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Is it stupid to pay extra on some loans?

September 26th, 2011 at 10:42 pm

The only loans (besides the mammoth of a mortgage) we have is a car loan at 2% and a student loan at 2.13%(some of which is tax-deductible, which effectively makes it even less).

We could even pay them off if we used our savings, but we did not. Though I occassionally make an extra payment on my SL (irrational? emotional? I don't know).

But when I think of it, 2% is much less than the rate of the official inflation, let along the real one (for me, inflation should include gas and food, since we buy those a lot). So that money looses value every year. Does it make any financial sense to pay extra on such low interest loans? Am I missing something important?

10 Responses to “Is it stupid to pay extra on some loans? ”

  1. MonkeyMama Says:
    1317075174

    Having only borrowed sparingly, and paid off ASAP (even sometimes at 0%) - you can't convince me that paying off loans early, even at low interest rates, is stupid. Wink Personally, I'd be rid of them both.

    P.S. Are you sure that your student interest is deductible? High income phases out the deduction. It's not a deduction I see many people in California taking, so leaves me skeptical since you are in NYC.

  2. creditcardfree Says:
    1317078893

    Um...paying any interest at all is 'stupid' (to use your word) in my book. I'm paying interest on a truck loan and a mortgage at the moment. I'd pay them off ASAP, if you have cash on hand. Of course, I wouldn't jeopardize your retirement or emergency fund savings to do so either.

  3. NJDebbie Says:
    1317084373

    Please remember that interest keeps you a slave to the lender. The sooner you pay off your loans the more money you get to keep for yourself. You can put that money into your baby's college fund, even if it's a miniscule amount.

  4. PatientSaver Says:
    1317089889

    I agree with the others. The less debt, the better. It's only 2%, but where can you make more than 2% in savings interest these days?

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    1317115311

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  6. ceejay74 Says:
    1317137827

    It may be a wash in terms of which is better, but I don't think it's ever stupid to pay off debt. Well, I guess if you didn't have an EF, in this economy it would be better to keep that money in savings.

    I don't think you have to be in any hurry to pay off loans with 2% interest rate, though. That's a pretty good rate!

  7. Nika Says:
    1317140790

    All right, tax deduction may not be happening, but still, it is 2%.

    Anyone wants to address the inflation argument? That's the one that troubles me here, mathematically.

    I am trying to think about it from purely financial point of view, and "slave to the lender" sounds like a Dave Ramsey slogan.
    I don't feel I am a slave -- these loans are not a hardship. And if I had to move overseas for a job or something like that, I could just pay off the car and sell it (we put like 50% down so we were never up side down).

    Should I be paying these loans off or should we keep the money? Should we be investing what little extras we have in some mutual fund or straight S&P500 fund, since times are turbulent?

    Or save in case some opportunity comes along? Like keeping an "opportunity fund". You can't borrow at 2% for anything except a car right now.

    Now that we have child care expenses (that are crazy in NYC) we can't save like we used to -- new savings will be a struggle, and few extra hundred here and there may be better off sitting in accounts. We do have a fully funded EF and are now dabbling a little in non-retirement investments.

    So being aggressive about paying down these loans, does it make mathematical sense?

  8. NJDebbie Says:
    1317242549

    "Slave to the lender" is definitely a Dave Ramsey slogan and one I totally agree with.

  9. NJDebbie Says:
    1317243008

    "Slave to the lender" is definitely a Dave Ramsey slogan and one I totally agree with. I still think in my humble opinion, that paying down interest carrying debt is not stupid.

  10. whitestripe Says:
    1317880602

    I have never really thought that debt was 'stupid'. I believe some people that get into debt are stupid, and people get into debt for stupid things, but debt itself, if used correctly, in my opinion is not stupid.

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