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.
We’re here to help you navigate this changed world and economy.
Our mission at Marketplace is to raise the economic intelligence of the country. It’s a tough task, but it’s never been more important.
In the past year, we’ve seen record unemployment, stimulus bills, and reddit users influencing the stock market. Marketplace helps you understand it all, will fact-based, approachable, and unbiased reporting.
Generous support from listeners and readers is what powers our nonprofit news—and your donation today will help provide this essential service. For just $5/month, you can sustain independent journalism that keeps you and thousands of others informed.