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Discussion Starter #1
Should I finance my Prius through Toyota for a 72 month loan at 6.9% or pay for it using a equity line of credit at 4.25%? My cost is about 28,000 all said and done.

The Toyota loan is simple interest. The equity line is monthly compounded interest. I am no accountant, so I'm asking for objective comments.
I would like to make monthly payments of about $450 on either choice.
I know the Toyota loan is fixed interest and the equity loan is linked to the prime rate.

I am attracted to the equity loan for the tax write-off and the option to pay interest only in the event of financial hardship/emergency.
 

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Saruman said:
Should I finance my Prius through Toyota for a 72 month loan at 6.9% or pay for it using a equity line of credit at 4.25%? My cost is about 28,000 all said and done.

The Toyota loan is simple interest. The equity line is monthly compounded interest. I am no accountant, so I'm asking for objective comments.
I would like to make monthly payments of about $450 on either choice.
I know the Toyota loan is fixed interest and the equity loan is linked to the prime rate.

I am attracted to the equity loan for the tax write-off and the option to pay interest only in the event of financial hardship/emergency.
Well, with the equity being linked to the prime rate, it *WILL* go up over the next few years. I'm an engineer, so I never learned 'accountant math', so I have no idea how to calculate the true cost of either of those (I used to know, but that knowledge has been replaced by much more useful info.) But I'd estimate that the simple interest one would cost less in the long run, when you take rate increases into account. BUT, the features of the equity loan also make it very attractive. So if you're willing to pay a little extra to write off the interest (which may, in fact, make it cheaper eventually,) and the ability to do the hardship payments, go for it.
 

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Avoid Variable Rates.

You really should look into a home loan as opposed to the line of credit. That would give you a fixed interest rate as well as the tax advantages. You would also be able to compare it to the Toyota loan offer- apples to apples.
The other advantage is that you could get the home equity loan right away (when the interest rate is probably be lower than it will be whenever you get the car) and start paying right away. Yes, the loan will cost you more than the interest you'll get from the bank where its stashed while you wait for the car, but since you'll need the loan anyway, at least it will be at the lower rate and paid off a bit earlier. :D
 

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How long, and be honest will you take to pay it off? If you are now at 4.25 on the HELOC, then you have Prime minus .25%. Correct?

So, will Prime be going up soon and for the forseable future? Almost certainly YES. But how long will it reasonably take to go up to 6.9% -- let's say 7% to make it easier. That is an increase of 2.75! That will, IMHO, take at least a couple years -- likely longer. But let's say three. Will you pay it off in three years? Even if you do not, and the Prime rate continues to climb, you still have the tax deduction portion of the equation. What tax bracket are you in? I would guess that if it goes up to 8%, with the tax break you still make out -- plus the flexibility of making your own payment amount up as you go along. Even if you take 5 years to pay it off. If you save $$ for the first 3, break even in year four, and pay a little extra in year 5 -- overall you still saved money.

The biggest question is how much self control do you have? Will you over pay the HELOC, when you don't have to? If the answer is no, take the higher rate car loan.

Otherwise, take the payment you would have on the car loan, and pay it on the HELOC. You will end up paying it off much sooner, and get the tax break, and have more flexibility, and have the pink slip if you have to sell it quick, and have one less payment on your credit report.

Spike
 

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You might consider borrowing the money from your 401k if you have enough in it to do that. I paid for my car doing that and the interest I pay on that loan goes back into my 401k, no bank involvement. I also owned the car outright when I drove it off the lot. As the current law is written, you can borrow up to 50% of your 401k; interest is determined by the plan holder based on prime rate. Since the interest is also my money, I look at it as an enforced contribution to my retirement fund. The fund did very well on the market last year and even after borrowing the money out of it, I am about where I was last year except that I have a new car.
Bob
 

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I would not suggest taking out of your 401k. It may sound nice but for the long run you would have less (by thousands if your young) when you retire. Example: $100,000 @10% at the end of five years will be $161,051.00 with no yearly additon. If you take out $25,000 and decide to make five equal payment of $5,000 plus an addition 10% for interest, you will have $5,500 as a yearly addition to the remaining $75,000 for five years. So $75,000 plus a yearly increase of the $5,500 @10% will become $157,274.11. A lost of $3,326.89 to your 401. Now if you plan to retire in 20 years, that lost is more. You need to make an additional payments to make sure your 401 will same in five years.
 

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Spike said:
I would also vote against borrowing from your 401k. As will any competent money manager.

Spike
Cha-Ching! That is what you will hear if you borrow from your 401k, then get laid off and cannot repay it. Who here is impervious to potential downsizing, hmmmm? Everybody is at risk, except for trial lawyers.

It happened to me about ten years ago. I borrowed to pay off some credit cards and to buy a personal computer. And I got laid off about 6 months later. I did find work again, but couldn't pay it back in time, and so I lost THOUSANDS in penalties and taxes.

And that's not the worst part. The killer is that the money that I couldn't pay back has not been working for my retirement for more than ten years now. :(

Never, never, never ding your 401K for a car, or for anything else that depreciates, for that matter!
 

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Discussion Starter #9
I have decided to pay for the car using the equity line. I'd NEVER consider touching my IRA for any reason short of a medical emergency. I am sure my dealer will just love the fact that I'm not financing through them or buying the extended warranty (thanks to Troy in Mass).

I am very good about paying over the minimum on debt... I have a "beacon score" of 763.

I have learned so much from you guys about so many things. Thanks again.

By the way.. has anyone ever seen or used those magnetic door protectors?
 

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This reply comes late, as you've already decided, but I'm not sure what you mean by the Toyota line being "simple interest" vs the compound interest of the equity line. Unless you mean that the Toyots loan has fixed payments with all the interest calculated in advance, so that early payment gets you no benefit.

Anyway, I'd have recommended the choice you actually made, just because the rate is 2.65% less. Prime is likely to rise, they say, but if Greenspan lives it sure won't go up anything like 2.65% before you've paid off the car. (I wish it would! I don't borrow. I have money in the bank and I'd like the extra income.)
 
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