You have a pile of assorted debts you need to pay off and you’re ready to get to it--which ones do you start paying first?  The conventional wisdom—and I’d dare say the advice of most experts—would be to start hitting the credit cards first.  And on the surface, this makes abundant sense.  They’re variable rate loans and usually have higher interest rates than most other loan types.  

But I can think of a few reasons—six of them actually—why you might want to pay off your car loan first. 

A car loan is secured debt

Should you lose your job and hit on a time when you’re unable to pay your debts, the banks that you have credit cards with will launch a systematic telephone assault on your household, liberally salted with threats of one sort or another.  It will last as long as you are behind on your debts, and it might even get a bit irritating. 

Most of it however, will be bluster—all they can do is call and threaten.  If they push you too hard—as in attempting to elevate the threats to legal action—that might induce you into filing for bankruptcy, which will most likely leave the lenders with nothing. 

Not so with a car loan however!  A car loan is secured by your vehicle—stop paying on it and the lender can come and repossess it in due course.  It’s a solid bet that being car-less will feel a lot worse than harassing phone calls, and for this reason alone paying off your car loan should be a priority.

Payment-to-debt ratio

You can generally knock out a bigger monthly payment by paying off a car loan than by paying off a credit card of roughly equal size.  That’s because the payments on a car loan are usually higher than for credit cards. 

Credit cards usually require that you pay something on the order of 2% of the outstanding loan balance with each monthly payment.  On a balance of $10,000, that’s $200.   But because car loans are fixed for short terms, the payment on $10,000 is probably higher—more like $300-$500 per month. 

You’ll free up more cash flow per month by paying off a car loan than a credit card. The more cash flow you free up, the more money you’ll have to pay off other debts.

A car is usually critical to your livelihood

Any asset you own that’s integral to the production of income should be owned free and clear, if possible.  For most people, a car is needed—at a minimum—to commute to your job.  Yes, it would be nice payoff credit cards, but the loss of car (due to repossession) will have a critical impact on your income as well as your debts and credit rating.

You don’t want to lose a $20,000 car for a $10,000 debt

I realize I’m hitting the repossession factor pretty hard in this article, but it is one of the prime attributes of car loans, and one that is easily overlooked—until an income disruption hits. 

But one of the uglier outcomes of repossession would be losing a car with substantial equity.  It’s one thing to have a car repossessed that’s worth only slightly more than the loan against it, but quite another if you have thousands of dollars in equity in it.  Not only would the car be lost, but so would the trade in value to buy another.

You have two or more car loans in one household

With the escalating cost of new cars, having a car loan has come to be viewed as the normal state of affairs.  Most households have a car loan for each vehicle owned.  If there are two car loans in your household, all of the risks that we covered above are roughly doubled. 

Worse is the drain on your cash flow.  If each car has a $400 per month payment, that means $800 is being siphoned out of the household budget each month—or almost $10,000 per year!  Think about the possibilities that are created if that kind of money were flowing into your investment portfolio, rather than into debt?

Staying ready for your next car purchase

For most people, the down payment for a new car comes from the sale or trade-in value of the vehicle already owned.  Any debt being carried on the old car reduces the size of the down payment available for a new one, raising the amount that will need to be financed. 

Think of paying off your car then as “keeping your powder dry” for the next purchase.  A car owned free and clear opens up a lot more options than one encumbered by debt.

If you’re about to begin a debt reduction plan, consider tackling your car loan first. It can often give you more breathing room early in the process than you can get from paying off credit cards first.