the reply Colin, that’s exactly my take on the situation.
And… way to throw a spanner in the works with the tax deduction comment! haha. How does that actually effect things? because the fact is that we all do get car allowances here.
I would agree with Colin.
Both are private expenses so you cannot claim any interest which means you should generally pay the highest interest loan first.
Change the scenario a bit. you have 2 credit cards, one high interest, one low – which would you pay first?
If the car loan was deductible, then you would generally pay down the house first as you could save more tax this way, but it would depend on your income as well – if you earn low income and don't pay tax then you would not be saving any!
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
If the car is tax dedutable that might change the whole senario and before paying anything off you should really seek the advice of a good tax accountant. If it is not deductable then I stick with the original comment.
good luck.
I wouldnt hesitate to say the 40k should go into the home loan. Two things that pumping into the home loan allows. First .. when the home loan loses its 'break' period and there are no penalties … it allows you to refinance your existing loan at a lower rate. And you end up with a bundle of 40k extra equity in the property that you can either draw against .. retrieve when you sell .. or use to refinance several existing loans and mash them all together.
The car loan exists as an ongoing liability on a depreciating item. There is no sense in trying to feel better by paying it off sooner. You make more by chucking it into your asset base and building assets by reducing the amount owning on your loan. Being rich means having an extensive asset base .. reduced or offset liabilities and loans that pay themselves off. So think how 40k better spent leads to that.
The other factor is that if anything goes wrong .. you have an amount in your property you can draw against. A backstop.
Over a 25 years loan you would pay $44,747.00 Interest on a 40,000 loan at 7% which is 111% interest
Over a 5 year loan you would pay $9,706.80 Interest on a 40,000 loan at 9% which is 24.2 % Interest
On the case of whether it is a good idea to own your own car. Leasing/Financing a car is stupid
Even if your paying 48% tax, Leasing is still stupid, Any accountant that tells you borrowing OPM to purchase a depreciating asset that will loose half its value within 3-4 years is smart because of tax concessions isnt worth talking to because they have no idea.
My last car I bought is worth 10k, I payed $3750 cash for it because the owner couldn't afford to get a road worthy or afford to fix it (he didnt know what was wrong with it)
I fixed it myself, It needed new coil packs which cost about $500, When I done the REVS check on the car I found out he payed 24k for it 3 years prior
I will use and abuse the car for many years and then sell it, probably not even making a loss
Not loosing money on cars or constantly making payments on one allows me much greater cash flow to purchase more assets
I know many people who make good money but are very poor men because they would be embarrassed to drive anything other then a new car on lease
Are you likely to one day move out of the house? In that case, the more you still owe on it the better when it becomes a rental income source and you can claim the interest owing on it.
I agree with hbbehrendorff above about cars-they are a money hole. Assuming both are not tax deductable, I would suggest pay that loan off in total, then if you came by another windfall put it into a homeloan offset account so that if you ever move out you can still claim the most interest as a deduction because you still owe plenty on the loan itself.
wipe the debt on your car?
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