Pay down the student loan, or buy the car with cash?
Here's another way to look at this that might make the decision easier: Looking at it this way you can turn this into a financial arbitrage opportunity, returning 2.5% compared to paying cash for the vehicle and carrying the student loan.  Of course you need to take other factors into account as well, such as your need for liquidity and credit. I hope this helps! To directly answer your question, the best choice is to pay cash and place the rest on your student loan. This is saving you from paying more interest.  To offer some advise, consider purchasing a cheaper car to place more money towards your student loan debt. This will be the best financial decision in the long-term.  I suspect the reason you are considering financing this vehicle is that the cash payment feels like a lot. Trust your instinct here. This vehicle sounds like large splurge considering your current debt, and your gut is telling you as much. Be patient. Use your liquid funds to get a more affordable vehicle and attack the debt. That is setting yourself up for financial success.
"My recommendation is to pay off your student loans as quickly as possible. It sounds like you're already doing this but don't incur any other large debts until you have this taken care of.  I'd also recommend not buying a car, especially an expensive one, on credit or lease either. Back during the dotcom boom I and many friends bought or leased expensive cars only to lose them or struggle paying for them when the bottom dropped out. A car instantly depreciates and it's quite rare for them to ever gain value again. Stick with reliable, older, used cars that you can purchase for cash. If you do borrow for a car, shop around for the best deal and avoid 3+ year terms if at all possible. Don't lease unless you have a business structure where this might create a clear financial advantage. Avoid credit cards as much as possible although if you do plan to buy a house with a mortgage you'll need to maintain some credit history. If you have the discipline to keep your balance small and paid down you can use a credit card to build credit history. However, these things can quickly get out of hand and you'll wonder why you suddenly owe $10K, $20K or even more on them so be very careful with them. As for the house (speaking of US markets here), save up for at least a 20% down payment if you can. Based on what you said, this would be about $20-25K. This will give you a lot more flexibility to take advantage of deals that might come your way, even if you don't put it all into the house. ""Stretching"" to buy a house that's too expensive can quickly lead to financial ruin. As for house size, I recommend purchasing a 4 bedroom house even if you aren't planning on kids right away. It will resell better and you'll appreciate having the extra space for storage, home office, hobbies, etc. Also, life has a way of changing your plans for having kids and such." In general I'd say, yeah, if you can pay cash, pay cash. If you pay cash, then by definition you pay zero interest. If you get a loan, you'll pay interest. Most people get a loan to buy a car because they don't have the cash. Possible reasons not to pay cash when you could: One: Technically you can pay cash, but if you did, you would have little or no reserve for emergencies. Like if the car costs, say, $20,000.00, and you have $20,010.00 in your bank account, then technically you could afford to pay cash, but you probably shouldn't, because you don't want to have just $10 left. What if tomorrow something comes up? Two: Arguably, you have a place to invest money that pays more than the interest on the loan. Like say you can get a car loan for, whatever the going rate is today, say 6%. And you know a place to invest your money that is very safe and almost guaranteed to pay 10%. It would make sense to borrow to buy the car, invest the cash, and then withdraw money from the investment to make the payments on the car. You'd end up 4% ahead. There are a lot of catches to that strategy, though. The biggest is that the more the investment pays, the more likely that it is risky. If you thought the investment would pay 10% but it ends up paying only 4%, then you will lose money by this strategy. Also, there's the psychological element: Many people SAY and fully INTEND to invest their money, but then find other things they want to buy and so spend it instead. If you pay cash, you're committed. A lender will look at three things when giving a loan: Income. Do you make enough money each month to afford the payments. They will subtract from your income any other loans, credit card debt, student loan debt, mortgage. They will also figure in your housing costs. Your Collateral. For a mortgage the collateral is the house, for a car loan it is the car. They will only give you a loan to a specific percentage of the value of the collateral. Your money in the bank isn't collateral, but it can serve as a down payment on the loan.  Your Credit score. This is a measure of how well you handle credit. The longer the history the better. Using credit wisely is better than not using the credit you have.  If you don't have a credit card, get one. Start with your current bank. You have a history with them. If they won't help you join a credit union. Another source of car loans is the auto dealer. Though their rates can be high. Make sure that the purchase price doesn't require a monthly payment too high for your income. Good rules of thumb for monthly payments are 25% for housing and 10% for all other loans combined. Even a person with perfect credit can't get a loan for more than the bank thinks they can afford. Note: Don't drain all your savings, you will need it to pay for the unexpected expenses in life. You might think you have enough cash to pay off the student loan or to make a big down payment, but you don't want to stretch yourself too thin. Well, I was about to ask a similar question. Unless you get into stocks/mutual funds it seems like returns on less risky items such as CDs (certificate of deposit) are terrible. I don't think it is a good use of folks time to ask what a Roth IRA is.  