Student loan vs auto loan (similar rate)

[SA_00000]

This may be a simple thing, but curious on other's opinions.


Student loan: ~$60/month, 6.55% (variable) (min for 9 more years)
Auto loan: ~$270/month, 6.3% (fixed) (min for 4.5 more years)


So, which one to pay? Generally higher interest. But... the whole time thing. In the long run paying the student loan saves the most on interest. But, is there any advantage to paying the auto off first to get that large monthly sum back?

[eric eckman]

What are the balances?

I favor the Dave Ramsey style debt snowball where you pay minimum balances on every debt except for the one with your lowest balance- you put everything that you have into that one and knock it out, and then take that money and roll it towards the debt with the next lowest balance.

The idea is that the small victories of paying off smaller debts is a strong motivator to keep going and putting more money into those debts to become debt free.

I understand that the absolute mathematically correct thing to do is to pay off debts based on their interest rate, but humans aren't math robots- we have feelings. The positive reinforcement of seeing your labor bear fruits in the form of debts being paid off is a strong motivator to keep working at it.

[eric eckman]

But, is there any advantage to paying the auto off first to get that large monthly sum back?

Just noticed this point and wanted to address it.

Yes and no. The advantage to getting that large monthly sum back is that you should be able to take that $270/month + the extra that you're paying to accelerate the loan payoff and roll it into the payments on your student loan. It would look something like this.

Since you don't mention the balances, I'm guessing based on the payments and terms left that you give that you have roughly:

$5000 left on the student loan
$12,600 left on the car loan

Pay: $160/mo on student loan (hypothetical $100/mo extra payment)
$270/mo on car loan

After 34 months, your student loan will be paid off and you'll have roughly $5000 left on your car. Now snowball that $160 from your student loan towards your car payment.

Pay: $430/mo on car loan

That payment will finish off your car loan in 12 months vs. the 20 months that you'd have left otherwise.

Doing the snowball this way, you're debt free 46 months from now. That's 8 months sooner than your car payment alone would be paid off by sticking with the minimum payments- all for an extra $100 a month. This goes much quicker if you can spare some extra. I also ran the numbers for paying off the car loan first with $100 extra because I assumed incorrectly that your student loan had a higher balance, and it actually would take you 47 months to become debt free that way, so definitely pay off the student loan first.

[Snodog]

I'de pay off the student loan first. Reasons being it is variable and isn't bankruptable and I tend to think of worst case scenarios.

[skydivingchic]

I would vote for the student loan first for 3 reasons. First, the interest rate is higher and paying off highest interest rate debt first will save you the most money. Second it is variable and interest rates have nowhere to go but up, which will only widen the interest rate gap between the two debts. Finally, student loans are not bankruptable. Certainly no one plans to file bankruptcy, but if anything bad ever happens, you will still have to pay the student loan.

[SA_00000]

I agree with these comments, seems like student loans will be going the way of the dodo. It's true the rates have nowhere to go but up, and an added psychological bonus of the snowball effect since it is the smaller loan as well.

Thanks!