Which car to pay off first?

BillR · #1 (**permalink**) 06-06-2007, 05:30 PM

My wife and I have managed to have a good year - we've banked about $55K in the last few months due to my business doing better than normal.

Currently our debts include -

Mortgage
$18K car loan on a 2005 Nissan Truck with 50K miles ($500/mo payment we typically make)
$12K car loan on a 2006 Nissan Car with < 4K miles. ($300/mo payment we make)
Some minor student loan debt.

We're already putting about $5K into home improvement. I've maxed our SEP/IRA contributions (for years and years now).

The question is - which car would you pay off first? We decided to only pay off one and maintain some liquidity. We pay more than the minimums on the loans but I can't decide which would be best to pay off first.

Mark A · #2 (**permalink**) 06-06-2007, 07:24 PM

I would personally pay off the 12k car loan first, unless there is a compelling reason (higher interest rates) on the 18k truck loan.

FredS · #3 (**permalink**) 06-07-2007, 10:51 AM

If you payoff one then apply the $300 or $500 per month to the remaining loan then I don’t think there is a really wrong answer to this question.

The real decision is how much debt you want to payoff now, $12K or $18k? If you payoff the truck first and apply the $500 to the car loan it would likely be paid off in less than 18 months. Paying off the car first and applying $300 to the truck loan might take 24 months, or more, to reach payoff.

Personally, I would payoff the truck. It is older, has more miles and will need to be replaced sooner than the car.

BillR · #4 (**permalink**) 06-07-2007, 11:20 AM

Actually....

Let me re-ask this question.

Which would you pay off first - a home LOC that has a $200/mo payment ($170 interest, 30 principal) or a car loan that has the same total debt amount?

I forgot to include the LOC in the first post - it's a tax deduction for me obviously but the interest rate is pretty high - the total balance is $19K - same as the older vehicle.

Mark A · #5 (**permalink**) 06-07-2007, 12:43 PM

Pay off the one with the highest interest rate first.

BillR · #6 (**permalink**) 06-07-2007, 01:14 PM

Well, the truck has the highest interest rate - 6.4%.

The LOC has a 5.25% rate.

Mark A · #7 (**permalink**) 06-07-2007, 02:34 PM

Pay the truck off first then.

Dru · #8 (**permalink**) 06-08-2007, 11:09 PM

Here's another thought...invest the money in a mutual fund. There are funds that have posted returns in excess of 10-12% for 10+ years (averages). If you can get a spread of 5-6% positive on the borrowed money, it seems you are ahead?

Sponsors