 Dear
Dr. Don,
My husband and I have a home equity line of credit
with an 11 percent interest rate and a car loan
at 8.3 percent. As you know, the HELOC is a revolving
account and the car loan is an installment loan
for five years. We will be receiving some extra money
every month that will allow us to send an extra
payment to the principal of one of these loans;
my question is, which one should we pay down first?
-- Hortensia Hierarchy
 Dear
Hortensia,
The goal is to minimize your interest expense after considering any tax savings associated with the mortgage interest deduction on your income taxes. The interest on the car loan isn't tax-deductible, so compare that 8.3 percent rate to the effective rate of interest on your home equity line of credit.
If you're not using the mortgage interest deduction on your tax returns, then the effective rate of interest on the HELOC is 11 percent. If you do use the mortgage interest deduction on your taxes then you can figure out the effective interest rate on the loan with CCH's Mortgage Tax Savings calculator.
Look beyond just the effective cost
of the two loans. It's likely that paying down
the HELOC makes more sense than paying down the
car loan, because by paying down the HELOC, you've
freed up some borrowing capacity on the credit
line should, you need it, and you've reduced your
interest expense over a much longer loan term.
|
