Should man prepay mortgage, or car loan?
Dear Dr. Don,
Let’s say I have a car loan at 4.9 percent interest and still owe $10,000 on the car. I also have a 15-year mortgage with a $65,000 principal balance at 5.125 percent.
What would be the better option to put the money toward? If I had $5,000 to put down toward one loan, which loan should I choose to save me more in the long term?
— Mark Misgauging
Dear Mark,
It’s an interesting question. Assuming you can use the mortgage-interest deduction on your income taxes, the home loan has a lower after-tax cost than the car loan. Conventional wisdom would have you pay down the higher-cost car loan.
Paying down the car loan, however, only saves on your interest expense for the remaining life of the car loan, while paying down the mortgage saves interest expense for a longer time period.
You weren’t specific about the remaining term of the car loan or mortgage, but you can use the amortization tables provided with Bankrate’s Mortgage payment calculator and Monthly auto loan payment calculator to compare the interest savings.
Both calculators allow you to input additional principal payments and they will show the reduction in loan term and total interest expense. I’ve put together a hypothetical example in the table below.
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