Graduating from college is a huge accomplishment. Being able to secure a great job and grab that car loan is taking adulthood to whole new level. You may be eager to see some of that debt go away quickly, so it is natural to weigh in whether or not to lop off one of the larger debts.

Consider This First

Depending on your financial circumstances, deciding which debt to pay off can be tricky. Before considering this, make sure you have set back some cash for an emergency fund. One of the most important steps you could ever make to keep out of consumer debt is have a fund set up for life’s unexpected expenses. The rule to this is three to six months of your committed expenses. It may be better to focus on reaching this goal before jumping into the debt pay-offs.

Once you have accomplished this feat, you are in a better position to make a decision on these two debts. As to which debt to pay off, there are going to be a whole lot of variables that can impact your decision. Maybe it seems like paying the car loan off will give you more breathing room financially each month, or your car is partially paid off and the remaining payments and interest are not that significant. Is your student loan interest less the interest rate and amount on your car note? Only you can gauge what is going to work significantly better for your budget.

Use an Amortization Table

Having said all this, paying off your student loans is the choice which would probably work out best. Loan repayment terms are typically much longer than the average car loan, so in the end, the student loans are going to cost more interest. You can ask your lenders for an amortization table for each of your loans. This will show you how much interest you would pay over the remainder of each loan. Then you will know more about which one to pay off first.

When paying off any debt, it is better to focus on the loan that has the higher interest rate. You may be able to deduct the interest you have paid on student loans on your taxes (which means it would make better sense to pay off the car loan first). If you should decide to continue on with school, and want to defer your loans, then pay the car off. You cannot defer a car loan; unfortunately it is not an option.

But in most cases, making the monthly student loan payment and not stressing over paying if off faster and instead paying off the car might be the solution. Unsecured loans are not tied to your collateral, such as property. Your loan creditor will not likely repossess your personal assets if you have an unexpected financial hardship.

Yet, the car loan creditor will snap that car up pretty fast if you happened to fall behind on payments. The opposite side of that argument is if you were to let the payments on your student loans slip due to an unforeseen circumstance, you could end up having your wages garnished down the road.

The answer to this question is going to be as unique as is your own financial situation. As much as it would be nice to lose both payments, even losing one frees up extra money. Interest rates and remaining payments are where you put your seeing- eye glass to work and do the math.

This is why it makes sense to have an emergency fund set up, so none of these financial woes scenarios play out. Many people would argue the interest variables between having a savings plan and paying off debt. This is an open debate.

Obviously, interest on your savings is most likely not going to weigh in as much as a car loan or student loan, but it seems like the difference there is the sense of security. Even though in the long run interests accrued on loans is fatter than anything your savings accounts adds up too, the bottom line is that emergency savings should be there.

Like everything else in life, this decision is one of balance, not of absolutes,