Open Question: Pay off one loan or the other?

We signed contract for a new car from a major dealer, VIN# and all. A week later, they couldn't deliver on the vehicle, or one that we were willing to agree to (sales guy was so pushy). we asked for our trade back. then a few days later (and not to our knowledge), they paid off our vehicle. Great for us because we had negative equity, but the problem is we have the vehicle, they have the title. They didn't open a new account (so far) for the vehicle we never took possession of. We have called them (even the GM of what is a major dealership) and they are not returning our calls. It has been 2 weeks since we first notified them of the fact they paid off our car. They call the credit union, and the credit union has said they will re-instate the loan if we sign paperwork. Why would I want to do that? This is the dealerships mistake that they should have to live with. In my opinion, their bait/switch cost them this time. are we opening ourselves up to suit to drop off the car?

Resolved Question: ways to cut our expenses?

here is our monthly expenses 2 adults 2 kids
Mortagage- 595 taxes and insurance too
car - 277
equity loan- 92
gas- 31
electric- 50
water sewer and trash- 44
land phone and internet- 55
cell (2 lines 500 min.) 60
diapers formula and wipes- 65 all store brand 2 lil ones
groceries 360
misc. household- clothing, shampoo etc- 20
car gas- 300
out to eat once monthly- 30
hair cut- 12
oil change average- 6 a mo.
doctor copay 20 average
Insurance 100 car
slush misc- 150

Open Question: Pay off one loan or the other?

1st Loan: $6,400 left @ 4.25% (Car)
2nd Loan: $26,000 left @ 8.8% (Home)

I have $7,000 available to put toward one or the other, which should i do?

#1 Pay off car would free up $400/month discretionary income that i could immedately start putting toward principal on the home loan or other investments.

#2 pay toward home, might save more interest in the long run but money would be stuck in equity of home and wouldn't be able to write off the taxes on that interest or use the money for other investments.

Which should i do?

Technorati Tags: equity loan, Open, Question, Pay, off, one, loan, the, other