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I have a student loan of around INR 11,00,000 (~USD 18,240) at 13.7% APR. I have an auto loan in the US for USD 10,000 at 6.35% APR. I am aware of the high interest rate on my auto loan and wish to re-finance in about 6 months.

My monthly savings after mandatory expense is around USD 2000. This includes rent, expenses, emergency fund savings, and the monthly required payment of my auto loan. I pay extra in my auto loan every month by at least 4 times my premium.

My question is, is it worth to pay extra in my auto loan as I am thinking of re-financing it near future? I somehow feel that I should just pay the required each month and pay my student loan instead.

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    The student loan rate is higher than auto loan. Right? – JTP - Apologise to Monica Apr 17 '14 at 15:24
  • Yes. My student loan is in India. Should I add an India tag as well? – tempusfugit Apr 17 '14 at 15:32
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    Joe's point is that why in the world would you pay extra on your auto loan, when you can pay down your student loan and yield a better financial result. IMO your question is incorrect. You should be asking yourself what you can do to earn extra $$$ to pay down this debt quicker. – Pete B. Apr 17 '14 at 16:33
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    Yes, what Pete said. The currency or country doesn't matter, in my opinion as interest is universal. – JTP - Apologise to Monica Apr 17 '14 at 17:14
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    @san1646 - As PeteBelford and JoeTaxpayer have tried to say, the mathematics of it is that putting all extra payment toward the higher-interest debt is the optimal strategy. That is, pay the minimum on your auto loan, and the rest toward your school loan. – Andrew Cheong Apr 17 '14 at 18:26
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I don't understand the calculations in the comments by the OP.

He says

My monthly savings after mandatory expense is around USD 2000. This includes rent, expenses, emergency fund savings, and the monthly required payment of my auto loan. (emphasis added)

He has $2000 USD left over after monthly expenses (which includes rent, food, utilities etc, contribution towards emergency funds, and the required monthly payment on the auto loan). He claims that by applying the $2000 USD per month towards reducing the debt, it would take him 30-36 months to be debt-free.

But is it not the case that applying the $2000 to the student loan of $18K+ (while continuing to make the auto loan payments) will pay the student loan off in less than 10 months? If no payments are made on that $18K+ student loan, the accrued interest of about $2K in 10 months (this is (18.25*13.7%*)(10/12) for a total of $20K+). In actuality, with the loan being paid down, the interest will be much less. Once the student loan is paid off, the extra $2000 can go towards what is left of the $10K auto loan each month and pay it off in another 4 or 5 months or so. So we are talking of 15 months max instead of 30-36 months.

Of course, as Carlos Briebiescas points out, the car is more valuable as an asset than can be sold in case of job loss creating a need for cash etc, and so paying it off first might be better, but that is a different calculation.

  • You're assuming that he can and is using the entire $2000 to make extra payments on the loan. But he likely has other expenses beyond what he calls his "mandatory" expenses. I guess that depends just what he counts as "mandatory". He didn't mention it including food, gas, etc, other variable items. – Jay May 5 '14 at 13:42
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So, in general, pay to the higher interest rate. Some contrived reasons you would want to pay your auto loan more could be:

  • You JUST took out your auto loan so you still owe close to 100%. A lender might consider you more favorably(/unfavorably?) if you have paid off a percentage amount before you try to refinance.
  • You could more easily refinance your student loan now for a lower interest rate than you could for your auto loan.
  • You want to pay your car loan first because there's a chance in the future you may not be making enough money. If you default on your car loan, it will be easily recovered. If you don't pay your student loan they probably won't be able to get at your car for some time since (i'm assuming) you're in the US.
  • The car is property. So you're gaining property you can sell later. It lets you drive to work. etc.

protected by Community Jul 15 '18 at 7:02

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