Pay off car loan or invest?

[Eleden]

I have a car loan with just under 10k left @ 2% and an "emergency fund" with 15k @ .85%. The car loan will be paid off in 2.3 years with current payments.

Other noteworthy info: I'm 27 years old, maxing out my 401(k), investing 325/mo in an S&P 500 index fund, and paying an extra 365/mo on our mortgage.

What do you fellow Mustacians recommend I do to best utilize the 15k I have making me next to nothing? Pay off the car ASAP and invest the rest? Invest it all since I'll be averaging more than a 2% return on investments? Open up a HELOC for emergencies? Other options?

Thanks!

[Dynasty]

One option would be to use 5K and put on the car loan.  (How many months of expenses would 10K left in the EF provide?)

Then maybe lower the amount extra you are putting on your mortgage and investing in the market to be able to come up with an extra 416 dollars a month to put towards the car loan.  Then it would be paid off in a year.

What is your mortgage rate at?

Mathematically it makes sense to throw more money at a higher interest rate loan or invest in something that will provide a greater level of return than debt repayment. But, it would be nice to have one less bill a month too.

At the end of the year, you could split the difference between what the car payment was and refund your emergency account/pay extra on the mortgage, or invest.

Or just invest it all now, make minimum payments on everything, hope you never need the emergency fund, and hope the market doesn't tank.  But I prefer the combination approach of investing, saving, and paying off debt early. Because the best mathematical approach doesn't care about what is best for you, and what the future might bring. Good to have all your bases covered.   

[Eleden]

10k would provide us with about 4 months of expenses comfortably. We could probably stretch that to 6 or 7 months if we really hunker down.

Our mortgage rate is at 5%. We looked into refinancing last month but it's not worth it since we're planning on selling in 1-2 years. It would take 2 years to break even on a re-fi unless we dumped a lot of money into it. Lowering the extra principal we currently pay on our mortgage wouldn't be ideal though since we're going to need the equity for a down payment on a different home when we sell.

Throwing 5k at the car loan sounds nice though. A balanced approach would probably let me sleep easier at night. There's definitely some trimming we have yet to do in our budget yet and I'm sure we could find 100-200/mo extra to throw at it in the coming months. After all, I just found out about MMM and his Mustachian wisdom 2 months ago. Plenty of mustache growin' to be had in the coming years :)

[Senor Smallchange Soulpatch]

Does the car loan require you to carry collison/comprehensive insurance on the car?  How would the numbers look if you paid the car off and then dropped to liability-only coverage?

I'd bet that the additional insurance you're required to carry on the car due to the outstanding loan is making your effective interest rate a hell of a lot more than 2%.

[nktokyo]

I suggest you pay off the car loan and draw a line in the sand that represents never going into debt to buy something that will depreciate in price again.

The difference in "net" return you could get by investing this money vs paying off debt is tiny vs the relative benefit of investing with a clean slate and a new set of values.