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Renew a CD or Pay Down My Debt?

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.

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Bill's Answer
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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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