Pay Off Your Loans!
REM # F587
By Ilyce R. Glink
Summary: Illyce gives a homeowner advice on what to do with the profits from a home sale. Pay off that car loan!
Q: I recently got a job that will require me to move out of state, because we don't know the area real well my wife and I have decided to rent a home for a year before deciding where we would like to buy a new home.
I have $25,000 from the sale of my old home. Should I save all of that money for the down payment on the new home next year or take $9,000 and pay off my car loan. The car loan’s interest is 6 percent and I pay $400 per month.
I’m just wondering what would be more financially sound.
A: The question you have to ask yourself is why would you put $25,000 in a savings account earning 1 percent interest when you're paying 6 percent interest on a loan?
Not only are you losing 5 percent, you're actually losing a little more because you have to pay federal and state income tax on the 1 percent you earn on your cash.
Here's what financial planners have known for years: Every dollar you spend to prepay a debt (any kind of debt) actually earns you the interest rate the debt carries. So, if you spend $9,000 to pay off your car loan, you've earned 6 percent on that money. That's a good deal.
To rebuild your savings, simply take the $400 per month that you would have spent, and keep tucking it away into your savings account.
NOTE: This column is distributed by Real Estate Matters Syndicate, PO Box 366, Glencoe, Illinois, 60022. This column may not be resold, reprinted, resyndicated or redistributed without written permission from the publisher.
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