My husband and I manage to save about $2,500 a month after contributing to IRAs and our kids’ savings. We’ve got a $20,000 loan on one car at 6.3% interest, and a $45,000 loan on another at 6.75%. Should we focus on paying down the car loans with our extra money, or invest it instead and try to earn more than 6.3% or 6.75% over time? What’s the smarter move?
You’re right on the edge with those rates. Personally, I’d pay off the debt, but others might think differently.
At 6%, I’d definitely pay down the car loan.
Make sure you’re maxing out any employer matching contributions first. Expensive cars are tempting, but remember that a $45k car today costs a lot more in future dollars. I drove an old car for years, maxed out my Roth IRA, and now I’m really glad I did!
@True
We both max out our employer match (and contribute 10% of our salaries). Thanks for the reminder!
Ash said:
@True
We both max out our employer match (and contribute 10% of our salaries). Thanks for the reminder!
Good plan! Keep maxing out that 401k and let your money grow. What you drive doesn’t matter nearly as much as building wealth.
@True
Solid advice. Investing now will pay off big in the future.
Get rid of those cars and buy something like a 1985 Volvo. Save the money you’re throwing at the loans. You’re parents now; no one cares what car you drive.
Kai said:
Get rid of those cars and buy something like a 1985 Volvo. Save the money you’re throwing at the loans. You’re parents now; no one cares what car you drive.
Agreed. Sell the cars and get an early 2010s Honda or a minivan—reliable, cheap, no car payments, and perfect for hauling kids.
@Storm
Haha, no plans to sell yet! The loan on my husband’s car is for a collector’s car (not his daily driver), but after the loans are paid off, we plan to invest everything. His daily is an '06 Subaru Forester, so we’re pretty practical otherwise!
Always pay down debt because the future is unpredictable.
Agreed. Focus on the debt first.
You shouldn’t need loans for cars at this stage in life. If you didn’t have those payments, you’d have an extra $1,500 a month to invest. Knock out the $20k car loan this year, then roll that payment into the $45k loan next year. After that, save up and avoid car loans in the future.
@Chin
We don’t plan to take out another car loan anytime soon. My husband’s car is a collector’s car he’s wanted forever. We’ll be saving money for a few years after paying off these vehicles before even thinking about another car loan.
@Ash
Nope, don’t even think about another loan. Save up and pay cash. If you don’t have the cash, keep driving your current cars or buy something more affordable. That $45k could have been worth a ton by retirement!
Pay down the debt. You’re not going to get 6.3% or 6.75% risk-free anywhere else.
It depends on a few things: how long until retirement, whether the investment is taxable, and your rate of return on investments. If you’re close to retirement, paying off the loans makes sense since you’ll need something like 7.7% return to match the loan interest after taxes. Conservative investments won’t get that kind of return, so paying down debt is safer.
@Cameron
We’re only 30, so we’ve got 30 years of investing ahead of us! And the investment is in a normal taxable stock account. Thanks for breaking that down—it helps a lot!
I’d say go middle of the road. Double up on payments for the $20k loan but keep investing, just cut it back a bit. Once the smaller loan is gone, you can go back to your normal plan. Maybe increase payments on the $45k loan a little bit, but don’t stop investing entirely.
Check out MYNZ; it might be able to help with this.