Car Loan VS Student Loan

[DisneyEater]

Don't just compare the rates, but compare the total interest paid. If one is paid at a lower rate over 15 years and the other is done in 4 years with a higher rate, then the one with the higher rate might cost you less in the long run. I see people make this mistake taking out home loans and buying cars with it.

The other thing to consider is the fact that when he graduates he might not want the student loan hanging over his head as he gets ready to make other big purchases where as the car loan will already be paid off.

 

[MrsPete]

I'd take the car loan. Student loans are not dischargable in bankruptcy... and they last forever.

I wouldn't be overly concerned about the need to discharge a 5K car loan either. If he can't pay off that loan, he has little chance of maintaining good credit for his future!

 

[StarCruiser]

My son's Stafford loan is 6%, his car loan is 1.9 %. Seems a bit backwards..

My car loan is 3.9%. Student loan is 1.625%. You'll have to compare to see which is a better rate today. As others have mentioned, he should try to pay off whichever loan in the same period (e.g. 5 years) regardless of the number of period allowed.

 

[danceintherain]

I don't necessarily agree that a car loan is the way to go. It depends on a lot of factors. My husband and I had around to $30,000 in student loan debt between us when we graduated in 2009. We're going to have all of it paid off within a year from now.

It's a matter of money management skills. It sounds as if your son is fairly good at saving money, so there's no reason to expect that he will have a problem discharging the debt in a timely manner. Theoretically, he could make payments on the student loans while he's still in school the same way as a car loan. He could have the whole thing paid off before it starts accruing interest. If for some reason he's not allowed to make payments while still in school, he could put the money in a savings account and use the money to pay it off when he graduates. He simply has to be aware of the debt, and how it can affect his future.

 

[leebee]

When he files a FAFSA, if he has that $5000 in the bank, it'll go against his ability to get a student loan. I'd use the cash for a car and take a student loan for school, but only if it's federally subsidized.

Student loans DON"T take "forever" to pay off, unless you only pay the minimum required. Just like with any loan or credit, if you make the "suggested minimum" payment, you'll be repaying for the entire repayment period. It's unfortunate, however, that student loans are amortized just like mortgages. When you start paying them off, about 95% of that monthly payment goes towards interest, which is why you end up paying back SO MUCH. With the huge amounts of money many borrow to go to private universities, it'd be much easier to repay the loans if they were repaid with simple interest.