3

I have a student loan with about 43k remaining. I want to buy a vehicle that costs about 10k. I have excellent credit. The interest rate on my student loan is over 6%; I can get a vehicle loan with very low interest through USAA (much less than 6%).

If I have about 25k liquid, does it make more sense to get a loan for the vehicle and pay down the higher-interest student loan, or to just buy the vehicle outright and use the remaining 15k to pay down the student loan (and avoid taking out another loan)?

  • 1
    First thing to check is whether the price of the car will be lower if you don't take out the loan. – DJClayworth Aug 11 '16 at 15:30
  • 1
    Second thing would be to check if you could refinance the student loan. If you do have excellent credit you could probably knock off 1% or 2% from that 6%. About a year ago I went from >6% to just over 3% (granted I went from a 10 yr (9 years left) to a 5 year loan, and took an adjustable rate, so YMMV). Not too difficult either. – pwcnorthrop Aug 11 '16 at 18:53
8

Here's another way to look at this that might make the decision easier:

  1. If you apply your cash to your student loan, that's like investing the cash with a guaranteed 6% return. The downside is that the cash becomes inaccessible.
  2. If you then go out and apply for a car loan at a lower rate (let's use 3.5% as an example) then you are effectively collecting the spread between the two loans, which is 6% - 3.5% = 2.5%.

Looking at it this way you can turn this into a financial arbitrage opportunity, returning 2.5% compared to paying cash for the vehicle and carrying the student loan.

Of course you need to take other factors into account as well, such as your need for liquidity and credit. I hope this helps!

2

To directly answer your question, the best choice is to pay cash and place the rest on your student loan. This is saving you from paying more interest.

To offer some advise, consider purchasing a cheaper car to place more money towards your student loan debt. This will be the best financial decision in the long-term.

I suspect the reason you are considering financing this vehicle is that the cash payment feels like a lot. Trust your instinct here. This vehicle sounds like large splurge considering your current debt, and your gut is telling you as much. Be patient. Use your liquid funds to get a more affordable vehicle and attack the debt. That is setting yourself up for financial success.

  • 5
    Given that the student loan has a higher interest rate than the potential car loan, I don't think "This is saving you from paying more interest" is right. – Ganesh Sittampalam Aug 11 '16 at 11:44
  • 1
    agree with jkuz - what is rarely considered in any of these thought experiments about where to put resources against debt or new stuff is that debt represents RISK. No one knows the future, but if you have debt, you know that it must be paid off. Therefore, consider completely getting rid of debt before considering buying a car, and then only buy a car with cash. Stay out of debt entirely, thereby removing risk from your future. – rocketman Aug 6 '17 at 21:07

You must log in to answer this question.

protected by Community Aug 6 '17 at 20:24

Thank you for your interest in this question. Because it has attracted low-quality or spam answers that had to be removed, posting an answer now requires 10 reputation on this site (the association bonus does not count).

Would you like to answer one of these unanswered questions instead?

Not the answer you're looking for? Browse other questions tagged .