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Should I pay off my student loans or my car first?

Does it make sense for me to focus on paying of my student loans first or focusing on my car loan? Or should I just make the established payment on both of them and save any additional money I have?

College Tuition, Debt, Financial Planning
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April 2017

I tend to favor divide and conquer strategies when it comes to debt. That means choosing one loan to pay off, rather than both. The idea is that if you throw all of your efforts at paying off a single loan, you'll get at least one loan paid more quickly.

In this situation, I would favor paying off the car loan first. There are two reasons for this. One is that a student loan is typically a longer-term loan, and for a larger balance. Simply put, it would be harder to pay off the student loan first.

The second reason is that car loans typically have outsized payments. For example, while the payment on a $30,000 student loan might be $300 a month, the monthly payment on a $10,000 car loan might be $400. Eliminating the car loan means that you can get rid of a big payment more quickly.

Once the car loan is paid, you will free up the cash flow currently being paid on the car loan to apply toward the student loan debt. That will give you the strength of a higher monthly payment, as well as the elimination of at least one debt fairly quickly.

Now I've made an assumption that the student loan debt is higher than the car loan, since that is usually the case. But if the student loan is smaller, you may want to pay that off first, since it will be more doable. At least part of the debt payoff process is psychological, so paying off one debt quickly is empowering.

April 2017
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