Living on a Budget, Saving Money/5 year plan
I'm 24 and have started working on paying off debt in order to buy a house in 5 years. My question is I have 2 car payments one I owe $3500 @ 2.99% 2 years the other I owe $7500 @ 3.99% 4 years. I recently came into some extra money from Uncle Sam, $4500 and wanted to know if it was better to pay off loan 1 or cut loan 2 down by 1/2?
Hi, it is always best to minimize debt, when you are looking to procure a mortgage, since the existing debt will factor in against you, when applying for the mortgage. That said, although these loans are historically low rate-wise (2.99% and 3.99%), what you have to ask yourself, is can I get a better rate of return with the freed-up money, if I were to pay these loans off?
With CD's/Treasuries (guaranteed) you may be able to get 3%+, but only if you move money to a 10-year (or higher) time frame, which is a dangerous proposition, given that rates may rise substantially in the future, due to the recent FED monetary policies (if you believe that). With Risk-on investments (stocks), you may be able to achieve that or not (crap-shoot).
By paying these loans off with the extra money you have, you can effectively save (which translates to "earn") 2.99% and 3.99%, which is money in the bank. If you expect rates to rise precipitously in the coming years, then you may choose to keep the loans, and invest the $4,500 in higher yielding investments.
IMO, and my opinion only, rates will remain low in the near-term (next couple of years), due to crafted FED policies, so you may be best applying the $ 4,500 (or part of it) towards your higher 3.99% loan, which will give you the biggest bang for the buck.
A lot of assumptions here, but something for you to chew on. Best of Luck!
As an aside, I always coach my kids (I have one your age), to avoid going into debt in any form (except for a possible mortgage, that can easily be afforded). I know this is easier said than done, but it is important to cultivate this mindset early on in your adult years.