How best to pay off a car loan?

Ask an Economist
Question: 

A few months ago I bought a new car and now I have to pay the bank 300 euros each month for six years with an interest of 7.6%; this is a total of around 4100 euros. Which is the correct thing to do now, try to pay off the car as soon as possible, or invest in stocks, crypto etc. and try to achieve a ~12% by investing each month? By the way, my salary is 1100 euros each month.

Answer: 

This is a very interesting question and one I'm sure a lot of people are seeking an answer to. Admittedly, the 7.6% interest rate is pretty high and it adds up to a significant amount of money over the course of six years. 

Achieving 12% by investing each month is an extremely hard task and one that involves a lot of risky financial decisions. To illustrate, cryptocurrencies are volatile, with an unproven rate of return and a lot of uncertainty related to its existence and security. As for the stock market, it's a long shot “game;” and one that, according to all the Wall Street experts, needs your long-term commitment, in order to achieve significant benefit from it. 

Overall, investing or not depends on how much of a risk-averse or a risk-loving person you are. One factor to be considered in any case is the opportunity cost of the time you will spend figuring out your investment portfolio. For example, the hours you would spend making your financial decisions could be used to get a second job and increase your monthly income. 

To summarize, it would be a good idea to try and pay the loan as soon as possible and save some money on interest payments. An advice concerning that matter: a lot of times the interest charge on car loans occurs daily. By making your car loan payment earlier during the 30-day month period, you could decrease the amount of interest paid. 

Answered by:
Angelos Lagoudakis
Ph.D Student
Tags: 
Last updated on January 13, 2021