Extra Repayment in Car Loan or in Home Loan?

Lproxies on 24/03/2023 - 11:58
Last edited 24/03/2023 - 12:11 by 1 other user

Hi OzBargain,

My family recently move in here in AU last year and just trying to learn this different features in loan. I currently have car loan and home loan and got extra savings. Both of the of them in variables rates with redraw available. We do have $80k in savings and I am wondering if it's better to redraw some to car loan or just have it all in home loan.

Car loan
interest rate: 7.09%
remaining: 2 yrs, 2 months
balance: $11,283.62

Home loan:
interest: 5.49%
remaining: 29yrs 8 months
balance: $500k

My thinking is that I should be placing all to home loan given that interest rate are calculated against the balance. Hoping for your opinions. Thanks!

Financial Car Loan Home Loan

Comments

  • Cluster on 24/03/2023 - 12:06
    +23

    I would be moving money from the home loan into the car loan, as the latter is more expensive in terms of interest rates.

  • Drakesy on 24/03/2023 - 12:07
    +8

    If you need to take out a car loan you can't afford the car tbh.

    But yes, as @Cluster has said, kill the car loan off asap.

    • orangetrain on 24/03/2023 - 13:22
      +23

      They have a 11k car loan while having 80k in savings. I'm baffled.

      • rambutann on 24/03/2023 - 13:49
        +1

        Truely confusing.

        • Drakesy on 24/03/2023 - 14:31
          +1

          Maybe they like burning money.
          I mean if depreciation doesn't get you the loan repayments definitely will.

          Although would explain why they've come to ozbargain.

        • kipps on 24/03/2023 - 16:20
          +1

          Maybe they like donating extra to our good financial institutions

    • sidesw1pe on 24/03/2023 - 16:44
      +2

      My car loan was at 3% and I invested my savings, getting a higher return than the interest cost.

      • Ryk on 24/03/2023 - 20:19
        -1

        so invest the value of the car too!

  • Settero on 24/03/2023 - 12:18
    +4

    Why not pay out the car loan , unless you are getting a better than 7.09 return , the 11k is not exactly the largest amount so not a major hit to your savings/emergency fund.

    • proxies on 24/03/2023 - 12:29

      unfortunately for the car loan, there are early repayment fees involve unless it's the last year.

      • singlemalt72 on 24/03/2023 - 12:55
        +13

        do the early repayment fees exceed the cost of interest between now and the final year?

        • JDMcarfan on 24/03/2023 - 16:44
          +2

          on the right track but does the early repayment fee exceed the cost of the excess interest paid until the final year.
          this is assuming that money in "savings" is in an offset, so money taken out of that will incur % at the home loan rate to pay off the car loan

          Working this out:
          Timeframe (to bring under 1 year, I'll make it 11 months): 15 months or 1.25 years
          Excess Interest Rate: 1.6%
          Balance: $11,300 (rounded)

          Excess Cost of Interest Payable: 1.251.6%11,300 = $226.
          If early repayment fee is greater than this, then keep the car loan until 11 months out, or try repaying all except a notional $100.
          If less than this then repay now and have only the home loan.

          • proxies on 24/03/2023 - 16:51
            +1

            @JDMcarfan: thank you! Termination fee is 700 at this stage.

            • avoidfullprice on 24/03/2023 - 18:49

              @proxies: Are there also monthly account keeping fees you will save?

              Car comprehensive insurance will also be cheaper if you own your car

          • JDMcarfan on 24/03/2023 - 16:56

            @JDMcarfan: sorry formula glitched due to ozb formatting rules:
            1.25 * 1.6% * $11,300 = $226

            and no worries

      • djkelly69 on 24/03/2023 - 13:34
        +1

        Can you make additional repayments without penalty? If so, you can just sit ~$11k in there but not pay it off completely, so you are not paying much interest at 7%.

        • proxies on 24/03/2023 - 16:54

          Yes, extra payments doesn't have charge as well as the redraw. This is exactly my current plan, just inquiring about if they will auto close it for some reason I forgot to remove some extra payments and they will charge me with termination fee.

          • JDMcarfan on 24/03/2023 - 16:59
            +3

            @proxies: there would be a minimum repayment or something that's directly debited?
            just have to make sure that's adjusted or otherwise again have a minimal amount remaining in the account so that there is a balance in 11 months after taking out the minimum repayments for the next 15 months.
            I.e. if you cant change the minimum repayment, just pay 14months of repayments so that when its 11months remaining there's only 1 month outstanding in the balance

          • avoidfullprice on 25/03/2023 - 09:12

            @proxies: Car loan doesnt have redraw?

      • carlJack on 24/03/2023 - 13:57
        +3

        Just leave $5 in your car loan. You dont have to close it completely.

