Overpay mortgage or pay a car loan fully

delioj

Hi I have a question:
If I pay the car loan fully, (£20k) I end up saving £2500 when compared to paying with a 4,9% interest rate the remaining 56 months.
In the other hand if I overpay 20k in my mortgage (fixed rate 2% for 4 more years) I reduce my time by 3 years (only 27years left) in a calculated saving of about £14k.

The numbers seem obvious (overpay the mortgage), but I can't make sense of why keeping the loan with a higher interest rate is more advantageous.
In my head I should try to get rid of higher interest debt 1st.
Is time the key here?

blue_max_3

Clear the car loan. No question. Always clear the most expensive credit first.

delioj

Thank you. I think like you too... But the math doesn't add up... In one hand those 20k save me £2500 if I pay the car, but if I pay the house I save 17k in the long run....

kuratowski

Once the car loan is gone, what are you going to do with the spare money from the the car loan payments?  If you use those to overpay the mortgage you'll end up better off than if you kept the loan and overpaid the mortgage now.

Nuggy96

delioj said:

Thank you. I think like you too... But the math doesn't add up... In one hand those 20k save me £2500 if I pay the car, but if I pay the house I save 17k in the long run....

Because you save £2500 over just under a 4 year period whereas with the mortgage you save 14k over 27 years. if you really simplify the mortgage and pro-rata to 4 years so divide the 27 years by 6.75 to get 4 years and divide the 14k by 6.75 years you save 2.07k compared to 2.5k. Hope that makes sense

delioj

kuratowski said:

Once the car loan is gone, what are you going to do with the spare money from the the car loan payments?  If you use those to overpay the mortgage you'll end up better off than if you kept the loan and overpaid the mortgage now.

That Eureka! moment
Of course! Thank you very much!

Bravepants

Pay the car loan. And then never, ever get a car loan again!

Thrugelmir

Clear the car loan. Then build a savings pot for the future. 

Sailtheworld

delioj said:

Hi I have a question:
If I pay the car loan fully, (£20k) I end up saving £2500 when compared to paying with a 4,9% interest rate the remaining 56 months.
In the other hand if I overpay 20k in my mortgage (fixed rate 2% for 4 more years) I reduce my time by 3 years (only 27years left) in a calculated saving of about £14k.

The numbers seem obvious (overpay the mortgage), but I can't make sense of why keeping the loan with a higher interest rate is more advantageous.
In my head I should try to get rid of higher interest debt 1st.
Is time the key here?

If you pay the car loan you save £2500 AND free up 56 monthly payments.

If you pay the mortgage then you free up no cash but save interest on the mortgage.

A more realistic like for like calculation would be to compare the position after 56 months..

(1) Pay off car loan then make 56 monthly mortgage overpayments equal to the car loan payments. Car loan (£0)  + Mortgage (x) = total debt

VS

(2) Pay £20k off the mortgage and make another 56 car payments. Car loan (£0) + Mortgage (y)  = total debt

Nuggy96

Other thing would be to check when the interest is added onto your mortgage. No point overpaying mortgage the day after interest rate is calculated as makes no difference