We were considering buying a new car (~$20000 with zero down and 0.9% interest rate) but we drive maybe 6000 miles per year. We would be paying ~$550/month to park something in our garage. Our current car is sexless but absolutely reliable.  I am now looking elsewhere and may either invest the money in our house (i.e., refinishing upstairs) or paying down our debt. We have a home loan - $132,000 at 3.5% - and a student loan - $12,675 @ 3.375%.  Depending on the loan rate on your car, I would pay that down first. Alternatively, find a fee-only broker and drop around $500 for them to come up with a financial plan for you. They will probably recommend a Roth IRA with a specific mutual fund in mind. You'll need $2500 or so to open the Roth, contributions from there should be such that you can start/stop them on demand without fees. I don't understand the calculations in the comments by the OP. He says My monthly savings after mandatory expense is around USD 2000. This includes rent, expenses, emergency fund savings, and the monthly required payment of my auto loan.  (emphasis added) He has $2000 USD left over after monthly expenses (which includes rent, food, utilities etc, contribution towards emergency funds, and the required monthly payment on the auto loan). He claims that by applying the $2000 USD per month towards reducing the debt, it would take him 30-36 months to be debt-free.  But is it not the case that applying the $2000 to the student loan of $18K+ (while continuing to make the auto loan payments) will pay the student loan off in less than 10 months? If no payments are made on that $18K+ student loan, the accrued interest of about $2K in 10 months (this is (18.25*13.7%*)(10/12) for a total of $20K+). In actuality, with the loan being paid down, the interest will be much less. Once the student loan is paid off, the extra $2000 can go towards what is left of the $10K auto loan each month and  pay it off in another 4 or 5 months or so. So we are talking of 15 months max instead of 30-36 months. Of course, as Carlos Briebiescas points out, the car is more valuable as an asset than can be sold in case of job loss  creating  a need for cash etc, and so paying it off first might be better, but that is a different calculation. The key here is the bank, they hold the title to the car and as such have the final say in things. The best thing you can do is to pay off the loan.  Could you work like crazy and pay off the car in 6 months to a year? The next best thing would be to sell the car.  You will probably have to cover the depreciation out of pocket.  You will also need to have some cash to buy a different car, but buy it for cash like you should have done in the first place. The worst option and what most people opt for, which is why they are broke, is to seek to refinance the car.  I am not sure why you would have to wait 6 months to a year to refinance, but unless you have truly horrific credit, a local bank or credit union will be happy for your business.  Choose this option if you want to continue to be broke for the next five years or so. Once any of those happen it will be easy to re-title the car in your name only provided you are on good terms with the girlfriend.  It is just a matter of going to the local title office and her signing over her interest in the car. My hope is that you understand the series of foolish decisions that you made in this vehicle purchase and avoid them in the future.  Or, at the very least, you consciously make the decision to appear wealthy rather than actually being wealthy. My in-laws are pressuring me to buy a home.  I don't really have much financial experience. In fact, I'm a nightmare with finances. I almost have my student loans payed off from school.  My in-laws and husband are great with finances and with real-estate.  My husband has a good job and $200k in savings.  I have a good job too, and still have some debt from school. (approx $60k left of 180k).   They say the house will be available in Jan or February for purchase, and that we should really try to buy it (prob $2-3 mil).   My guess is they want to make it available to us off the market (which is a huge benefit in this area,  there are really no houses available lately) .   The problem is:  I am uncomfortable because I don't have all of my loans payed off,  I could divert money away from paying off the loans in order to save for a larger downpayment. I just got a bonus of $35k (after taxes)   I don't think I'll have all of my loans payed off by January. Should I save my money for the downpayment or focus on my loans, should I go for the house?  I don't know how to weigh these options against each other with such little experience. As well as paying 8% interest on your loan (i.e. $800/year), you're also wasting money on the car: depreciation, insurance etc. So it's worth a lot to you to get out of it. Set against that is the risk of having to borrow the $3000 you'll be taking from your emergency fund at a higher interest rate (say 30%?) for at most 6 months, which would only cost you $300-$400 even if it happens. You'll also be giving up a small amount of interest on the $3000, but at current interest rates that pretty much negligible. There is a small chance that an emergency would also cause the available credit on your credit cards to disappear, but in the short term that should be pretty unlikely. So I think the balance is overwhelmingly in favour of getting out of the loan as soon as you can.