(Not awake, I guess, to figure this out)
Just wondering this morning when I realized that we owe basically the same on our truck as we do on our mortgage
Now why am I paying off the truck so much faster than the house??
Oh and the payments are nearly the same
Property taxes
Number of payments and the Rule of 12s.
Large loans work (loosely) under the scheme that for the first 1/12th of a loan, you’re paying 1 part principal for 11 parts interest. Second 12th, 2 parts principal to 10 parts interest. And so on until in the last stretch you’re paying 11 parts principal and 1 part interest. That’s not really a financial rule or law, just a way to view how payments over a long time affect the payoff.
How many payments were on your truck, and how many are left? Ditto for your mortgage?
And WHAT are the interest rates for each?
Is your mortgage payment just principal and interest? That’s where you want to compare. Chances are you’re better off paying the vehicle off faster as it depreciates MUCH faster than the house and doesn’t get you any tax deduction. (If your vehicle loan is 0%, disregard.)
Yes, but did they start off the same?
I doubt it.
You probably had a 3-5 year loan on your truck, with the initial value being 20-30K.
With your house, you most likely had a 15 or 30 year loan, with the principal being 100K or more.
So, the monthly payments might be the same, but it takes you 5x as long to pay off the house. At some point the balance on the house becomes the same as that on the truck, but the payments don’t change.
But if you use math (Math!) to solve this problem: whatever the starting points were, if the interest rates are the same, if the outstanding principal is now the same, and if the monthly payments are the same, then the time to pay off each loan will be the same.
But without precise numbers about the terms of the loans from the OP this conversation is a waste of time. Perhaps the car loan is some promotional gig subsidized by the manufacturer at zero interest or something like that.
Not what you are asking I’m sure, but it’s a good idea to pay off the truck faster because it won’t last as long.
I don’t understand why that matters. If the collateral is no longer worth anything, that’s the lender’s problem, why would the debtor care?
Surely the best idea is to pay down the loan with the worst economics - the highest effective interest rate, factoring in tax deductions.
It’s not about the economics, people just don’t like to be paying off loans on something they don’t have anymore.
So why on earth would you recommend that they do such a thing? The correct advice is: although it may seem unattractive to be end up paying off a loan on something you don’t have anymore, really that’s unimportant. If you have a choice of several existing flexible loans to pay off, the collateral is the lender’s problem, and shouldn’t concern you. You should pay off the most expensive loan first.
Your “advice” is equivalent to saying: although astrology is bollocks, I know you like it, so I recommend that you consult an astrologist.
That may or may not be much of an issue if both loans are reaching their end. Whatever strategy saves the most interest is probably the better choice.
the house is 5k lower than the house loan
The house loan is four years old, the truck is about 10 months in
Of course the house loan is lower than the truck loan. I’d have to look up the interest but I am sure it is higher than 5%-we would not be so lucky as to have it lower than that
Yes that repayment would include the interest but not sure its over 100K though. Might be but if I paid it off sooner than the 30 years we would end up paying less interest, right?
yup…12 rules
truck payment…4 years…approximately
House payment 30 year mortgage with 5 years done
Of course it is. The point here is that lenders don’t want to loan money where the collateral will be worthless or gone before the loan is paid off because they know the borrower is less motivated to pay off the debt. The borrower should avoid this situation also to avoid making poor decisions as well. When your collateral still has value you have the opportunity to sell it to clear the debt, when it’s gone it’s all out of pocket. If your current car has gone off to the junkyard you usually need another one, if you’re still paying off the first one you’ll be increasing your debt to maintain the same position. Unless you’re getting some kind of miracle interest rate your term of the loan is going to correspond pretty well with the life of the car, beneficial for you and the lender. Now you can consult a financial adviser who just dreams up interest rates for a car considerably lower than mortgage rates for unheard of terms of the loans and follow their advice if you want, but I’d prefer someone who has a better grip on reality.
Your only point I disagree with. Anyone who carries continual car debt in this fashion is making some poor financial choices and likely some questionable vehicle choices. It only makes sense if you give in to the notion that buyers are helpless to get ahead in this area.
I’m just talking about the usual situation car buyers find themselves in. I don’t get into that position at all, I haven’t carried any car debt in decades. I think most people buy too much car, think only about the monthly payments without considering the interest rate, or their desire for something new even if they haven’t taken full advantage of the previous deal. Buyers are certainly not helpless to get ahead, they just act like they are too often.
No, you still owe the remaining car loan amount even if the car is destroyed in an auto accident. That could also be true for the house mortgage, even if the house burns down (depending on the terms of the mortgage). But an auto accident is much more likely than your house burning down.
You are stating the facts correctly, but drawing the wrong conclusion.
Since, as you say, what happens to the underlying assets has no bearing whatsoever on the amount you have to repay, why do you think the expected life of the car has any bearing on which debt you should repay first? If you have a choice about which debt to repay, you should repay the most expensive debt (in terms of the effective interest rate charged). What the debt is “attached” to as collateral is irrelevant to you as the borrower.
Say you have $120k in debt - $20k car loan at 0%, $100k mortgage at an effective 2% (factoring in tax relief).
You get a windfall of $30k from great aunt maud’s will.
You should put it all to paying off the mortgage first, and keep the car loan outstanding as long as you are allowed to under the terms of the loan.
You’ll be left with a total of $90k debt either way, and your only concern is that the interest rate should be as low as possible. $20k at 0% plus $70k at 2% is always better than $90k at 2%, whether the car exists or not.