mortgage vs car loan vs invest extra cash?
Pay off your car loan. Here is why: As you mentioned, the interest on your home mortgage is tax deductible. This may not completely offset the difference in interest between your two loans, but it makes them much closer.  Once your car debt is gone, you have eliminated a payment from your life. Now, here's the trick: take the money that you had been paying on your car debt, and set it aside for your next car. When the time comes to replace your car, you'll be able to pay cash for your car, which has several advantages. "First off, the ""mortgage interest is tax deductible"" argument is a red herring.  What ""tax deductible"" sounds like it means is ""if I pay $100 on X, I can pay $100 less on my taxes"".  If that were true, you're still not saving any money overall, so it doesn't help you any in the immediate term, and it's actually a bad idea long-term because that mortgage interest compounds, but you don't pay compound interest on taxes. But that's not what it actually means.  What it actually means is that you can deduct some percentage of that $100, (usually not all of it,) from your gross income, (not from the final amount of tax you pay,) which reduces your top-line ""income subject to taxation.""  Unless you're just barely over the line of a tax bracket, spending money on something ""tax deductible"" is rarely a net gain. Having gotten that out of the way, pay down the mortgage first.  It's a very simple matter of numbers: Anything you pay on a long-term debt is money you would have paid anyway, but it eliminates interest on that payment (and all compoundings thereof) from the equation for the entire duration of the loan.  So--ignoring for the moment the possibility of extreme situations like default and bank failure--you can consider it to be essentially a guaranteed, risk-free investment that will pay you dividends equal to the rate of interest on the loan, for the entire duration of the loan. The mortgage is 3.9%, presumably for 30 years.  The car loan is 1.9% for a lot less than that.  Not sure how long; let's just pull a number out of a hat and say ""5 years."" If you were given the option to invest at a guaranteed 3.9% for 30 years, or a guaranteed 1.9% for 5 years, which would you choose?  It's a no-brainer when you look at it that way." A point that hasn't been mentioned is whether paying down the mortgage sooner will get you out of unnecessary additional costs, such as PMI or a lender's requirement that you carry flood insurance on the outstanding mortgage balance, rather than the actual value/replacement cost of the structures.  (My personal bugbear:  house worth about $100K, while the bare land could be sold for about twice that, so I'm paying about 50% extra for flood insurance.)  May not apply to your loan-from-parents situation, but in the general case it should be considered. FWIW, in your situation I'd probably invest the money. Without knowing actual numbers it's tough to say.  Personally, I would pay off the car then, going forward, use the money that would have been paid on your car note toward your mortgage.  I always think of things in the worst possible scenario.  It's easier, and faster, to repossess a car than to foreclose on real estate.  Also, in an emergency situation, depleting your fund for your car loan and your mortgage would be significantly more detrimental than only paying a mortgage with a car owned outright.  Fewer obligations means fewer things to draw down your funds in an emergency. Whether the tax deductability of the mortgage interest outweighs the lower rate on your car loan will depend on a lot of factors that haven't been shared.  I think it's safe to assume with only 1% of separation the real difference isn't significant.  I think when determining which credit cards to pay off, choosing the one with the highest rate is smart.  But that's not the situation you're in. If you don't have foreclosure concerns I'd still pay off the car then start investing. Since you've already maxed out your 401k and your IRA, if you wanted to invest more-- then it would either be in a brokerage account or a 529 (if you have kids/ intend on going back to school). As to investing versus paying off your loans -- the interest on them are small enough that it will depend on your preference.  If you need the cash flow for investment purposes (ie if you are going to buy an investment property) then I would pay off the car loan first -- otherwise I would invest the money.   Since you've already expressed that you wouldn't be too interested in paying the mortgage off early, I've left that off the table (I would prioritize car loan over mortgage for the cash flow reason)  If you do open a brokerage account -- make sure you are minimizing your taxes by putting the 'right' type of assets in a tax advantaged account. It depends on your tax rate. Multiply your marginal rate (including state, if applicable) by your 3.1% to figure out how much you are saving through the deduction, then subtract that from the 3.1% to get the effective rate on the mortgage. For example, if you are in the 28% bracket with no state tax impact from the mortgage, your effective rate on the mortgage is 2.232%. This also assumes you'd still itemize deductions without the mortgage, otherwise, the effective deduction is less. Others have pointed out more behavioral reasons for wanting to pay off the car first, but from a purely financial impact, this is the way to analyze it. This is also your risk-free rate to compare additional investing to (after taking into account taxes on investments).
