Auto loan and student loan balance
I have a student loan of around INR 11,00,000 (~USD 18,240) at 13.7% APR. I have an auto loan in the US for USD 10,000 at 6.35% APR. I am aware of the high interest rate on my auto loan and wish to re-finance in about 6 months.
My monthly savings after mandatory expense is around USD 2000. This includes rent, expenses, emergency fund savings, and the monthly required payment of my auto loan. I pay extra in my auto loan every month by at least 4 times my premium.
My question is, is it worth to pay extra in my auto loan as I am thinking of re-financing it near future? I somehow feel that I should just pay the required each month and pay my student loan instead.
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I don't understand the calculations in the comments by the OP.
He says
My monthly savings after mandatory expense is around USD 2000. This includes rent, expenses, emergency fund savings, and the monthly required payment of my auto loan. (emphasis added)
He has 00 USD left over
after monthly expenses (which includes rent, food, utilities etc, contribution towards emergency funds, and the required monthly payment on the auto loan).
He claims that by applying the 00 USD per month towards reducing the
debt, it would take him 30-36 months to be debt-free.
But is it not the case that applying the 00 to
the student loan of K+ (while continuing to make the auto loan
payments) will pay the student loan off in less than 10 months?
If no payments are made on that K+ student loan,
the accrued interest of about K in 10 months (this is
(18.25*13.7%*)(10/12) for a total of K+). In actuality, with
the loan being paid down, the interest will be much less.
Once the student loan is paid off, the extra 00 can go towards
what is left of the K auto loan each month and
pay it off in another 4 or 5 months or so. So we are talking of 15 months
max instead of 30-36 months.
Of course, as Carlos Briebiescas points out, the car is more
valuable as an asset than can be sold in case of job loss
creating a need for cash etc, and so paying it off first
might be better, but that is a different calculation.
So, in general, pay to the higher interest rate. Some contrived reasons you would want to pay your auto loan more could be:
You JUST took out your auto loan so you still owe close to 100%. A lender might consider you more favorably(/unfavorably?) if you have paid off a percentage amount before you try to refinance.
You could more easily refinance your student loan now for a lower interest rate than you could for your auto loan.
You want to pay your car loan first because there's a chance in the future you may not be making enough money. If you default on your car loan, it will be easily recovered. If you don't pay your student loan they probably won't be able to get at your car for some time since (i'm assuming) you're in the US.
The car is property. So you're gaining property you can sell later. It lets you drive to work. etc.
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