I had an interesting conversation with my Dad the other day about my car loan. He said I should invest the insurance money rather than pay off my loan.

I was surprised but his advice did make sense.

Our first reaction is to pay off debt, right? No one wants to have frequent payments to someone. People want to be able to own their items outright. Especially with a new car or new-to-you car, having a car payment can be burdensome. Not to mention the cost of gas, insurance, maintenance, etc.

Let me take you back a moment. Last month, my 5 year old blue car, got rear ended. Pretty shitty circumstance, and of course, there was enough damage to it, that the car ended up being totaled.

Well there starts the hunt for a new car. My previous car was paid off after about a year and I wanted to be in the same situation with my new car. (I know it is not recommended to buy a new car with depreciation and all, but I had an offer for a hybrid that I could not refuse). Fast forward to my negotiations with the dealership and they said that if I wanted the discount, I had to finance. I knew this was a ploy to finance with them, but I had a good chunk of money saved up and the money coming from the insurance agency that I could pay off the car very quickly. Plus the bonus: my loan would have a .90% financing. Truly unheard of. A few things to consider: I have good credit (800+) and I had paid off my previous car which showed good credit history. The total amount I would be paying in interest is $1,023.87.

My new car’s sticker price was $36,260, a little more than I wanted to spend, but like I
mentioned before, it was a hybrid, so worth the extra penny or two. AND, not too shabby when the average cost of a new car today is on average, $32,086.

I justified the price and the loan was not a bad offer at all. With the $12,000 check from the insurance companies, my first instinct is to put it all towards the car. At first, the logic is reasonable. I will then only have to pay off $24,000. The argument is: can I get more returns by investing the insurance money than what I would have to pay for the loan at .90%?Invest or Payoff My Car Loan

Assuming you can get more than a percent worth of gains in the stock market, which the average return is 6-7%, should I invest? Should I pay off the loan ASAP to not pay as much interest? Will my psyche take a hit now that I have a car loan?

What do you think I should do?

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  • I know what you mean, my first instinct would be to kill the car debt. We were recently in the same boat and got a new to us car with crazy low financing. Of course, I wanted to not have a car payment, but this presented the perfect opp for us to pay off our higher interest student loan debt first. And even still, if there was no student loans, we would probably get ahead by investing the money and getting a greater return on investment than we would if we had saved on the minimal interest.

  • Emily Nance Jividen

    The interest rate is great, and that would make it tempting. It all depends on whether you’re bullish or bearish I guess. I feel like the stock market is kinda high compared to value, and no one’s paying good interest right now either. My tendency would be to get rid of the debt.

    • Great points about how you interrupt the market. I think I will end up going 50/50, so I get to win at both (hopefully!)