I have a consolidated car+personal loan at 5.5%, which I pay ~1k/month. It's currently at 33k remaining, and I recently received a bonus from work that would allow me to pay it off in full.
I did hear that, sometimes, it's worth reinvesting big sums and just keep paying the debt aggressively. Any advice for my case? What might be more worth it?
Thank you in advance for your insights!
Should I pay off my car loan in full, or invest the sum and continue paying it aggressively every month?
byu/veryberry_icecream inpersonalfinance
Posted by veryberry_icecream
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5.5% is around the tipping point where it can be worth paying off early, depending on if you’re accomplishing higher priority tasks already.
I could pay off my car loan, but I just put the amount in a HYSA. It’s like borrowing money almost for free with added flexibility of not sinking a chunk of money into a car.
Over 5% is typically recommended to pay off the debt as it is a guaranteed, post tax return.
5.5% is obviously on the cusp, however subjectively being is less debt and having more cash flow in case of an emergency feels good.
Would say pay off the debt, and then redirect the funds to investing/saving
Assuming you are in the 22% tax bracket, you would need to earn at least a 7.05% (before factoring in state taxes) in order to exceed the 5.5% instant return on paying off the loan.
If you are in the 32% tax bracket, you would need to earn at least a 8.09% return to come out even or ahead.
Both of these are assuming short term gains or interest from an HYSA. If this is invested, the math becomes more favorable BUT it may need to stay invested for years depending on your luck in the market.
I would pay off at least some of the loan, and invest the rest.
Musings:
Would the investment be regular brokerage, a traditional IRA, or a Roth IRA? What tax bracket are you going to be in for this year? Are you going to need the money for a large purchase any time soon? How secure is your job? What is the payment and remaining time on the loan? What is your post-tax cash flow like?