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Is it better to renew a CD, pay-off a car loan, or pay-down a second mortgage?
I have a $10,000 certificate of deposit (CD) maturing soon. Since CDs are earning only 1.5-3%, would I be better to pay-off my car loan at 6% or pay-down my second mortgage and not renew the CD? I'm not sure which would be better to pay-off or pay down.
Generally speaking, it is does not make good financial sense to hold investments that are earning interest at a lower rate than the rate you are paying on your debts.
Since you are in exactly such a situation, you should consider cashing-out your investments and using the funds to pay down your highest interest debts. For example, if you use the $10,000 currently in the CD to pay off your car loan, your return on "investment" would be equal to the interest you would have paid over the remaining life of the loan. I expect that this amount would greatly exceed the potential interest earnings on your CD.
Of course, there are many exceptions to this principle, such as investments made into 401(k) accounts, which carry significant penalties for early withdrawal of invested funds. Also, if the CD is your only savings, you should think twice before depleting your rainy-day fund.
I encourage you to consult with a certified financial planner, CPA, or other financial professional to review your debts and investments in detail. He or she should then be able to tell you whether you should cash out your CD and how best use the funds to pay down your debts.
I wish you the best of luck, and hope that the information I have provided helps you Find. Learn. Save.
Best,
Bill
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Did you know?
Mortgages, credit cards, student loans, personal loans, and auto loans are common types of debts. According to the NY Federal Reserve total household debt as of Q1 2024 was $17.69 trillion. Housing debt totaled $12.82 trillion and non-housing debt was $4.88 trillion.
A significant percentage of people in the US are struggling with monthly payments and about 26% of households in the United States have debt in collections. According to data gathered by Urban.org from a sample of credit reports, the median debt in collections is $1,739. Credit card debt is prevalent and 3% have delinquent or derogatory card debt. The median debt in collections is $422.
The amount of debt and debt in collections vary by state. For example, in Texas, 37% have any kind of debt in collections and the median debt in collections is $1997. Medical debt is common and 19% have that in collections. The median medical debt in collections is $835.
While many households can comfortably pay off their debt, it is clear that many people are struggling with debt. Make sure that you analyze your situation and find the best debt payoff solutions to match your situation.
