Auto loan vs student loan

Question: Chris. I am trying to figure out the best way to pay my remaining student loan while purchasing a newer car. I have about $10k left on my student loan with about a 2.5% variable rate, and have enough in my savings to pay-off that balance. My question is... Should I pay-off the loan first and then make a small down-payment on the car, or use that savings to make a larger down-payment. I am fortunate enough to be able to afford the monthly payment on both the loan and the car at the same time, but I can't decide what the most efficient way to do this is. Pete, Lombard, IL

Answer: I would put a larger down payment on the car and, therefore, take out a smaller fixed rate loan.

The interest rate on the auto loan will be considerably higher than on your student loans. For example, the average rate on a 36 month loan on a new car is 6.47%, according to the auto buying section of Bankrate.com.

Yes, odds are that your student loan rate will go up somewhat over the next three years. Interest rates typically rise during a business cycle expansion. Still, you'll probably come out ahead financially. What's more, even though you're doing well it's good to know that your student loan debt offers a lot of built-in protection if your financial circumstances change, including deferment and forbearance. The same isn't true with auto loans.

About the author

Chris Farrell is the economics editor of Marketplace Money.

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