Paying off car loan in full vs. paying off student loans in full vs. downpayment on property

Submitted by nearlymind t3_127xz81 in personalfinance

Hi everyone,

I'm trying to figure out what the best strategy here is. I'm 25, recent graduate, with a full time job and living with my parents paying minimal bills. My girlfriend and I both want to move out of our parents place soon, but we know that it's crazy expensive to do so in our area right now. Now I'm trying to plan the best strategy for my finances.

I have about $50,000 saved up, $6,800 remaining on my car loan (at 2.49%), and then $37,000 in student loans (currently 0%, but average will be about 4.5%). My student loans are split up between 9 different direct subsidized and unsubsidized loans with varying interest rates (again, currently 0%).

I've been saving about $1,000 a month. I pay about $75/week on my car, and I pay nothing for my student loans right now because of the pause, but am expecting to be paying anywhere between $200-$400/mo when they start up again.

So... what should I do first here? Should I pay off my car loan in full, my student loans in full, a portion of my student loans (of the 9 different ones), or keep saving and paying as I go and put my cash on downpayment in the coming months?

Looking forward to different perspectives!

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No-Cartographer7427 t1_jegddi7 wrote

My choice would be to Pay off the car note. Take some of the cash and save as rainy day fund, then put the rest as downpayment for a piece of property. Don't buy your dream house right away. Buy the bare minimum to fit your current needs to keep payments low, even if you can afford more. Take the extra monthly money and double up on your mortgage to pay off the house early and save lots of $ on interest. Then, when you pay that one off, upgrade and keep the first house as an income property. When you make the extra mortgage payments, separate it from your normal minimum payment and Notate on the extra payment that it goes to Principal Only. If you do not do that last part, depending on who you get the mortgage from, they will most likely apply just apply it as an early payment for the next month.

Also, I recommend using a Credit Union for the Mortgate.

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Exotic-Art-2687 t1_jeglwzu wrote

It makes no sense to pay down a car loan at 2.5% when you can make 4% (likely 3% after taxes) risk free in a HYSA or up to 5% risk free with slightly more hassle through CDs, money market accounts, or bonds.

It makes even less sense to pay down that car loan when they have student debt that is not dischargeable in bankruptcy and will soon be at 4.5% interest.

It makes even less sense again if they will soon be buying a house that will likely come with a mortgage interest rate of ~6%, plus potential PMI if their down payment is not large enough.

They're better off saving money in a HYSA now and using it toward their house downpayment when that comes. If interest rates decrease (so the HYSA is earning less and the mortgage rate is lower), they can always put the saved cash toward the car (or potentially preferably the student loans depending on what happens with payment pause/forgiveness) and come out ahead of where they'd be if they put the money toward the loans now.

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nothinbutflip t1_jege3or wrote

It depends on your goals here. But I would (assuming you have no other debt) pay off the car loan right now and put $43,200 in a HYSA so you gain some interest while your student loans are at 0%. Keep contributing your 1K monthly, should be $1,300 now since your car is paid off, and once those student loans start charging interest again pay it off.

Or if you find a house you like and its affordable you use that money for a downpayment on a house. Then work on paying off those student loans. Ideally your income will increase and you'll be able to save more or pay more towards the loans.

You're in a good place. Great job saving 50K.

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Exotic-Art-2687 t1_jegmpd1 wrote

Why pay off the car when they can make more interest in a HYSA (net of taxes) than they pay on the car loan?

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lemonpepsiking t1_jeh2w4s wrote

I'm a personal fan of not having a car payment. Is it mathematically correct here? No. But humans are humans.

The second reason could be if op is looking to buy a house soon, one less debt obligation a month could help the mortgage availability.

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martin t1_jegflnb wrote

Unless you have a strong emotional need to pay off debt, I would pay as you go, especially since these are relatively low rates. You're doing great with your savings vs. debt.

Having flexibility now as you start your lives will help you make better longer-term-focussed decisions. I say this having been in the opposite position when starting out. If you do feel the itch to pay off, pay highest interest first - but wait at least until the 0% period expires.

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insight7777 t1_jegjkom wrote

If your parents are letting you stay there for free be very very grateful. Thank them for that. Also make sure you are doing more than your fair share of chores/work around the place. It was unclear if your girlfriend also lived there. If so, make sure she is also helpful. They are doing you a big favor

The cheapest and I think best option is to continue to live with your parents. This option allows you to put the max amount against the debt and get it paid off as quickly as possible.

You can make a few percent here and there by not paying off the loans …but don’t think it is that much if you run the numbers. I think the satisfaction of being debt free is worth way more than the few dollars you may make by not paying off the debt as fast as you can. Being debt free feels awesome!

It’s too soon to buy a house Also you don’t want to buy a house with a girlfriend. That’s a bad idea. Can get messy and complicated

You have $50,000 saved. Wow Good job 👍

If it was me Thank my parents!! Keep living with parents Pay off car loan Pay off student Loans but maintain a $20,000 emergency fund Keep working on paying off remaining student loans Don’t think about moving out until all debt is paid Get a second job

Good luck!!!!

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SocalGSC92 t1_jegkbx1 wrote

That’s what I would do. Focus on car first before student loans pick up, and maybe pay off a chunk of student loans before August so principle is lower while there’s no interest and probably shave off a couple months at the end of the loan. But still save more for the downpayment as you do this. And I wouldn’t do it all at once with that $50K

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