Where is my money best spent on loan repayment? Auto loan vs. Student loan?

I have a $3500 balance on my car loan at about 6% and 24 payments remaining. I have a $10000 balance on my supplemental student loan at %11 and 10 years remaining. I currently have a $4000 surplus I am planning on putting towards my loans. I am having trouble figuring where my money is best spent? Pay off the car loan now, and then put the extra monthly savings to the student loan, or pay down the student loan a little and continue on business as usual? Thanks.

Where is my money best spent on loan repayment? Auto loan vs. Student loan?
Make all prepayments on the 11% student loan first. Even after the tax deduction for the student loan, this is still more expensive.





Think of it this way. If you prepay $1 on the car loan today, you will save $.06 in interest next year, but if you prepay $1 on the student loan, you will save $.11.





Now, lets assume that you marginal tax rate is 30% and you can fully deduct your student loan interest. Your after tax cost of debt is (1-.30)*11%=7.7%. So, after tax, you will be better bt $0.017 per year for each dollar prepaid until the loan is paid off.





As long as your marginal tax rate is less than 45%, you are better off paying off the student loan first.
Reply:Your student loan has a higher rate, so that will save you the most money. (you may be able to consolidate at a lower rate)





However, 4000 is enough to pay off the auto loan and make that payment go away.





So, if your income is stable and both payments fit comfortably in you budget I would pay down the student loan.





If you monthly budget is a stretch, I would pay off the auto loan to free up that payment each month. And send it to the student loan of course.
Reply:If you pay off your car, you will have one less bill to pay, which will allow you to pay more per month toward your student loan. If you just pay down your student loan, you will have only $6,000 left to pay, but you won't be able to pay as much per month.
Reply:I'd pay off the auto loan, leaving $500 to pay on the student loan. Once you have the auto loan paid off in full, you'll be able to concentrate on paying down the student loan. I've found it's easier to deal with one loan at a time.
Reply:The best thing to do is pay down the student loan.


But paying off a loan is even better.Your loan amounts are not that high and won't make much of a difference.


My advice is to pay off the car loan and double up on the student loan.





What ever you do,paying off debt is the best thing for your future.


Best of luck
Reply:Paying down the student loan and continuing to make payments on both loans will end up costing you the least interest in the long run.





However, if you are struggling to make both payments, it may be better to pay off the car loan and put the $500 into a savings account for emergencies, and devote most/all of the previous car loan payment, along with the current student loan payment to the student loan. It will end up costing you more in interest, but if it improves your monthly cash flow so that you are not forced to borrow other money, it may be worth it.





The question you need to answer yourself is what's most important to you right now - monthly cash flow, or saving money on interest in the long run.
Reply:The Finance PhD candidate gave you the only good answer here.


BAD reasons for paying off one loan over the other include: "so you have one less to think about," or "b/c it's got the larger balance." NO!!





The smartest way to pay down debt is to start with your "most expensive debt." That is your debt with the highest AFTER TAX rate (the real rate after your tax benefits). And Mr PhD broke out the numbers for you there. Pay as much as you can on the student loan FIRST b/c that's your most expensive debt. Don't worry about paying ahead on your auto loan until the student loan is paid off.





Anyone who answer differently...well, I just feel sorry that they will never get it! And they will be paying on their debt loooong after you'v paid down all of yours ;)