“Should I save or pay off my car loan directly?”: I have a car loan of $23K at 7.5% interest. How can I minimize debt and save on interest to focus on student loans?

Hi Money Minder,

I’ve got a dilemma: should I dump all my spare cash into my car loan or should I stash it in my HYSA account that’s giving me a sweet 4.5% interest? My car loan’s sitting pretty at 23K with a 7.5% interest rate, and I’m chipping away at it with $400 a month. But I really wanna crush this debt so I can tackle my student loans (the biggest one’s at 6.5%).

So, what’s the move, Money Minder? Should I beef up my car payment or let my money chill in the HYSA until I can make a big lump-sum payment? Help a confused budgeter out!

Thanks for your help!

Response from THE MONEY MINDER:

Hello There,

I understand your dilemma and commend you for being proactive about managing your finances. Given your situation, it would be most financially beneficial to prioritize paying off your car loan directly rather than saving in your High Yield Savings Account (HYSA) and then making a bulk payment. The reason behind this is the significantly higher interest rate on your car loan compared to the interest rate on your HYSA. By paying off your car loan sooner, you will save on the interest expenses that would accumulate over time.

Considering the interest rate on your car loan is at about 7.5%, it would make more financial sense to allocate any extra funds towards paying off this debt rather than leaving it in your HYSA at 4.5% interest. By contributing more than the monthly amount towards your car loan, you can reduce the principal balance and the interest accruing on it, thereby saving money in the long run.

Once you have paid off your car loan, you can then redirect the funds that were going towards the car loan to tackling your student loans, starting with the one with the highest interest rate at 6.5%. This methodical approach will help you reduce your overall debt burden and save on interest expenses in the long term.

Remember, every financial decision is unique to an individual’s circumstances, so it’s essential to consider your financial goals, budget, and priorities when making these decisions. All the best from THE MONEY MINDER in your journey towards financial freedom!