Should I invest or pay off debt

mp3tricord

I have a problem. A good problem but something I would like to get some comments on.

Over the past year I have saved 20k USD. I wondering what I should do it. I have three choices to choose from:

A. Pay off my car loan. The car loan is 18k and is spread over the next 3 years. The interest is fixed at 5% for the entire length of loan.

B. Pay down my mortgage. It is quite large and is spread over the next 26 years and is fixed at 5.65% for the entire length of loan.

C. Invest in diversified collection of stocks.

I'm a young married guy with a small family and don't have any cash flow issues. I have no other debt other than the two mentioned above. My intuition is to pay off my car loan. Because I can pay off the entire loan and one less major bill coming to house each month.

However thinking logically about it. It would be better to pay down my mortgage because the interest is higher and the loan is longer (so more interest get accrued over the length of the loan).

Also I will most likely be able to make more money in the stock market then the 5-5.65% I would save by paying off loans. Even though this is not a certainty I think my average portfolio is between 8-10% a year.

So what do you think A, B or C.

Thanks for your time.

grumbler

Hi. This is the UK site. I don't think that you'll get a good advice here.

mp3tricord wrote:

...A. Pay off my car loan. The car loan is 18k and is spread over the next 3 years. The interest is fixed at 5% for the entire length of loan.

For UK 5% APR looks too low. Are you sure that 5% is APR (not a 'flat rate')? Even if it is, is there early redemption penalty? If yes, real APR for comparision with invesment could be much higher.

B. Pay down my mortgage. It is quite large and is spread over the next 26 years and is fixed at 5.65% for the entire length of loan.

Again, what about early redemption penalty? Are you allowed to make extra payments? Here in UK it would be a problem with a fixed rate mortgage.

Also I will most likely be able to make more money in the stock market then the 5-5.65% I would save by paying off loans. Even though this is not a certainty I think my average portfolio is between 8-10% a year.

Many here in UK thought the same when taking endowment mortgages. Now they face shorfall.

Just my thoughts ...

mp3tricord

Interesting.

While there could be penalties for early payments I would say they are not very common. All the loans I have ever taken did not have an early penelty payment. And it is 5% APR for the car loan and 5.65% APR for the home loan. Wonder why lending is more expensive in the UK?

I'll look for an american financial site, thanks.

Bisoy

Grumbler was right I would have dig up the T&C of your car loan and your mortgage as I am pretty sure that early redemption penalty are now very common these days. But I might be wrong in your situation.

tomstickland

You have to look at the terms and conditions of the loans.
Investment is a risk. If it paid a guaranteed rate over the mortgage then you'd be better of using the investment. But it's a risk.
Paying off the higher rate loan is the correct decision, but paying off the car loan would be a phsychological boost.

mp3tricord

I've verified that neither loan suffers from an 'early redemption penalty'.

Bisoy

If you don't mind me asking, Which lender did you get your loan?

cheers

tomstickland

Well, pay off some mortgage then, it's the highest rate loan you have.