Paying off debt and investing money are two strategies you can use to build wealth. While it makes sense to pay off high-interest debt right away, most people don't rush to pay off low-interest debt like mortgages.
One individual has been making regular auto loan payments and has a $13,500 balance. This person is comfortable with the monthly payments but recently received a $6,000 windfall. On one hand, that extra money can cut the auto loan balance by almost half. However, those funds can also go into the stock market and earn a higher return.
"I'm genuinely torn," the individual admitted to the Middle Class Finance subreddit.
Fellow Redditors offered their suggestions on how to proceed with the situation.
Don't Miss:
- Inspired by Uber and Airbnb – Deloitte's fastest-growing software company is transforming 7 billion smartphones into income-generating assets – with $1,000 you can invest at just $0.30/share!
- Hasbro, MGM, and Skechers trust this AI marketing firm — Invest before it's too late.
Build An Emergency Fund
One commenter suggested building an emergency fund with the $6,000 if the original poster doesn't already have one. The advantage of an emergency fund is that you won't have to take out another loan if a surprise expense shows up.
The auto loan currently has a 6.8% APR, so its interest will accumulate faster than the emergency savings account. However, it can be more expensive to take out a personal loan if you need it in the future.
The commenter suggested that the original poster only needs a six-month emergency fund. If that condition has already been satisfied, it makes more sense to put the money toward the auto loan.
Trending: Maker of the $60,000 foldable home has 3 factory buildings, 600+ houses built, and big plans to solve housing — this is your last chance to become an investor for $0.80 per share.
Factor In Taxes
Although moving the money into a high-yield savings account can give you a financial buffer during emergencies, not every commenter was on board with the idea.
"Considering it's 6.8%, 100% pay it off early," one commenter suggested.
However, when it comes to choosing between extra loan payments and a high-yield savings account, you have to consider the tax implications. As one commenter explains, a 4% APY on a high-yield savings account isn't as high as it sounds.
"You'll also be paying taxes on that 4% interest while the interest on your loan continues to accumulate at a higher rate," the commenter explained.
The Redditor will save more money if they pay off the loan than store the money in a high-yield savings account. If the Redditor has other ways to handle emergency expenses, paying the auto loan may be the better route.
See Also: Invest where it hurts — and help millions heal: Invest in Cytonics and help disrupt a $390B Big Pharma stronghold.
The Freedom Of No Monthly Payment
One commenter explained that they were in a similar situation and opted to pay off their auto loan with the windfall they received from a class action settlement. This commenter explained that the freedom from not having to worry about monthly payments anymore was worth it.
The original poster also mentioned freedom as a key factor. Paying off half of the loan will result in less interest and lower monthly payments.
While putting the money into a high-yield savings account can help in the event of an emergency, paying off the loan is a better approach. You can also invest the money in the stock market and potentially get a return that's higher than 6.8%. However, the stock market isn't a sure thing, while chipping away at the auto loan results in guaranteed savings.
Read Next:
- Maximize saving for your retirement and cut down on taxes: Schedule your free call with a financial advisor to start your financial journey – no cost, no obligation.
- ‘Scrolling To UBI' — Deloitte's #1 fastest-growing software company allows users to earn money on their phones. You can invest today for just $0.30/share with a $1000 minimum.
Image: Shutterstock
© 2025 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
