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They have a $14,000 home equity loan at 7.25% apr, a car loan on a 7 yr old car for $9500 at 5.99% apr and $90000 in savings at 3-4% interest rate.
They are currently having a baby and have short-term goals of starting a business so they don't want to get rid of too much cash. They probably will only be in this house for another 3-5 yrs.
Should she pay-off the home equity loan or the car loan or both? need to hear from you
Depending on what they really need for the new addition to the family and to start the business, I'd definately be thinking to pay off that home equity loan...and both if they think that it will leave them with enough cash.
I tend to agree with Rick. Pay off both the car and the credit line, and then tap the credit line for the business venture. One fly in the ointment might be the interest rate on NEW withdrawals from the credit line. I would guess that the HELOC is probably a variable at Prime (now at 8.25) -1%. Another factor would be their tax bracket. About 17% tax is the rate where the HELOC equals the car loan. To have accumulated $90,000 in regular savings, I would speculate that their tax rate is higher than 17%. I hope this helps.
There is some missing info here. Is the Home Equity loan a LOAN or a HELOC (Home Equity Line of Credit). That makes a difference. As Dr D pointed out HELOCs are generally adjustable rates tied to prime. Other factors are is the $90K in saving all their savings? Do they have a mortgage on the home? If so, how much at what rate? How much equity do they have? What do they think they will need as startup costs on the business?
Depending on the answers to those question I might be more inclined to just pay off the car.
Just a little something I learned from being in the car business and writing car loans all the time. . . .For one thing 5.99% on a 7 year old car is REALLY good!!! I don't know of any banks or credit unions that have those kind of rates on a car that old. So, my first question would be, is the car loan an actual car loan or is it an unsecured loan that they just took out to pay on the car? If it is a standard auto loan, you are only paying on interest on 55% of the amount financed on an annual basis (ie 55% of 9,500=5,225) then you multiply that by your apr to get your cost of interest annually (ie $5,225x5.99%=312.97 in yearly interest). As far as the savings goes, if you have $90,000 and you are at a 3-4% interest rate, you are compiling interest upon interest every year. For instance, $90,000x3%=$2,700 of interest a year. And that will keep going up! I wish I had a savings with a 3-4%!!! My crappy little passbook savings is only at 1/2% right now!
Wildcat girl is correct in her calculations but I don't share her enthusiasm for the savings account that she does. The numbers look good on paper, but in reality 3-4% simply retains purchasing power (counteracts the 3-4% annual inflation rate). I personally don't think there is any reason to hold that much cash especially in the face of a declining $. I would recommend to pay off both loans. This would leave them with 66,500. They obviously like the comfort of cash on hand but I would suggest dropping it to about $20,000. Given their future plans I would shop around for some CD's that cycle weekly, monthly, or bi-yearly. CD's are safe investments that can be fairly liquid depending on the cycle. Another bonus to them is they can be leveraged against because they are so safe. That means they could use their cash to leverage a business and let the cash continue earning a modest 5% apr.
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