Invest or Paydown?

Canada. I have a ~12k car loan at 4.5%, with 4 more years left to run. I took control last year of my finances and am now fully buffered and saving every month. I maxed out my RESP and RRSP last year, including a catch-up year for the RESP, and will do the same this year. I have an extra ~$300 per month on top of RRSP contributions to put towards investment/retirement.


My question is, pay down the debt or begin my investment portfolio, or a combination? Right now I am considering increasing my car payment by $100 pcm to shorten the debt's lifespan, but this is based on my preference for being out of debt over holding investments. 

Any input is welcome.

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  • I'd probably go 50/50. 4.5% isn't high, but it isn't low either.

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    • eloquentz
    • Numbers Wizard (Accountant), Acoustic Artist (Musician) and Jill of all Trades (Wife & Mother)
    • eloquentz
    • 2 yrs ago
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    Paying off the car loan gives you a 4.5% return.  Can you do better with your investments?

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  • I would personally recommend paying down the debt, especially if you feel a preference toward it. The sense of progress and freedom that my wife and I experienced when we paid off our student loans served as a strong incentive to keep saving and start investing. 

    One of the things I didn't really realize before we paid off our debt is that we would not only be avoiding extra interest, but we would suddenly drop a major expense. That sounds rudimentary, but it was pretty shocking when a fifth of our expenses just vanished, and we suddenly got a "raise" in our disposable income.  It's VERY exciting to see that money make your assets go up instead of make your debts go down. 

    You might think about it in terms of, "How much is debt freedom worth to me?" For some, it might not be much. For us, it was definitely worth the gains we missed out on (and the market was soaring when we were paying down our debt), because now we feel far more free, secure, and positive about our finances. 

  • How much is the car worth, and will there ever come a point at which you are likely to be upside-down on the loan? I like to be rightside up on my secured debt. 

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  • Another thought for the $300, a car replacement category, if you haven't considered one, but I would probably be inclined to clean up the debt before going that route.

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