Should I pay off first auto loan or home loan?

Question

In 2019 I moved to a new apartment I bought, which I had to get a loan for, since I could not pay the sum required. At the time interest was very low, so I decided to go for it, and took a 564k Euro loan with an effective fixed interest of 1.7% per year with the option of paying off a chunk of the capital every year on top (during these years I managed to do that for a sum of 30k Euro). The banks here almost always require to re-discuss the loan every 10 years, so I can expect interests to go up in 2029.

I also had to buy a car recently (2023), which I took a 45k Euro loan for with a 4.99% effective interest per year for 6 years. This loan too has the option of paying off a chunk of the capital on top each year.

As far as I know, at the beginning of your payments, you are paying basically only the interest, so I do not expect - especially for the car - it to make a lot of difference, therefore I wanted to ask the question: given the possibility of putting some money together, which capital should I pay off first? Does it make any sense to put it to use for the car, or should I save it for the apartment, given that interest could go up at a later point in time, and at that point I could have less debt affected by the new interest?

Answer 1

The banks here almost always require to re-discuss the loan every 10 years, so I can expect interests to go up in 2029.

How do you know that? We have 2023 now, inflation is said to go down within the next two years. What happens in 2029, no one will be able to tell you.

I also had to buy a car recently (2023), which I took a 45k Euro loan for with a 4.99% effective interest per year for 6 years.

You surely absolutely needed such an expensive car. Financing a car isn't always the best idea. (read: in most cases is the worst idea).

As far as I know, at the beginning of your payments, you are paying basically only the interest,

That's exaggerated - but the interest part at the start is higher than at the end.

If you are paying 700 € a month for your car loan, your initial payment is about 187 € on interest and 513 € on principal. In total, this loan costs you about 7500 € on interest.

therefore I wanted to ask the question: given the possibility of putting some money together, which capital should I pay off first?

Definitely the car loan. Each 100 € paid into that will save you 4,99 € of interest per year.

or should I save it for the apartment

Where would you save that? On an account which gives you 2% interest while happily paying 5% for the loan? That wouldn't be a good idea.

Get rid of the expensive loan first. After that is paid off full, the 700 € a month (or whatever you pay for that) can be saved for paying off the home loan, or even be saved up at a higher rate than 1.7%

In 2028 or early 2029, you can start thinking about which way to go:

• Which interest will you get? Will we have another low interest phase, and you can get 1.0, 1.5 or 1.7%? Then relax and keep that loan, and invest the money.
• Or will the interest be 4%, 5% or even 8%? Then pay off as much as you can - once the Zinsbindungsfrist has expired, you are only bound by your liquid money.

Remember that until 2029, you will be able to save up some money - the earlier your 700 € payment for the car stops, the more you can save up.

Answer 2

When it comes to paying off loans, it can be difficult to determine which loan to prioritize. In most cases, it is recommended to pay off high-interest debt first.

If your auto loan has a higher interest rate than your home loan, it may be wise to pay off your auto loan first. This will save you money in the long run because you will pay less in interest.

However, if your home loan has a higher interest rate than your auto loan, it may be better to pay off your home loan first. This will save you a significant amount of money in interest over the life of the loan.

Ultimately, the decision to pay off your auto loan or home loan first depends on your personal financial situation. Consider factors such as interest rates, monthly payments, and overall debt when making your decision.