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Pay off car loan or make a lump sum mortgage overpayment?

(9 Posts)
Ruby1080 Mon 17-Feb-14 10:56:18

Hi, I'm wondering if anyone can advise me on what is the best thing for me to do. I've got a lump sum of money that I was going to use to overpay my mortgage. However, last night I was thinking this through and wondered if it would be more beneficial to pay my car loan off first. I've got a settlement figure but still don't really know what would be best so would appreciate some input.

The figures are:

Repaying the car loan in full would cost £5,471 - this would save me £1,450 in interest, and I would also no longer be paying the monthly payment of £154 (45 months remaining). If I took this option, then the £154 pm would go towards the mortgage.

According to the Money Saving Expert mortgage repayment calculator, paying the same amount (£5,471) off my mortgage now would save me £14k over the remaining 34 year term, and would mean the mortgage was paid off 4 years 3 months early.

I'm not sure how relevant this is as I will be remortgaging in the summer and reducing the term anyway. How can I make a fair comparison between the two options? My head's frazzled with it.

Wetoopere Mon 17-Feb-14 11:07:23

The mse calculator offers the option of regular over payments too, try comparing regular £154 & the lump sum option?

petalsandstars Mon 17-Feb-14 11:10:36

If you pay off the car loan and then put the (45 x £154) onoto the calculator to overpay the mortgage what does that save you?

That would give you a better comparison I think

Ruby1080 Mon 17-Feb-14 11:29:01

Thanks. The figures are skewed as the calculator thinks I'll be making that overpayment for the full term of the mortgage, but if I look at where it'll put me in 3 years time, it looks like this:

* Pay off car loan, then use the £154pm to overpay the mortgage means the mortgage will be £77,307 after 3 years.

* Use the lump sum to overpay the mortgage, and continue paying £154 pm for the car means the mortgage will be £77,040 after 3 years.

Is that the right way to work it out? Looks like it won't really make much difference either way, which is confusing because the loan is 15.9% APR and the mortgage is 3.99%. I suppose the difference is that the mortgage is over a much longer term?

LadyKooKoo Mon 17-Feb-14 12:23:19

The difference between paying the mortgage now and paying the mortgage monthly is �267 (in favour of paying the mortgage now). However, as you would be saving interest on the car by paying the car now and paying the mortgage monthly, you would actually be saving �1183 by paying the car now and paying the mortgage monthly. I would therefore pay off the car now and pay the mortgage monthly. This will also reduce your other liabilites when you come to remortgage so could help you get a better deal.

Pay off the car. Martin Lewis also says "it's important you prioritise using your savings to get rid of the most expensive debts". And what Martin doesn't know about money isn't worth knowing IMHO.

AMumInScotland Mon 17-Feb-14 12:46:31

Pay off the higher APR first, that is always the best thing. So pay off the car loan.

UNLESS there is any risk of you not making your mortgage payments, because your mortgage is secured on the house so not paying it could lose you the house, whereas not paying the car loan could only lose you the car.

MissWing Thu 20-Feb-14 21:20:24

AMumInScotland is right!

MissWing Thu 20-Feb-14 21:21:23

And Lady- you knows it. I love Martin Lewis because every Christmas he tells people not to spend money they haven't got on presents they can't afford.

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