Prioritize paying car loan before investing?

Debt
#1

Hey all, first post here. Curious to know your thoughts on paying off your car loan versus making your monthly payment and investing the rest aggressively.

I’ve been in the train of thought that if your interest rate is low enough (mine is 3.9%), you’re better off investing because you should be able to beat 3.9% in annual returns, and the annual interest paid is fairly low compared to the potential gains you could make in the market.

Thoughts?

1 Like
Is it worth it to pay off car or invest?
#2

I absolutely would pay off the car first. Here’s a few reasons:

  • Guaranteed vs potential: Yeah, 3.9% is relatively low as far as interest rates go, but you are DEFINITELY on the hook for paying that, whereas gains from investing are only potential gains and will include a lot of volatility. That opens you up to risk. i.e. imagine borrowing $1 million at 3.9% then dumping it all in the market. Hopefully that makes your stomach turn, because you could realize how you can go broke if the bad thing happens. That’s the risk that you can avoid by paying off the debt first.
  • Borrowing mentality: Paying interest to borrow money to spend money you don’t have to buy something that plummets in value is a quadruple whopper good way to stay broke. If you choose to keep that debt around, it represents a borrowing mentality that is likely to continue next time you buy a car. If you get out of debt and decide never to borrow money again, you’ll avoid that debt trap and be much more wealthy.
  • Simplicity: Why do you need bank in your life? Get rid of those car payments, then throw those car payments into investing. Simplicity favors the individual investor (complexity favors the bank or the financial institution) and is one of PFC’s principles.
  • Leveraging depreciating asset: I know a lot of millionaires, but I don’t know any who got there by borrowing money to buy things that plummet in value and investing the difference. That’s just not how to build wealth. That’s how to stay broke.

So yeah. Keep it simple. Pay off the car. Never borrow money for a car again. Then pay invest those payments. If you want those points pounded into your head some more I have a ton of posts on borrowing for cars on my instagram like these:

1 Like
Should I pay off the rest of my car loan?
New car: pay cash or finance?
#3

Hey Jeremy, let me first say thank you for taking the time to reply to my question. Your insight is fantastic and I really appreciate it!

Quick follow up to your advice, so you’re saying to prioritize paying off the car above any other investing or saving goal? Meaning, put every dollar I am able to towards the car payoff until it is completely paid for?

#4

Hey Tom! I know you probably would like Jeremy to answer this but it’s an online community so I get to add in my 2 cents worth! Sorry! I would say that once you have a solid emergency fund in place (most recommend $1,000 or so), then just knock out your debt. If you are really throwing all the money you can at your car loan, you’ll likely kill it quick. As Jeremy said, sure the loan is likely at only a 3.5 - 4% interest rate but by paying that loan off, you are getting guaranteed ROI.

2 Likes
#5

Thanks for the reply Dustin. I actually am already pretty “ahead of the game”… full 6mo emergency savings and 100K in investments. Just wasn’t sure if I should continue to aggressively invest or take care of my car debt first, and wanted to know the pros and cons of choosing either. Appreciate your response!

#6

Awesome!! Sounds like you’ll be able to knock the car loan out real quick!

#7

@Jeremy should we max out the match from employer and then focus on that car loan before all other investments?

#8

Yes, max out the employer match (as long as you have money to make minimum monthly car payment). If you dont max out the employer match, you are throwing away free money.

#9

Yes, I’d always max your match first. Here’s how I prioritize my dollars: