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Should I pay off my student loans or car loan first?

Comparing interest rates and loan terms can help you decide.

Updated

girl standing inside of her car
Trying to decide whether to pay off your car loan or student loans first? Comparing interest rates and terms can help you figure out which loan is costing you the most in the long run. But you’ll also want to consider how flexible each loan’s repayment options are and whether you’ll face a penalty for making extra repayments.

When should I pay off my car loan first?

You might want to consider paying off your car loan before your student loans if you find yourself in any of the following situations.

  • You have a short loan term. Loan terms on car loans are typically shorter than student loans. Getting that debt paid off first can be a quick win — motivating you and opening up funds to be applied toward other forms of debt.
  • You’re having trouble managing all of your debt repayments. Federal student loans have options for income-driven repayments, which could work out to as low as $0 per month. And most private lenders offer some form of deferment or forbearance if you’re struggling financially. If you can only afford one major payment per month, focus on your car loan since it’s less flexible.
  • You signed up for a loan forgiveness program. If you qualify for loan forgiveness for your student loans, it makes sense to pay more toward your car loan and maximize the amount of student loans you can have forgiven.

When should I pay off my student loans first?

Alternatively, there are times when it makes more sense to focus on your student loans and get them paid off first.

  • Your student loan interest rate is higher. Depending on the type of student loan you have, interest rates can be as high as 18%. If your car loan has a lower APR, it can make sense to pay off your student loans first to save money on interest.
  • You have a cosigner on the student loan. If you have a student loan with a cosigner or you’re making payments on a loan your parents took out for you, there can be pressure to pay it off sooner. Especially if your cosigner is interested in applying for a personal loan or other form of credit that requires a low debt-to-income ratio.
  • You’re eligible to claim your interest payments on your taxes. Depending on your income level, you could be eligible to claim up to $2,500 on your taxes for student loan interest paid. Making extra payments on your student loans rather than your car loan can help ensure you take full advantage of this perk.

4 questions to figure out which to pay off first

If you’re still unsure which option is best for you, asking yourself a few questions can help you decide:

  • Which has a higher interest rate? Determine which loan has the highest APR or if either has a variable interest rate, which could potentially increase your monthly repayments depending on the economy. Paying off these first can help you save on interest in the long run.
  • Does your car loan have prepayment penalties? While student loans usually don’t come with prepayment penalties, many car loan providers charge a fee if you pay off your loan before your term is up. Check your car loan contract to see if there are any charges you’ll be on the hook for by making extra repayments.
  • Which has the shortest loan term? If the loan term is short, it may make sense to resolve it first and move on to other debt. This can also help motivate you and eliminate the number of debts you have more quickly.
  • How flexible are my repayment options? Loans with less-flexible repayment plans have a higher risk of defaulting and hurting your credit. Getting these paid off first can help ensure your credit score doesn’t take a hit.

I’m ready to pay off my car loan. How do I get started?

Following these three steps can help you pay off your car loan faster and reduce the amount of interest that adds up. This gives you more money in the bank for when it’s time to focus on paying back your student loans.

Step 1: Set up biweekly payments instead of monthly.

While this is an easy change, it accomplishes a couple of different things:

  • You’ll accrue less interest because you’re making payments more often, meaning you’ll save money in the long run.
  • You’ll make an extra payment each year, since 26 biweekly payments equates to 13 full payments instead of 12.
  • You can shave multiple months off your car loan, again helping you save on interest.

Step 2: Apply extra money toward your car loan.

Putting a little extra cash toward your car payment can help you slowly peck away at your debt. You might want to consider using your:

  • Tax refund
  • Work bonus
  • Money from a side hustle

Step 3: Remove unnecessary add-ons from your car loan.

Were you talked into add-ons when you first bought your car that you’ve never used? You might want to consider removing some or all of these to help you pay off your loan faster:

  • GAP insurance
  • Service plans
  • Extended warranty

Most car loan providers or dealerships will give you a prorated amount back based on how much time has passed and your car’s mileage. You can then put that money toward extra payments on your loan.

