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Payoff credit card debt or auto loan - The Bills.com Blog
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Payoff credit card debt or auto loan
Tuesday, Oct 9, 2007
Question: I have about $17k, in credit card debt, and I just got a return of $17k on an investment. My wife and I are in need of a 2nd car... Should I pay off all my credit cards and finance the car, or should I put the 17k toward buying a car? Thank You, Phil M.
If the interest rate on your credit card debt is higher than the interest rate on your auto loan (which is almost always the situation), then you should pay off the credit card debt. The benefits are less money
going to cover interest fees and possibly a lower monthly payment. Ideally, you would use the extra cash flow to pay down the total debt amount faster, getting debt free in a shorter amount of time. Be sure not to "run up" your credit cards once they are paid off!
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Bill
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We hope that this helped you to Find, Learn, and Save!
Best,
Bill
www.bills.com
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1. Posted by Matthew Schneider on Monday 25th May 2009 11:27
I disagree with your recommendation because you failed to take into account insurance premiums. If the owner is comfortable with liability only insurance, and 17k is enough to own the car outright, it would be a wiser choice to buy the car with cash. Having comprehensive insurance is usually at least 100 dollars more a month. If you factor that premium as if it were a finance charge, the auto loan is significantly more expensive to hold. A note should be made that the 17k is taxable income and if the buyer hasn't paid taxes on it yet, he/she should set some of that money aside to pay in April.
2. Posted by Bill on Tuesday 26th May 2009 07:31
Thanks for the comment, hopefully it will help folks.
3. Posted by LeAnne Schlegel on Wednesday 11th November 2009 11:07
If they are going to be buying a new or newer car, then they will want to have full coverage anyway. I certainly would not want my new car to have liability only. What if they had an accident?
4. Posted by Bill on Wednesday 11th November 2009 16:12
Another way to express the Matthew's point is if a vehicle owner set aside the ~$100/month additional amount that collision insurance costs into an investment account reserved for the repair or replacement of the vehicle, the vehicle owner would be money ahead. There is an opportunity cost of buying collision insurance, especially if the buyer drives infrequently, has a history of safe driving, lives in a rural area, and has the discipline to set aside $100/month as a collision reserve.