Pay off car loan or Mortgage

northwestiron

I'm new to the site but would welcome some advice to help me make the correct decision. I have £20k in spare savngs (keeping aside a rainy day fund) and with current interest rates I want to pay down some debt. Ihave two options.

1. Pay off a car loan where I owe circa £23k but the early settlement figure is £19k. The loan has about 3 and a half years to run. This would save me a monthly payment of £450 and the car is good for a while yet.

2. Pay my yearly overpayment allowance on my mortgage which is about £13.3k on a £133k mortgage to reduce the years left on my mortgage. This is a tracker mortgage at 0.59% above base until Jan 2010.

The dilema I am having is that my house which I purchase in 2007 was £266k when I purchased but no doubt will have depreciated a fair bit. I dont know whether it is better to pay off the obvious car loan with much higher interest or whether I will need the LTV benefit an oferpayment would give me to gain the optimum mortgage deal in Jan.

Anyone help?

Thanks

Kavanne

To get an LTV less than 75% your house needs to be worth more than £199500.

As a rule you should pay off the more expensive debt. What rate is your car loan charging?

MoneySavingNovice

Difficult question!

You have a good rate with your mortgage.

I guess your rate on your car loan is less good. If it were me I would be inclined to pay off the car loan and use the saved £450 per month to pay down the Mortgage. £450 x 12 = £5400 p.a. which is a good part of the overpayment allowance. You do have a reasonable LTV on your house any-way so I guess that an additional £8k would not make too much difference next Jan.

Interested in other views on this question!

northwestiron

Just had a quick look and cannot find loan documents without a longer search. I think it is about 8-10%APR

northwestiron

Any more views to help me?

Thanks

mrmajika

Definately don't pay it to the mortgage yet, as the interest is 1.09% at the moment.

If you decide not to pay off the car then stick it in a savings account, maybe Eggs 3.25% Savings Account.

You'll earn more here than you would save on the mortgage, then you can pay it to the mortgage come January if you need to.

THRIFTY_GIRL

1.Ensure that your money is in one of the highest paying instant access savings accounts. (maybe put some £7k in a Lloyds TSB Vantage account too).

2. Check the rate of the car loan and also check for any associcated early repayment charges. If these are applicable it may not be worth paying off early. Have this info ready but don't pay anything off yet.

3. Look at your mortgage. What is the lender's SVR after the tracker expires? Can you get a better deal? Don't forget you can apply for a new deal now (can usually be booked up to 6 months in advance). Some of the best deals require a deposit of 30 to 40% (60% LTV). The bank will also carry out a valuation and you will then know how much you need to top up to achieve your desired LTV.

4. Once you have worked out how much you need to save for the remortgage you will know what is available to pay off the car loan.

Just by way of example, if your house is worth £200k now (hopefully it should be at least this), then you a mortgage of £120k will equate to a 60% LTV, so you will need to top-up by £13k; if you can get a similar rate with 70% LTV you will not need to top up and it will probably be better to pay off the car loan subject to any early repayment charges - if these apply then I would go for a fixed rate savings bond.

THRIFTY_GIRL

northwestiron wrote: »

I'm new to the site but would welcome some advice to help me make the correct decision. I have £20k in spare savngs (keeping aside a rainy day fund) and with current interest rates I want to pay down some debt. Ihave two options.

1. Pay off a car loan where I owe circa £23k but the early settlement figure is £19k. The loan has about 3 and a half years to run. This would save me a monthly payment of £450 and the car is good for a while yet.

Thanks

3 and a half years to run = 42 months
Monthly repayment = £450
Total payable: 42 x £450 = £18,900

Does this mean that you have to pay the interest even if you pay off the loan early?

If this is so then DO NOT pay off the car loan!!!

northwestiron

Well noticed Thrifty Girl...!

Ive dug out the details and they are as follows on the car loan:

31 Payments remaining = £13,764
Final Payment = £8268
=£22,032

Settlement figure = £18,790

Difference

northwestiron

Sorry pressed two early!

Difference £3242