I recently sold my first house due to a PCS (Permanent Change of Station). The numbers weren’t working out to rent it out, so selling made sense. After the sale, I’m looking at roughly $56K in profit.
Here’s my financial situation:
- Car loans: 2 loans, each about $42K
- Other debt: Credit card ~$300, personal loan ~$5K
- Savings: ~$9K
- Monthly bills: Phones, utilities, insurance, etc.
- Living mostly paycheck-to-paycheck due to paying a mortgage and rent simultaneously while the house was on the market
Now I’m debating how to best use the profit.
Option 1: Debt Snowball Approach
One strategy is to pay off one car loan completely and then use the freed-up monthly payment to accelerate repayment on the second loan. This method, often called the debt snowball, focuses on psychological wins and momentum.
Pros:
- Immediate reduction in monthly obligations
- Motivating progress by eliminating one debt entirely
- Less stress from fewer active loans
Cons:
- You still carry one large car loan
- Interest continues on the remaining loan
Option 2: Keep Paying Standard Payments and Invest
Another approach is to continue making regular payments on both car loans and use the extra cash — which was previously for your mortgage — to invest or save the remaining $54K.
Pros:
- Money continues to grow through investments or high-yield savings
- Keeps some liquidity for emergencies
- Can potentially earn more than the interest on the loans
Cons:
- Slower progress on debt repayment
- Risk if investment returns underperform
Things to Consider
- Interest rates on the car loans: Higher interest rates generally make paying off debt more attractive.
- Emergency fund: You currently have $9K in savings. Maintaining a comfortable buffer is critical.
- Risk tolerance: Investing the profit carries risk, while debt repayment is guaranteed return (interest saved).
- Psychology: Some people prefer the peace of mind from being debt-free; others are comfortable leveraging capital.
Conclusion
Both strategies have merit. If your goal is peace of mind and reducing monthly obligations, paying off a car loan first (debt snowball) makes sense. If your goal is maximizing growth while managing risk, keeping both loans and investing the extra cash could be more effective.
Ultimately, the decision depends on your comfort with debt, risk tolerance, and long-term financial goals.