Do I pay off my car or college loans first?

Questioning young adult - shutterstock_120973177Q: I have saved enough to pay off my car or my stu­dent loans. Both are at the same inter­est rate and I don’t know what one I should pay off first.

–Brit­tany, Illinois

A: Con­grat­u­la­tions on being able to save up this much! Nice work!

First Things First
As for where to apply your saved up cash, I’d first sug­gest that you make sure you keep some of it for an emer­gency fund. One of the most impor­tant steps you can take toward stay­ing out of con­sumer debt is to keep money in the bank for life’s unex­pected expenses. Gen­er­ally you’ll want to shoot for a bal­ance of 3–6 months’ worth of your com­mit­ted expenses in such an account. Believe it or not, I’d focus on this before your debt.

Many Vari­ables
As for which debt to pay off, there are a lot of vari­ables that can impact this deci­sion. For exam­ple, your car loan might be par­tially paid off and the inter­est por­tion of your remain­ing pay­ments might not be that sig­nif­i­cant. Or, some of your stu­dent loan inter­est may be tax deductible, caus­ing the effec­tive inter­est rate to be less than the rate on your car note. Or, maybe pay­ing off the car loan makes more sense because it might give you more breath­ing room each month in your bud­get. Again, there’s a lot that could impact this decision.

Biggest Inter­est Expense
Hav­ing said all of this, my guess (and it really is an edu­cated guess) is that pay­ing off your stu­dent loans will prob­a­bly work out to be your best bet. Since their repay­ment terms are likely much longer than the remain­ing term of your car loan, your stu­dent loans will prob­a­bly end up cost­ing you more in inter­est expense than your car loan will. If you wanted to get a more defin­i­tive pic­ture, you’ll need to ask your lenders for an amor­ti­za­tion table for each of your loans. These tables will show you how much inter­est expense you’ll pay over the remain­der of each loan and should be help­ful in decid­ing which one to get rid of first.

Con­grat­u­la­tions once again! I hope this helps and I wish you all the best!


4 responses to “Do I pay off my car or college loans first?”

  1. I agree with keep­ing an emer­gency fund, how­ever if you have debt, keep a thou­sand of your cash. A thou­sand dol­lars will fix most prob­lems that arise in life, Hot water heater, car repairs, etc. Then throw the rest of it at your debt. Get that debt paid off ASAP! It’s gain­ing inter­est!! I promise your sav­ings account is not pay­ing you the amount of inter­est your debt is charg­ing you. Good Luck

    1. Thanks for com­ment­ing SGB! Though I didn’t state it in this response, I com­pletely agree with you on the smaller emer­gency fund idea and typ­i­cally tell peo­ple that it in some cases it may be best to start with per­haps $1,000. The chal­lenge with all of the guid­ance we pro­vide in spaces like this is that it’s dif­fi­cult to say defin­i­tively what some­one should do since we don’t know the full pic­ture. Thanks again for offer­ing an addi­tional perspective!


  2. One thing to con­sider is depend­ing on life sit­u­a­tion, stu­dent loans can be deferred in case of unem­ploy­ment, etc. A car loan can’t be. I would pay off the car loan after hav­ing an emer­gency fund.

  3. If you have a car loan and in seri­ous debt, sell the car and get hoopdy till you pay that debt off. If your car is worth more than 50% of what you make in a year, you have too much car. Sell it, cut your losses and move on.

    Get­ting out of debt is 10 times harder than get­ting into it.

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