I have a home equity loan that I used to finance a portion of the purchase of an expensive car. The loan is about 1/2 paid off, but now I have enough money to pay off the loan. I am not sure if I should pay off the loan now (early) to save on paying the additional interest (6% on the loan) vs. should I keep the loan and use it, as I have been doing, to get a nice take deduction each year since I am in the 36% tax bracket?
Mike S.
Congratulations on doing so many things right! You were smart to use a home equity loan to finance your car. Figuring in the tax deduction, you are only paying about 4% interest on your car (6% minus one-third for taxes.)
Before you pay off that loan, do you have any other debt with a higher interest rate? I'd pay that first. I'd also prioritize funding your retirement plan, especially up to the maximum amount your employer matches.
Now, how are you doing with your investments? If you can do better on investments than 4% after tax, you might want to invest rather than pay off such a low-interest loan. Over the long haul, for example, a diversified stock portfolio pays about 10% per year even after market corrections. Or, you could take that money and make a downpayment on investment real estate. Don't we all wish we'd done that ten years ago!