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Renew a CD or Pay Down My Debt?

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Mark Cappel
UpdatedMay 10, 2024

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.

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.



Debt statistics

Debt is used to buy a home, pay for bills, buy a car, or pay for a college education. According to the NY Federal Reserve total household debt as of Q4 2023 was $17.503 trillion. Auto loan debt was $1.607 trillion and credit card was $1.129 trillion.

According to data gathered by from a sample of credit reports, about 26% of people in the US have some kind of debt in collections. The median debt in collections is $1,739. Student loans and auto loans are common types of debt. Of people holding student debt, approximately 10% had student loans in collections. The national Auto/Retail debt delinquency rate was 4%.

Collection and delinquency rates vary by state. For example, in Indiana, 17% have student loan debt. Of those holding student loan debt, 9% are in default. Auto/retail loan delinquency rate is 4%.

While many households can comfortably pay off their debt, it is clear that many people are struggling with debt. Make sure that you analyze your situation and find the best debt payoff solutions to match your situation.