Car Loan or Home Loan: Which Would You Pay First?

Car loan or home loanIs it wiser to pay your car loan or your mortgage? It might seem like a silly question – after all, ideally you want to pay both. But if you had to choose, wouldn’t you pay your home loan first?

Apparently not, according to a recent report by Marketplace.

The report found that lenders are much more eager to give people car loans now than home loans, because Americans have shown more willingness to make car payments during hard times than mortgage payments.

I would have thought it might be the opposite. After all, many people consider homes a great investment and one that can even grow in value over time (despite the evidence of the last few years). Meanwhile cars tend to depreciate almost from the moment they are driven off the dealership parking lot. That would make me personally more likely to pay a mortgage than a car loan.

And if you are working toward getting out of debt, it might even make sense to ‘downsize’ your car and get out from under the car payment altogether. That’s what Jennifer, one of our users did, and it worked out really well for her. She used the extra money from not having car payments to start paying more toward her other debts, like credit cards.

Yet it seems on average Americans are more inclined to pay their car loan. And that has encouraged lenders to go in that direction. The report referenced above says that standards for making auto loans are not stringent at all in the current environment and that many of the loans being made are considered “sub-prime.” That sounds a bit ominous, given what we’ve recently lived through with the housing market.

If you are currently in a situation where you’re struggling to make your payments (of any kind), consider signing up for ReadyForZero. Our free tool will help you organize your debts and will show you which ones to focus on to get out of debt as fast as possible. And if you need help with saving money, check out our Budgeting Tips resource center – it could help you learn some great strategies!

What about you? Would you be more likely to pay your car loan or your mortgage?

Image credit: ASurroca

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  • Money After Graduation

    My guess would be that people want to pay down a debt that they feel is achievable, as a car loan is usually smaller than a mortgage. I think people feel like a mortgage is insurmountable at times.

  • holly

    I would pay off a car loan first since it’s a depreciating asset!

    • That makes sense. What if you were trying to get out of debt – would you try to ‘downsize’ the car to get out of that monthly payment?

  • William_Drop_Dead_Money

    Definitely the car loan – interest rate is higher and I need to start saving for the replacement – don’t want another car loan ever gain! 🙂

    • If the interest rate is higher then it would definitely make sense to try to get that one paid off quickly! I know what you mean – it would be nice to not have a car loan any time in the future.

  • I’m assuming that repossessions of cars are a LOT easier for banks to deal with than going through the courts and dealing with foreclosure on a house. So much so that I know of people who lived in their house for over 2 years without making payments to the bank before going into foreclosure. Maybe that logic plays a role in it?

    Luckily I haven’t had to make this choice, but I hope I’d look at what equity I’ve got in both assets before making car loan vs. mortgage decision…

    • That is a really thoughtful point that I hadn’t considered. I think you are probably right that it would make sense in some cases for the reasons you outlined – although it still would be risky. The equity argument is very powerful too.

  • It would be scary to have to make this choice. I think I’d explore other avenues before resolving to not pay one, like borrowing money from a family member. (Hey! I’m trustworthy.)

    • Great point! If you can find a way to get through that difficult point in time, you could potentially avoid all of the worst consequences of not paying one or the other. Always thinking about protecting that credit score!