  • tsunamisurfer on 24/03/2023 - 12:27
    +15

    I really don't want to be 'that guy' but this is a Year 5 Maths question.

  • djkelly69 on 24/03/2023 - 12:29
    +2

    My thinking is that I should be placing all to home loan given that interest rate are calculated against the balance.

    Sorry to say this is incorrect. General rule should be to put it against the debt with the highest interest rate, regardless of term.

  • djsweet on 24/03/2023 - 12:30
    +5

    The best thing to do is to pay off the loan with the highest interest rate. If you have 80k in savings I can't imagine why you would have taken out the car loan in the first place. Just pay it off!

  • proxies on 24/03/2023 - 12:33

    thanks guys for the input! Learning from this experience. Given the fees involve in taking off the car loan at this stage, I will maximize the redraw on that side until I can take it out. Cheers!

    • original15 on 24/03/2023 - 12:58
      +1

      As someone said above, calculate what the cost of early pay off are vs the interest you will pay until you reach the time/milestone where you can pay it off without this extra fee

    • Hearthstone on 24/03/2023 - 16:31

      how much is the fee? paying 7.09% while you have 80K in saving is just crazy
      paying 7.09% interest you got to earn 10% equivalent assuming you on 30% tax rate

      interest will cost you around $1500-$1600 on the car loan till the term end
      if it cost a couple hundred bucks of fee get rid of the loan

      • proxies on 24/03/2023 - 16:48

        Appreciate all the responses. For the questions about how did I arrived with this loan and with this savings, it's because I recently sold a property from my home country.

        It cost AUD 700 to terminate the loan on 1st and 2nd year and only will be no fees on it's last year. I thought of maximizing extra payments until the last year and payout for me not to be charged by termination fee. I am still inquiring if I can place like a figure that's very close to outstanding balance so that I will have small interest.

        • ltjet on 25/03/2023 - 09:00

          So you want to pay over $1000 in interest in order to save paying the $700 fee. Makes sense.

        • avoidfullprice on 25/03/2023 - 09:06

          I thought of maximizing extra payments until the last year

          What about making 9-11 standard monthly payments up front? Like 5k today, so your balance will be $0 when you have 12 months left on your loan?

  • Fredfloresjr on 24/03/2023 - 13:06
    +6

    80k savings and doesn't want to pay 11k. Doesn't make sense.

  • JIMB0 on 24/03/2023 - 13:50
    +7

    What you need to do is buy an $80k car.

    • kipps on 24/03/2023 - 16:28
      +1

      A high yield investment car. Not just any car.

  • trapper on 24/03/2023 - 13:50
    +1

    Pay off the car loan.

    I hope the $80k is currently sitting in an offset account also…

  • Seraphin7 on 24/03/2023 - 13:56
    +2

    This is bizarre. How you get into this financial situation … a car loan, a home loan, and then apparently $80k in savings … is somewhat beyond me.

  • avoidfullprice on 24/03/2023 - 16:13
    +1

    If you pay the car early, you might get refund on any motor equity insurance taken out on the car.

    Also, depending on the early termination fees structure, you might be better off to aim the loan fully paid out say 12 months ahead, as opposed to fully pay them off now. You save on compound interests

  • Hearthstone on 24/03/2023 - 16:23

    take the saving and paid off the car loan, it tax free earning 7.09% you can find it very hard to achieved in the current climate

  • bobbified on 24/03/2023 - 18:45
    +1

    Any extra cash goes into the one that has the highest interest rate (unless there's penalties/fees for early repayment).

  • Hugh G Rection on 24/03/2023 - 20:41

    i bought my brand new tesla cash.

    waiting for the housing market to crash until i buy another property, so im just saving right now.

  • Leiothrix on 25/03/2023 - 08:58

    You have the savings, why do you even have a car loan?

    Pay off the car loan, put the extra on the mortgage.

  • 2esc on 25/03/2023 - 11:06

    Get rid of the car loan

  • Chewy2221 on 25/03/2023 - 11:24

    I would pay off the car loan & if possible pay extra on the home loan. Extra repayments in the early years of a long term debt can dramatically shorten the loan period thus reducing the total amount of interest paid. Good luck.
    .

  • afah0447 on 25/03/2023 - 13:39

    It makes no sense whatsoever to have a car loan of $11k and have $80k in savings. You might as well set a portion of your money on fire or walk up to your bank and give them your money for nothing.

  • pebee47 on 26/03/2023 - 19:07

    Calculate what the residual amount of the car loan would be withh 11 months left to pay out. Then pay down that amount now, so @ 11months you’ll have extinguished the debt.
    If your State has concessional electricity for EV owners, consider buying an EV. This may well cover the extra interest you are paying now.

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