Q: We took a dealer/bank loan on a new vehicle, intending to pay it off with our credit union home equity line of credit.
But something weird happened. Our home equity line of credit (HELOC) interest rate floats. It’s currently at 7.84 percent. On the other hand, our car loan is fixed at 5.75 percent, with 57 payments remaining at $730 per month. Is it wiser to stick with the car loan or pay it off with the higher HELOC?
A: I don’t think it’s ever a good idea to pay off a less expensive loan with a more expensive loan.
If you’re paying nearly 8 percent on your home equity line of credit, but your car loan is fixed more than 2 percentage points less than that, you’d have a hard time convincing me that it’s a better choice to pay off the car with more expensive money. Your monthly payment may be higher on the car loan, but you are paying less interest on the money borrowed.
Even if you itemize on your federal income tax return and can write off the interest you pay on the car, you probably would just break even in terms of the two loans — and most people don’t write off interest. They just take the standard deduction.
In short, it’s a far better deal to keep the car loan. Just make the commitment to pay it off as quickly as possible as cars, unlike houses, typically depreciate in value.
(2 votes, average: 10.00 out of 5)
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