"Wow, you guys get really cheap finance. here a mortage is 5.5 - 9% and car loans about 15 - 20%. Anyway back to the question. The rule is reduce the largest interest rate first (""the most expensive money""). For 0% loans, you should try to never pay it off, it's literally ""free money"" so just pay only the absolute minimum on 0% loans.  Pass it to your estate, and try to get your kids to do the same.  In fact if you have 11,000 and a $20,000 @ 0% loan and you have the option, you're better to put the 11,000 into a safe investment system that returns > 0% and just use the interest to pay off the $20k. The method of paying off the numerically smallest debt first, called ""snowballing"", is generally aimed at the general public, and for when you can't make much progress wekk to week.  Thus it is best to get the lowest hanging fruit that shows progress, than to try and have years worth of hard discipline just to make a tiny progress.  It's called snowballing, because after paying off that first debt, you keep your lifestyle the same and put the freed up money on as extra payments to the next target.  Generally this is only worth while if (1) you have poor discipline, (2) the interest gap isn't too disparate (eg 5% and 25%, it is far better to pay off the 25%, (3) you don't go out and immediately renew the lower debt.  Also as mentioned, snowballing is aimed at small regular payments.  You can do it with a lump sum, but honestly for a lump sum you can get better return taking it off the most expensive interest rate first (as the discipline issue doesn't apply). Another consideration is put it off the most renewable finance.  Paying off your car... so your car's paid off.  If you have an emergency, redrawing on that asset means a new loan.  But if you put it off the house (conditional on interest rates not being to dissimilar) it means you can often redraw some or all of the money if you have an emergency.  This can often be better than paying down the car, and then having to pay application fees to get a new unsecured loan.   Many modern banks actually use ""mortgage offsetting"" which allows them to do this - you can keep your lump sum in a standard (or even fixed term) and the value of it is deducted ""as if"" you'd paid it off your mortgage.  So you get the benefit without the commitment.  The bank is contracted for the length of the mortgage to a third party financier, so they really don't want you to change your end of the arrangement.  And there is the hope you might spend it to ;) giving them a few more dollars.  But this can be very helpful arragement, especially if you're financing stuff, because it keeps the mortgage costs down, but makes you look liquid for your investment borrowing." "Some pros and cons to renting vs buying: Some advantages of buying: When you rent, the money you pay is gone. When you buy, assuming you don't have the cash to buy outright but get a mortgage, some of the payment goes to interest, but you are building equity. Ultimately you pay off the mortgage and you can then live rent-free. When you buy, you can alter your home to your liking. You can paint in the colors you like, put in the carpet or flooring you like, heck, tear down walls and alter the floor plan (subject to building codes and safety consideration, of course). If you rent, you are usually sharply limited in what alterations you can make. In the U.S., mortgage interest is tax deductible. Rent is not. Property taxes are deductible from your federal income tax. So if you have, say, $1000 mortgage vs $1000 rent, the mortgage is actually cheaper. Advantages of renting: There are a lot of transaction costs involved in buying a house. You have to pay a realtor's commission, various legal fees, usually ""loan origination fees"" to the bank, etc. Plus the way mortgages are designed, your total payment is the same throughout the life of the loan. But for the first payment you owe interest on the total balance of the loan, while the last payment you only owe interest on a small amount. So early payments are mostly interest. This leads to the conventional advice that you should not buy unless you plan to live in the house for some reasonably long period of time, exact amount varying with whose giving the advice, but I think 3 to 5 years is common. One mitigating factor: Bear in mind that if you buy a house, and then after 2 years sell it, and you discover that the sale price minus purchase price minus closing costs ends up a net minus, say, $20,000, it's not entirely fair to say ""zounds! I lost $20,000 by buying"". If you had not bought this house, presumably you would have been renting. So the fair comparison is, mortgage payments plus losses on the resale compared to likely rental payments for the same period." "While I would be very leery of making any Investments in Greece, and if I lived there might want to strongly consider a larger than average investment in 'international' funds (such as an index fund on the US, UK, or German exchanges) Having debt in Greece might not be such a bad thing... if only it was denominated in local currency. The big issue is that right now, you'd be taking out a loan on property in greece, that would be denominated in Euros.  If worse comes to worse, and Greece is kicked out of the EU and forced to go back to the drachma, then you might be in a situation where the bank says ""this loan is in Euros, we want payment in the same"" and if the drachma is plummeting vs the Euro, you could find your earning power (presuming you were then paid in drachma) greatly diminished.. And since you'd be selling the house for drachma, you might be way under-water in terms of the value of the house (due to currency exchange) vs what you owed. Now, if Greece were currently on the drachma, and you were talking about a mortgage in the same, I'd say go for it.  Since what tends to happen when a government has way overspent is they just print more money rather than default.. that tends to lead to inflation, and a falling currency value vs other countries.  