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Extra Cash for Debt Prepayments

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  • #1

    Extra Cash for Debt Prepayments

    Though I would make a quick post regarding this for some input. My wife and I only have a mortgage and a car loan for debt.

    Mortgage was initiated on 11/2010 for $177,805 at 4.75% for 30/yrs.
    Car loan was initiated on 12/2011 for $14,300 at 3.75% for 4 years.

    Would it make sense to prepay vehicle first due to it being more of a consumer type loan, or mortgage being the higher interest rate? Since the origination of the mortgage, we have prepaid about $1,000.

    We have $1,700 left over at the end of each month in our budget for prepayments, but currently balancing that with home improvements (windows).

    I personally keep going back and forth on my decision!
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  • #2
    The mortgage interest is tax deductible, so assuming the 25% bracket, your effective rate is only 3.525, making it lower than the car loan. I'd focus on the car loan first.

    This assumes that you have an adequate EF and are fully funding your retirement plans first.
    Steve

    * Despite the high cost of living, it remains very popular.
    * Why should I pay for my daughter's education when she already knows everything?
    * There are no shortcuts to anywhere worth going.

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    • #3
      I agree with Steve. Focus on the auto due to it being a higher interest rate, a non tax deductable loan, and a depreciating asset.
      Brian

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      • #4
        Well, that was fast!

        Thanks for the insight. I keep forgetting about the effective rate on mortgage due to the interest being tax deductible.

        Looks like the vehicle loan gets some extra principle paid each month.

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        • #5
          Originally posted by Xtreme Thunder View Post
          Looks like the vehicle loan gets some extra principle paid each month.
          Make sure that extra payments actually get applied to principal and not just recorded as extra payments. You might need to call them to be sure.
          Steve

          * Despite the high cost of living, it remains very popular.
          * Why should I pay for my daughter's education when she already knows everything?
          * There are no shortcuts to anywhere worth going.

          Comment

          • #6
            Originally posted by disneysteve View Post
            Make sure that extra payments actually get applied to principal and not just recorded as extra payments. You might need to call them to be sure.
            Yup, we have the loan through our credit union. It shows up in the list of our accounts when we log on for internet banking. It allows me to make a transfer from any account to either one as normal online banking transaction. The auto loan has three options, pay to interest currently accrued for the cycle, principal and interest and principal only. I of course did principal only, and it applies it and updates current balance instantly.

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            • #7
              I'd focus on the car loan first.
              I'd do just this. I'd pay the car loan first!

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