Other ways to save on your student loans

Below are a few options for lowering your student loan payments. Any extra money you save can then be put toward your car loan.

  • Switch to an income-driven repayment plan. If you have federal loans, an income-driven repayment (IDR) plan can give you lower monthly repayments based on your salary.
  • Sign up for autopay. Many student loan servicers offer a discount on your interest rate if you sign up for automatic payments. You’ll not only save money on interest, but it also ensures you’ll never be slapped with a late fee.
  • Consider refinancing. Refinancing your student loans for a lower interest rate or longer loan term can help you lower your monthly repayments even more.

Compare refinancing options for your car loan or student loans

Data indicated here is updated regularly
Name Product Min. Credit Score Max. Loan Amount APR
SoFi Student Loan Refinancing Variable Rate (with Autopay)
650
Full balance of your qualified education loans
2.25% to 6.09%
A leader in student loan refinancing, SoFi can help you refinance your loans and pay them off sooner.
Purefy Student Loan Refinancing (Variable Rate)
620
$300,000
2.27% to 7.49%
Refinance all types of student loans — including federal and parent PLUS loans.
Credible Student Loan Refinancing
Good to excellent credit
None
1.99% to 9.24%
Get prequalified offers from top student loan refinancing providers in one place.
Splash Financial Student Loan Refinancing
650
None
1.89% to 6.66%
Save on your student loans with this market-leading newcomer.
Education Loan Finance Student Loan Refinancing
680
None
2.39% to 6.01%
Lower your student debt costs with manageable payments, affordable rates and flexible terms.
Earnest Student Loan Refinancing
650
$500,000
1.99% to 5.64%
Get a tailored interest rate and repayment plan with no hidden fees.
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Compare up to 4 providers

Data indicated here is updated regularly
Name Product Filter Values Minimum credit score APR Loan term Requirements
PenFed Auto Loans
Varies
2.99% (Starting at)
Up to 10 years
Active membership with PenFed
Low APR car loans from a well-known credit union.
LendingClub Auto Refinancing
Fair or better credit
7% to 24.99%
From 2 years
Car must be less than 10 years old with fewer than 120,000 miles. Current loan must have a balance between $5,000 and $55,000 and at least 24 months left in its term.
Lower your monthly car payments and save on interest through a fast and easy online application process.
Ally Clearlane
640
3.99% to 7.74%
3 to 7 years
Monthly income of $2,000+, live in an eligible US state, ages 18+
SuperMoney Auto Loan Refinancing
600
Varies by lender
Varies by lender
Car must be less than 10 years old with fewer than 150,000 miles. Fair to excellent credit, an income source, US Citizen or Permanent Resident, 18+ years old
Find an offer and get rates from competing lenders without affecting your credit score.
LendingTree
Good to excellent credit
Starting at 3.09%
Varies by lender
18+ years old, good to excellent credit, US citizen
Compare multiple financing options for auto refinance, new car purchase, used car purchase and lease buy out.
MotoRefi Car Loan Refinancing
525
2.99% (as low as)
1 to 6 years
Must have an income of at least $2,000/month and have a vehicle with less than 100,000 miles.
A car loan connection service for borrowers looking to refinance.
RateGenius Auto Loan Refinance
510
2.99% (as low as)
Varies
Income of $2,000+/month, vehicle has less than 150,000 miles and is no older than 8 years, loan balance is between $10,000 and $100,000, debt-to-income ratio is less than 50%
Connect with a network of over 150 lenders to refinance your car loan.
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Compare up to 4 providers

Bottom line

Paying off your car loan first can be a good option if you have a shorter term and higher, less-flexible payments. On the flipside, you might want to focus on paying off your student loans first if you’re getting pressure from your cosigner or have an interest rate that’s significantly higher than your car loan.

Whichever you decide, you might want to consider refinancing your student loans to save even more money in the long run.

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