Car loan or credit card: which to pay off first?

Why balance size is the wrong starting point

It's tempting to target whichever debt has the bigger number, since it feels like the larger problem. But interest is calculated on the rate applied to the balance, not the balance alone, so a much smaller balance at a much higher rate can genuinely be costing you more every month than a larger loan at a low rate.

Comparing the actual monthly cost of each

Multiply each balance by its APR and divide by 12 to see roughly what a month of carrying that balance costs in interest alone. A $2,000 card at 23% APR costs about $38 a month in interest. A $10,000 auto loan at 6% APR costs about $50 a month. The auto loan's balance is five times bigger, but its monthly interest cost is only somewhat higher, which shows how much the rate gap matters.

Where the collateral changes the calculation

An auto loan is secured by the car, meaning missed payments can lead to repossession relatively quickly compared with unsecured credit card debt. This doesn't usually flip the math, since the rate gap is often large enough that the card still deserves extra payments first, but it does mean you should never let the auto loan's minimum payment lapse while focusing extra money elsewhere.

Putting extra payments where they'll do the most

Once you've confirmed the rate gap, direct extra money to the higher-rate debt while keeping the other current.

1. List both debts with their exact balance and APR.
2. Divide each balance by 12 after multiplying by the APR to compare rough monthly interest cost.
3. Keep making at least the minimum payment on both debts every month without exception.
4. Send any extra money to the higher-rate debt, which is usually the credit card.
5. Recheck the comparison if either rate changes, since a variable-rate card or loan can shift the math over time.

Common questions

What if my auto loan's rate is actually higher than my card's?

Then the auto loan would be the higher priority under a rate-based approach. Always compare the actual APRs on your statements rather than assuming cards are always higher, since promotional and subprime auto rates can vary widely.

Should I ever pay extra on the auto loan instead, even at a lower rate?

Some people do this to build equity faster or get out from being underwater on the loan. That's a reasonable personal priority, but understand it usually costs more in total interest than targeting the higher-rate debt first.

Does refinancing the auto loan change this comparison?

It can, if refinancing lowers the rate further, widening or narrowing the gap with your card. Get the new rate in writing and redo the comparison before assuming refinancing changes which debt deserves extra payments.