Thoughts on paying off low interest loans

I have around $20K in debt between student loans and car loans.  I have super low interests on these loans ! ~1%.  This means that each each, I pay $200 in interests with the rest going to principal.  

I have the cash sitting around to pay off this debt.  However, I am unsure if I should do it.  

The idea of having no debt and no monthly payments is great!  However, I have been told


1. It's basically free money since the interest is so low

2. You are basically floating the 20K and can use it for many other more important things

3. Having continuous debt payment is good for your credit


Anyways, I am curious what others think.  Please no comments about how I can take the 20K and invest it and get a great than 1% return.  I am very risk averse so at this time no interest in investing

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  • With interest rates that low, I wouldn't be rushing to pay them off either. There are many people who are affronted by debt and will do anything to get rid of it, whereas since my only debt is my mortgage and my monthly payment is completely reasonable for my salary and location, I don't pay any extra (well actually I pay $7/month extra to get to a round number because it's "prettier", but that may as well be nothing). I'm just not bothered by the existence of the debt and I don't see it as a moral failing or someone else having control over me.

    I would be maximizing 401(k), IRA, and if applicable HSA contributions with that money. Yes your IRA and 401(k) are not guaranteed to generate returns, but they are still likely to generate more than 1% returns and you could go super conservative and allocate to bonds rather than stocks. Many online savings accounts are currently giving up to 2% interest rates if you are super risk averse. Same with some CDs. And what do you mean by risk averse? There are different levels. Like I'm averse to anything that sounds like a get rich quick scheme, but at the same time, to me, 0 risk equals 0 rewards which is not useful when planning for retirement. I've altered my future 401(k) allocations, starting this month, to be heavier on bonds than they have been for the last several years, but the majority is still in stocks.

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  • Me personally -- I hate debt.  It's a ball and chain for me, personally.  Everyone is completely different.  If I were you, I'd just pay it off.  However, I'd make sure you're still taking advantage of your 401Ks and maxing your Roth IRA since your interest rates are low and aren't really costing you much.  (401Ks and Roth assuming you're in the US).

    If you're losing sleep over that $20K, it'd be better to get rid of it and have the peace of mind.  But it's really just a personal decision and I don't think there's a right or a wrong way to do this.

    Also, if the $20K is your emergency fund, then don't touch it or only take a portion to pay off the debt.

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  • I wouldn't bother either. We have a car loan sitting at 1% interest that we've just let ride because it's so low. However, we took the money that we might have used to pay it off and put it in an Ally savings account (currently at 1.25% interest), so if anything changed with our monthly expenses we'd be able to pay it off quickly, or we could still use the money for something else if we choose. And it gives us more confidence in putting other money in our 401k, IRAs, etc, since we know we could easily cover our debt (other than mortgage) plus a healthy e-fund for monthly expenses on top of that should our income change. As long as you are saving money and not spending too much and incurring more debt, I see nothing wrong with your strategy. 

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  • Saving & making money and peace of mind are two different items.  When I'm given the choice, I chose peace of mind.  Some times my peace of mind choice is to not make or save as much as I could.  

  • Being debt-free and staying debt-free is essential to my long-term retirement planning bigger picture, and it gives me a confident/optimistic swagger, so it contributes to my emotional well-being. I can nerd out on math analysis, so I no longer let myself be distracted by or engage in interest rate versus investment return analysis on one small portion of my financial life, because it always seems logical in isolation but never fits in with my longer-term plan.  I think in my case 'debt' has come to mean far more than just the mathematical equation. I experience  significant emotional gut-clenching in proportion to the amount of debt -- the stress actually affects me physically -- and that is the personal in personal finance.

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  • Ultimately, it is your choice. Do whatever gives you the best piece of mind.

    For me, I complicate things and here are my rules.

    1. If it is student loans and the interest is very low, let it ride and pay extra only if you feel flushed with money.  Keeping the extra money saved/making money or paying off other debt is better for me because if I get in financial trouble student loans usually can be deferred, other debt or missing the money is worst.

    2. If it is a loan (like for a car) with very low interest *and* I have all the money to pay off the loan at once I will place that money into saving or low risk investing if it will make more money.  I know I can always pay off that loan at any second but I am making more money than the loan. I have peace of mind and making money.

    3. If neither of the above is the case (like with CC debt) I pay that off ASAP.

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  • I'm with jenmas this one.  At 1% I wouldn't pay it off unless I was already maxing out all of my tax-advantaged accounts available to me. And even then if I had extra money that wasn't needed for anything else in my budget, I'd probably choose to invest it instead.

    Hell, you can beat that 1% with online savings accounts, CDs, I Bonds guaranteed, municipal bonds or bond funds with minimal risk. Personally I'd go a bit riskier with equities.

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