Q: I am a 25 year old college graduate making around $55,000 a year.
I currently have $10,000 in student loans at 5.4 percent and a car loan of $23,000 at a high interest rate of 9.9 percent because I had no credit coming out of college.
I have some extra cash at the end of each month. Should I pay off the student loan or put the extra money towards the car loan?
A: You owe $23,000 on your car at nearly twice the rate of your student loans. The student loans are (somewhat) tax deductible, but the car loan is not.
Any extra cash you have should go toward paying off your car as quickly as possible. While you can check to see if your credit has improved enough to qualify for a lower car loan interest rate (check your credit history and score at www.annualcreditreport.com), you should plan to get rid of your car loan as quickly as possible.
Once you have paid off your car loan, then turn toward your student loans.
Good luck at keeping your debt under control. There are two things that will help: Plan to keep your car for at least 10 years. And, consider getting a part-time second job in order to increase the amount of cash you have coming in right now.
You don’t want to sacrifice your future for today’s debts. If you put the maximum away in your 401(k) for the next 10 years, you’ll retire a multi-millionaire. So, do whatever you have to do bring in enough income to keep your retirement contributions high while paying off your high-interest rate debt as quickly as possible.
Good luck, and thanks for writing.
May 2, 2006.