None of which is bad for someone with a debt which would be rapidly shrinking due to the effect of inflation. but right now, safer to rent." Does the full time PHD student extend to 70-80 hours/week or more? If not, can you pick up an extra job to aid with living expenses? Also, whose name is the debt in? Is your wife paying to avoid the black mark on her credit record or her mother's? Basically what it looks like to me is that you guys currently have a car you cannot afford and that her mother doesn't seem to be able to afford either, at a ridiculous interest rate on top. Refinancing might be an option but at a payoff amount of 12k you're upside down even when it comes to the KBB retail value. I'm somewhat allergic to financing a deprecating asset (especially at a quick back of the envelope calculation suggests that she's already paid them around $18k if you are indeed three years into the loan). What I would be tempted to do in your situation is to attempt to negotiate a lower payoff to see if they're willing to settle for less and give you clean title to the car - worst thing they can say is no, but you might be able to get the car for a little less than the $12k, then preferably use your emergency money to pay off the car and put it up for sale. Use some of the money to buy her a cheaper car for, say, $4k-$5k (or less if you're mechanically inclined) and put the rest back into your emergency fund. The problem I see with refinancing it would be that it looks like you're underwater from a balance vs retail value perspective so you might have a problem finding someone to refinance it with you throwing some of your emergency money at it in the first place. "Mathematically, the wisest choice is to invest your extra money somewhere else and not pay off your 0% loan early. An extreme example highlights this. Suppose some colossal company offered to loan you a billion dollars at 0 % interest. Would you take it? Or would you say ""No thanks, I don't want that much debt."" You would be crazy not to accept. You could put that money in the safest investments available and still pocket millions while making the minimum payments back to them. Your choice here is essentially the same, but unfortunately, on much smaller scale. That said, math doesn't always trump other factors. You need to factor in your peace of mind, future purchases, the need for future borrowing, your short term income and job security, and whether you think you can reliably make payments on this loan without messing up and triggering fees that wipe out the mathematical advantage of slow paying the loan. You are fortunate because you really can't make a wrong choice here. Paying off debt is never a bad choice IMO. However, it may not always be the best choice." you should always invest if your investment rate of return is higher   than your interest rate Your next line, about standard deviation is dead on.  There are too many variables to give an exact answer here, in my opinion. The main reason is that one variable isn't easy to quantify - One's risk tolerance.  Clearly, there's one extreme, the 18% credit card. Unless you are funding loanshark type rates of 2%/week, it's safe to say that 18% debt should take priority over any investments, except for the matched 401(k) deposits.  What I think you're talking about is something we've addressed here in multiple threads.  Do I prepay my sub 4% mortgage or invest? In this case, (and to Noah's comment) the question is whether you can expect a post-tax return of over 3% during your time horizon. I look at the return for 15 years from 1998-2013 and see a 6% CAGR for the S&P. I chose 15 years, as the choice is often one of paying a 30 year mortgage faster, as fast as 15. The last 15 years offer a pretty bad scenario, 2 crashes and a mortgage crisis. 6% after long term gains would get you 5.1% net.  You can pull the data back to 1871 and run CAGR numbers for the timeframe of your choosing. I haven't done it yet, but I imagine there's no 15 year span that lags the 3% target I cite.  What makes it more complex is that the investment isn't lump sum. It may not be obvious, but CAGR is a dollar invested at T=0, and returns calculated to T=final year. It would take a bit of spreadsheeting to invest the extra funds every month/year over your period of analysis.  In the end, there are still those who will choose to pay off their 4% mortgage regardless of what the numbers show. Even if the 15 year result showed worst case 3.5% (almost no profit) and an average 10%, the feeling of risk is more than many will want. "I'm in the ""big mortgage"" camp. Or, to put this another way - what would you be happier to have in 15 years? A house that is worth $300,000, or $50,000 of equity in a house and $225,000 in the bank? I would much rather have the latter; it gives me so many more options.  (the numbers are rough; you can figure it out yourself based on the current interest rate you can get on investments vs the cost of mortgage interest (which may be less if you can deduct the mortgage interest))." There are several factors here. Firstly, there's opportunity cost, i.e. what you would get with the money elsewhere. If you have higher interest opportunities (investing, paying down debt) elsewhere, you could be paying that down instead. There's also domino effects: by reducing your liquid savings to or below the minimum, you can't move any of it into tax advantaged retirement accounts earning higher interest. Then there's the insurance costs. You are required to buy extra insurance to protect your lender. You should factor in the extra insurance you would buy vs the insurance required. Given that you can buy the car yourself, catastrophic insurance may not be necessary, or you may prefer a higher deductible than your lender will allow. If you're not sufficiently capitalized, you may need gap insurance to cover when your car depreciates faster than your loan is paid down. A 30 percent payment should be enough to not need it though. Finally, there's some value in having options. If you have the loan and the cash, you can likely pay it off without penalty. But it will be harder to get the loan if you don't finance it. Maybe you can take out a loan against the car later, but I haven't looked into the fees that might incur.  If it's any help, I'm in the last stretch of a 3 year car loan. At the time paying in cash wasn't an option, and having done it I recognize that it's more complicated than it seems.