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Which loan to payoff first? Help me w/numbers please!  

post #1 of 12
6/1/08 at 1:24pm
Thread Starter 
OK, here is the situation:

Loan #1 RV
Simple Interest, 15 year loan
10 years left
Interest rate: 6.5%
Principal remaining: $21,377
**Loan interest is written of federal taxes
No prepayment penalty
RV is FOR SALE


Loan #2 Used Auto
Simple Interest, 5 year loan
3 years left
Interest rate: 5.64%
Principal remaining: $12,248
No prepayment penalty
Vehicle will be kept for a LONG time!


So, there it is. I know that we'll save more in interest if we pay the RV loan off first because the terms are longer and rate is higher. However, we also write off about $1500 in interest per year (federal taxes) on that loan. And the RV is for sale - asking price is close to loan amount, so we wouldn't be stuck paying more into the loan at the time of sale.

I'm estimating an additional $200 - $300 per month toward principal for the chosen loan. (Unless it makes sense to pay more principal on both?)

Thanks for your opinions
post #2 of 12
6/1/08 at 1:44pm
I would pay the RV. It's higher interest, and even though you are asking close to the loan amount, if you don't get quite the amount you owe, if you sell for less, you'd have to come up with the difference at the sale to pay off the loan, I think it would be better to get the loan down well below what you'll sell it for.

As for really which is costing more, I guess it depends on the tax bracket to really be sure, since if you are saving quite a bit in taxes, it may negate the higher interest rate or it may not if you are in a fairly low tax bracket.
post #3 of 12
6/1/08 at 1:47pm
I would pay off the car loan since it owes less, then once it is paid off, you can take that payment and combine it with your RV payment to pay that down too if you haven't sold it by then or decide later to keep it.
post #4 of 12
6/1/08 at 1:55pm
Thread Starter 
Quote:
Originally Posted by mightymoo View Post
I would pay the RV. It's higher interest, and even though you are asking close to the loan amount, if you don't get quite the amount you owe, if you sell for less, you'd have to come up with the difference at the sale to pay off the loan, I think it would be better to get the loan down well below what you'll sell it for.
This was my line of thinking too. However, we do have some cash in savings to pay the difference (and we're willing to do so to get rid of it!).

Quote:
Originally Posted by mightymoo View Post
As for really which is costing more, I guess it depends on the tax bracket to really be sure, since if you are saving quite a bit in taxes, it may negate the higher interest rate or it may not if you are in a fairly low tax bracket.
28% tax bracket for 2007. I'm not sure how to figure this part out
post #5 of 12
6/1/08 at 2:03pm
I asked my husband because he's a numbers guy. He said that some of the benefit depends on your overall tax situation, but if you are well above the poverty line but not wealthy you are better off paying off loan #2. Due to being able to write off the interest on loan #1 your effective interest is probably closer to 4%.
post #6 of 12
6/1/08 at 2:05pm
Personally, I'd go with the car. Get it paid off first and if you still have the RV then, pay off that one.
post #7 of 12
6/1/08 at 2:09pm
Thread Starter 
Quote:
Originally Posted by rightkindofme View Post
I asked my husband because he's a numbers guy. He said that some of the benefit depends on your overall tax situation, but if you are well above the poverty line but not wealthy you are better off paying off loan #2. Due to being able to write off the interest on loan #1 your effective interest is probably closer to 4%.

Interesting. I wonder how to go about figuring out the "effective interest". This was DH's point about it. He wants to pay the car off first -- but didn't run the numbers specifically either

ETA: Of course, that's because DH wants to trade the old RV in for a newer one
post #8 of 12
6/1/08 at 2:17pm
Quote:
Originally Posted by anthasam View Post
This was my line of thinking too. However, we do have some cash in savings to pay the difference (and we're willing to do so to get rid of it!).



28% tax bracket for 2007. I'm not sure how to figure this part out
Just a simple calculation, without amortization or compound interest, so its not completely accurate, but...

21,377 at 6.5% interest for the year is $1389.50 (21377*.065=1389.5). When you earn $1389.50, you pay 28% taxes on it (because deductions always come off the top, or highest tax bracket), so you are paying $389.06 in taxes on $1389.50 of earnings. Thus, because this loan is tax deductible, you are therefore SAVING that $389.06 in taxes instead, so you can deduct this from the total interest your really paying, leaving you paying about $1000 in interest for the year. $1000/$21,377 = 4.68%.

You are paying a higher effective interest than 6.5%, which I'm not taking into account on either side as I said its just simple fudge calculation, but it looks like the RV loan might be costing you less money in your tax bracket than the other one.
post #9 of 12
6/1/08 at 8:18pm
Thread Starter 
Quote:
Originally Posted by mightymoo View Post
Just a simple calculation, without amortization or compound interest, so its not completely accurate, but...

21,377 at 6.5% interest for the year is $1389.50 (21377*.065=1389.5). When you earn $1389.50, you pay 28% taxes on it (because deductions always come off the top, or highest tax bracket), so you are paying $389.06 in taxes on $1389.50 of earnings. Thus, because this loan is tax deductible, you are therefore SAVING that $389.06 in taxes instead, so you can deduct this from the total interest your really paying, leaving you paying about $1000 in interest for the year. $1000/$21,377 = 4.68%.

You are paying a higher effective interest than 6.5%, which I'm not taking into account on either side as I said its just simple fudge calculation, but it looks like the RV loan might be costing you less money in your tax bracket than the other one.

OK, I dug out the specific info from last year. According to our statement, we paid $1522 (rounded) in interest last year. So, $426 (28% tax bracket) subtracted from $1522 is $1096 in interest paid. $1096/$21377 = 5.13%
post #10 of 12
6/1/08 at 8:25pm
Quote:
Originally Posted by anthasam View Post
OK, I dug out the specific info from last year. According to our statement, we paid $1522 (rounded) in interest last year. So, $426 (28% tax bracket) subtracted from $1522 is $1096 in interest paid. $1096/$21377 = 5.13%
There you go, then I would pay the other one down first.
post #11 of 12
6/1/08 at 9:11pm
Quote:
Originally Posted by Equuskia View Post
I would pay off the car loan since it owes less, then once it is paid off, you can take that payment and combine it with your RV payment to pay that down too if you haven't sold it by then or decide later to keep it.
I would do this too!
post #12 of 12
6/1/08 at 9:32pm
Thread Starter 
Quote:
Originally Posted by mightymoo View Post
There you go, then I would pay the other one down first.
Thanks for your help
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