The Help Desk

Your tough questions. MONEY's smart answers.
Presented by

Which to tackle first: car loan or student loan?

September 24, 2012: 6:30 AM ET

I have an auto loan (a balance of $22,000 with an interest rate of 2.69%) and a student loan ($6,500 at a 3% rate). If I put extra money each month towards one of these loans, which should it be? — Andrea V.

On a purely mathematical basis, you're better off focusing your efforts on first paying off the loan with the highest interest rate. Over time, that strategy will save you the most money because you won't be spending so much on interest payments. On a psychological basis, that may not necessarily be true; personal finance guru Dave Ramsey, for example, argues that paying off the smallest debt first, by giving you a quick victory in the debt-elimination process, better motivates you to pay off all your loans.

In your case, the higher-interest debt and the lower-balance debt are the same one, making the decision easy: Direct your extra payments to paying down the student loan with the 3% interest rate. "While the rate difference between the two isn't huge, it has the higher interest rate and you'll get the satisfaction of having one bill paid off," says Neil Collins of Collins Financial Advisors in Melrose, Mass.

That said, Collins notes that both loans have very favorable rates, and suggests considering other ways to use the extra cash in your budget. For instance, boosting your contributions to retirement savings accounts such as your 401(k) or IRA may provide more bang for your buck than accelerating payments on your student loan or car loan. "At the very least, make sure you're saving the minimum to take advantage of any 401(k) match," he says. "And if you have a little extra, you can put it in an IRA or a Roth IRA."

— Austin Kilham

Got a question for the Help Desk? Send it to

Posted in: Credit, Family Money
Join the Conversation
Help Desk

Got a question about your money? We want to hear it! Each week we're answering your questions on CNN, Headline News and

Your email or phone number won't be published; we'll use it to get in touch if we need more information about your question.
Help Desk Video
  • NEXT
    Not enough money in America's 401(k)s
    Despite the surging stock market bringing balances to record highs, the average Fidelity 401(k) account has less than $100,000 in it. That's just not enough. Play
  • NEXT
    Explaining Obama's myRA
    President Obama unveiled a new savings plan for retirement accounts, aimed at encouraging people to start building their nest egg. But how exactly does it work? Play
  • NEXT
    Tricks on how to save in your 20s
    Saving for your retirement in your 20s doesn't have to be a financial burden. Prioritizing your expenses is usually the first step in building a nest egg. Play
  • BACK
    Don't get fooled by Black Friday sales
    Here are some of the tricks that retailers use to make you think you're getting a deal. Keep an eye out for them while shopping this Black Friday. Play
Best Tips
Some of the nation's leading business owners, investors, and thinkers share their thoughts on rebuilding your wealth. More
These strategies can help you manage the challenges -- both emotional and financial -- of helping an aging parent from afar. More
You don't need to be fanatical to get to 780. Those in the know say these moves matter most. More
Featured Newsletters

Tips for saving and spending smarter.

Search This Column
View all entries from this: Week, Month
Help Desk
More help for your career, your investments and your budget.
Powered by VIP.