Reduce Mortgage vs Auto Loan

[mifamily]

I am seeking advice on a possible auto loan vs 2nd mortgage balloon loan.

Our family requires a new vehicle which we have been saving for over the last year. We now have enough money to cover the cost of this vehicle and have a car lined up. The cost of the vehicle is $15K and we can get a 5.5% 60 month used car loan through our credit union.

We also have a 2nd mortgage that we are attempting to pay off ($25K) at 6.75%.

I am unsure if it would be better to apply for a used car loan at a lower interest rate and apply our savings towards the higher interest rate mortgage. I am leaning towards purchasing the used car with cash.

Benefits of Paying Mortgage
---------------------------
Interest savings
No loan application required for vehicle


Benefits of Purchasing Auto
---------------------------
No effect on credit (extra loan)?
No extra payment created
Mortgage interest can be claimed on taxes


Please advise and let me know if you have any questions.

Thanks

[jIM_Ohio]

Are you concerned with credit rating? I don't see that as a factor into making decision.

What is the total line of credit on the 2nd mortgage? Can you refinance the 2nd mortgage into a HELOC?

HELOC would be lower interest rate than 6.75% if credit was good. Then put car on the HELOC, then put the savings towards paying down a portion of the HELOC.

win-win-win

you get "paid for"
your loans (2nd mortgage and car loan) are at a much lower interest rate
your interest is tax deductable

[disneysteve]

I would use the cash saved to buy the car. After taxes, the 2nd mortgage rate isn't bad at all (and is as good or better than the car loan). You saved up 15K over a year. Keep saving like that but put the money toward the 2nd mortgage. You'll have it down to 10K in another year and paid off in less than a year after that.

Or do as Jim suggested. Just a little more juggling to go that route.

[maat55]

I would pay cash for the car. Jim's idea of a HELOC is a good separate idea. Either way, you should have no car payment and be applying additional savings to the 2nd mortgage.

[mifamily]

Thanks for the advice guys. That confirms my original tendancy to pay cash for the car. The work and risks seem to outweigh the rewards.

As far as the HELOC, I don't think the principal on our house is low enough to apply for one and I plan on paying the 2nd mortgage off in about 2-3 years.

[SavingGuru]

I agree - buy the car in cash! Seems like the logical solution.

[GabRob]

There are two key points to remember in life all debt is bad for you, and the other is that a cash buyer always get the best deal on a used car.

Buy the car you can afford for cash and apply as much money as possible to paying off your debts.

[disneysteve]

all debt is bad for you

a cash buyer always get the best deal on a used car.

Welcome to the board.

I would have to disagree with both of your points.

All debt is certainly not bad for you. Do you own a home? Did you pay cash for it? Not many people can say yes. Without a mortgage, very few people could afford to buy a home. I'd say that is a good reason to have debt (if done responsibly). I also borrowed money for college and medical school, so I wouldn't have my education and career if not for debt. I'd say that was a good reason to have debt.

As for the car, dealers make much of their money on financing so are less likely to give a good deal if you are paying cash. If you don't tell them you are paying cash until the very end of the deal, they may rescind their offer. The better option may be to take their financing and then turn around and pay off the loan right after you get it.

[maat55]

There are two key points to remember in life all debt is bad for you, and the other is that a cash buyer always get the best deal on a used car.

Buy the car you can afford for cash and apply as much money as possible to paying off your debts.

I would agree that I would rather have no debt at all, but I also agree with steve that not all debt is bad.

As far as buying cars with cash or financing, I think the dealers are better at the game than the public. If you truly want to save with cash, you need to buy from the individual.

[Alex_Adviser]

Hi there,

I would like to suggest you to Purcahse the car on cash and do not finance it. As you mentioned that you have saved it in a years time, that means the 2nd mortgage can be reduced again by 15k next year if you can save that amount again in the next year. Even the interest rate is quiet nominal and also manageable.

All the best

[Smelly_Cat]

I think Home equity loans for cars can put you in a bind by making you owe more for your house than you can sell it for. I have made home equity loans to pay off credit cards, cars and ended up owing 80k on 75k house, Its just something to be carefull off, cause once I got the credit, it was soooo easy to get money. SC