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Paying off car loans

Q. I currently have a car loan that I am trying to pay off as soon as possible ($30,000). I am wondering whether it would be wise to sell my shares ($25,000) to smash the debt as quickly as possible. What do you think?

A. You are on the right track as far as suggesting that the car loan is costing you interest and you can save this money by paying off the loan. Loans for cars, holidays and other lifestyle items are what we call bad debt because the interest is not deductible. You may be in a better position if you pay off the existing car loan and then re-borrow and invest.

I could answer your question and then you may go away and continue to pay the loan or sell your shares and that would be that. However, let’s look more closely at your situation and see if we can provide you with something more.

To know what is the right thing to do in your case, you need to consider what your goals are (that is, the big picture) and look at how you are going to achieve them. Then you need to do some figures and see the cost saving that results from paying off the car loan versus the capital gains or loses and dividends lost if you sell the shares (also consider transaction costs). I would also suggest, and you may not like this idea, that you look at the cost savings of selling the car and either catching public transport or downsizing the car.

The actual shares you hold is another significant factor. If they are penny dreadful miners, I would suggest you cut your losses, pay off the loan and start again. If they are blue chip shares, the decision to sell may be harder to justify.

Confucius once said: “by three methods we may learn wisdom: First, by reflection, which is noblest; second, by imitation, which is easiest; and third by experience, which is the bitterest.”

 

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

 

Published on: Tuesday, October 27, 2009

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