I agree with what the other responders have said, and add one more
caveat... that the loan terms are equal. If you are rolling a car loan
with, say, 36 months left on it into a mortgage with a term of 360
months, you will pay far more interest on the car under the new loan
than the old one. In fact, you will be paying interest on the car long
after it has worn out and rusted away in the junk yard.

Dave

- quote -

You can approximate the effective interest rate of a tax-deductible
loan by subtracting your marginal tax rate times the interest rate.
So in your case:

r_eff = (1 - 25%) * 6.8% = 5.1%

That's not EXACTLY the whole story, but it's pretty close. Also,
interest on the new loan is probably deductible from your state income
taxes, as well. This has the effect of increasing your marginal tax
rate, so you'll save even more money with the tax-deductible loan.

As Elizabeth pointed out, this all depends on being able to deduct the
interest in the first place. There's also the question of whether
this is a good idea. A typical setup for this situation is taking out
a 2nd mortgage to pay off a car or a credit card. This seems like a
good idea on the surface, but it can get you in to trouble.

Credit card debt is unsecured debt. If you can't make the payments,
nothing really happens except your credit score plummets. A car loan
is secured by your car. If you fail to make the payments, they repo
your car. But a mortgage is secured by your HOUSE. If you stop
making those payments... the bank might foreclose on you. That's a
lot worse than having your credit score tank or losing your car.

--Bill

"Sam" <neverchecked40[at]hotmail.com> wrote in message
news:1173114073.696099.171810[at]j27g2000cwj.googlegroups.com...
- quote -

In this example, you will not be paying enough annual interest to itemize,
and therefore will not be able to take advantage of the tax deduction. Don't
let the tax tail wag the dog.

Elizabeth Richardson

I have an opportunity to re-finance a loan whose interest is not tax
deductable loan with a loan whose interest is tax deductable. Can
someone explain the math to me on how I can determine what my new
interest rate will be?

Here are some hypothetical numbers, I realize the interest rate on the
new loan is higher than the original but I am curious if the actual
interest paid after realizing the tax deduction would be less than the
original loan. Can someone explain the math on how to do this
comparison?

Original Loan
Balance: $10k
Interest Rate: 6.25%

New Loan
Balance $10k
Interest Rate: 6.8%
Interest is tax deductable
I am in the 25% tax bracket


Thanks, Sam