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!

Scott

Share |

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!

      Scott

  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.

USAA or its affiliates do not provide tax advice. Taxpayers should seek advice based upon their own particular circumstances from an independent tax advisor. The information is provided for informational purposes only and is not intended to substitute for obtaining professional financial advice. Please thoroughly research and seek professional representation before acting on any information you may have found in this article. This article is in no way attempts to provide advice that relates all personal circumstances.

Examples given are hypothetical illustrations and not an indication of the benefits or features of any USAA product. You should seek policies and advice based upon your own particular circumstances. Sample loans are for illustration purposes only and are not a rate quote, pre-approval, or commitment to lend.

Scott Halliwell and JJ Montanaro are CERTIFIED FINANCIAL PLANNER™ practitioners with USAA Financial Planning Services, one of the USAA family of companies. Certified Financial Planner Board of Standards, Inc. owns the certification marks CFP® and Certified Financial Planner™ in the United States, which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.

USAA Financial Planning Services® refers financial planning services and financial advice provided by USAA Financial Planning Services Insurance Agency, Inc. USAA Financial Planning Services Insurance Agency, Inc. (known as USAA Financial Insurance Company in California, Lic. #0E36312), a registered investment adviser and insurance agency and its wholly owned subsidiary, USAA Financial Advisors, Inc., a registered broker dealer. (known as USAA Financial Insurance Agency in California), a registered investment adviser and insurance agency and its wholly owned subsidiary, USAA Financial Advisors, Inc., a registered broker dealer.

USAA means United Services Automobile Association and its affiliates. Investments provided by USAA Investment Management Company and USAA Financial Advisors Inc., both registered broker dealers. Banking products provided by USAA Federal Savings Bank. Credit cards provided by USAA Savings Bank. Both Banks Member FDIC.