Paying off debt and investing money are two strategies you can use to build wealth. Although it makes sense to pay off high-interest debt immediately, most people are not in a hurry to repay low-interest debt.
One has been making regular car loan payments and has a balance of $13,500. This person is happy with the monthly payment but recently received a surprise $6,000. On the one hand, the extra money can reduce the automatic loan balance by nearly half. However, these funds can also enter the stock market and get higher returns.
“I was literally torn apart,” the man admitted to middle-class finance Subreddit.
Redditors compatriots made suggestions on how to proceed.
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One commenter suggested that if the original poster had not yet been established, a $6,000 contingency fund was established. The advantage of an emergency fund is that if unexpected fees occur, you won’t have to borrow again.
Auto loans currently have an APR of 6.8%, so their interest will be faster than emergency savings accounts. However, it may be more expensive if you need to take out your personal loan in the future.
Commentators suggest that the original poster only takes six months of emergency funding. If this situation is already met, it makes more sense to put money into a car loan.
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While transferring money to a high-yield savings account can bring you financial buffers in an emergency, not every commenter thinks about it.
One commenter suggested: "Considering that it is 6.8%, pay it off 100% early."
However, when it comes to the choice between additional loan payments and high-yield savings accounts, you must consider the tax impact. As one commenter explained, the 4% APY on a high-yield savings account is not as high as it sounds.
"You will also pay taxes on that 4% interest, while interest on the loan continues to accumulate at higher rates," the commentator explained.
If Reddit pays off the loan, it will save more money instead of storing the money in a high-yield savings account. If Redditor has other ways to deal with emergency fees, paying for a car loan might be a better route.
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One commenter explained that they were in a similar situation and chose to pay off their car loan through the windfalls obtained from the class action solution. The commenter explained that it is worth it to not have to worry about the freedom of monthly payments.
The original poster also mentioned freedom as a key factor. Paying off half of the loan will result in less interest and lower monthly payments.
While putting money into a high-yield savings account can help in an emergency, paying off your loan is a better way. You can also invest your funds in the stock market and have the potential to get a return of more than 6.8%. However, the stock market is not sure, while eliminating auto loans will create guaranteed savings.
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Redditor's article asked if they should pay off half of their car loan or invest in the money: "I'm really torn" originally appeared on benzinga.com.
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