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If you’re juggling a car loan and student loans, you might be wondering which debt to prioritize. While it’s important to keep up with minimum payments on all your loans, making extra payments on one of these types may help you save money on interest.

The decision of whether to pay off car or student loans first ultimately depends on your personal financial situation, but the considerations in this guide can help you determine which path is best for you.

Understanding Your Debt Types

First, it’s important to understand the difference between student loans and car loans. Student loans may be federal or private, and they might come with fixed or variable interest rates. They’re unsecured loans, meaning they’re not backed by collateral.

Federal student loans qualify for various benefits and plans that can help lower student loan payments, such as income-driven repayment, as well as programs to temporarily pause payments if needed, like deferment and forbearance. Federal student loans are also eligible for forgiveness programs such as Public Service Loan Forgiveness.

Private student loans don’t have as many benefits as federal loans, but some private lenders will let you modify or postpone payments if you run into financial hardship. You might also explore refinancing student loans to see if you can qualify for a lower interest rate or more favorable terms that might help make your payments more manageable.

Car loans, on the other hand, typically have fixed interest rates and they are secured by your vehicle. If you fall behind on car loan payments, a lender can repossess your car. Car loans commonly have repayment terms of 36 to 84 months.

Unlike student loans, auto loans don’t usually offer much flexibility if you’re having trouble making payments. And car loan payments can be costly — the average car payment in 2024 is $734 a month. By comparison, the average student loan payment is estimated to be about $500 when adjusted for inflation in 2024, according to the Education Data Initiative.

Factors to Consider When Prioritizing Debt

There are several things to think about when deciding whether to pay car or student loans first. Some of the main considerations include your loan’s interest rate, tax implications, and repayment terms.

Interest Rates and Total Costs

It typically makes sense to pay off the loan with the highest cost of borrowing first. This usually means the loan with the highest interest rate. If your student loan has a rate of 5.00%, and your car loan has a rate of 10.00%, paying off the car loan would save you more money in the long run.

Along with the interest rate, consider whether the loan carries any other fees, such as a prepayment penalty. Student loans don’t charge penalties for prepayment, but a car loan might. Compare each loan’s annual percentage rate (APR), as this figure takes both interest and fees into account.

Tax Implications and Deductions

Another factor has to do with tax deductions. The student loan interest deduction allows you to deduct up to $2,500 a year in student loan interest from your taxable income, depending on your modified adjusted gross income (MAGI). At certain income limits, student loan tax deduction phase-outs begin. In 2024, if your MAGI is less than $80,000 a year if you’re a single filer, and $165,000 if you’re married and filing jointly, you can qualify for the full deduction. If you earn between $80,000 and $95,000 ($165,000 and $195,000 if married filing jointly), you can make a partial deduction.

Car loans don’t qualify for a tax deduction on interest unless you are self-employed or a business owner and use the vehicle for business.

Loan Terms and Repayment Periods

Student loans tend to have more flexible repayment terms than car loans. Federal student loan borrowers are eligible for various repayment plans, including the Standard plan, which spans 10 years, and the Extended plan, which is 25 years.

Federal loans are also eligible for income-driven repayment (IDR), which adjusts your monthly payments in accordance with your income and might eventually lead to loan forgiveness. Plus, you may qualify to postpone payments through deferment or forbearance if you go back to school or lose your job.

Car loans don’t qualify for many options. You’ll often choose a repayment term of three to seven years and be expected to pay monthly on your agreed-upon rates and terms. If you can’t make payments, the lender can repossess your vehicle.

Benefits of Paying Off Car Loans First

Paying off a car loan before your student loan can have several advantages, especially since car loans don’t have as much repayment flexibility or offer any tax benefits for vehicles that are strictly for personal use. Here are some reasons to consider prioritizing your car loan over your student loans.

Eliminating Secured Debt

Defaulting on a car loan could lead to losing your car. The sooner you can pay off your secured car loan, the sooner you’ll own your car outright and you won’t have to worry about the possibility of car repossession.

Potential Savings on Interest

Car loans may come with higher interest rates than student loans, so paying off the auto loan first could lead to more savings. Let’s say, for example, that you owe $15,000 on a car loan at a 10.00% rate and a $15,000 student loan at a 5.00% rate, and that both loans have five years left on their repayment.

If you put an extra $100 per month toward your car loan, you’d save $1,232 on interest and get out of debt nearly a year and a half sooner. If you put that extra $100 toward your student loans, you’d also get out of debt about a year and a half sooner but you would save just $574 in interest charges. Our student loan payoff calculator can help you crunch the numbers on your student debt.

You could also consider refinancing your car loan for a better rate to help save on interest. This option might be worth exploring if interest rates are lower now than when you originally took out the loan.

Building Equity in Your Vehicle

The faster you pay down your car loan, the more equity you’ll hold in your vehicle. That means you’ll own more of your car outright, which could come in handy if you ever want to sell it. Plus, you’ll be less likely to end up underwater on your car loan, which can happen when the debt you owe on your vehicle exceeds what the vehicle is worth.

Advantages of Prioritizing Student Loans

Although it often makes sense to prepay a car loan before a student loan, there are certain advantages to paying off student loans first. Here are some scenarios where you could benefit from prepaying your education debt:

•   Your student loans have a variable rate: Some private student loans have a variable rate that can increase and make your borrowing costs unpredictable. If you’ve been dealing with a rising variable rate, you may want to pay off those loans as quickly as you can. You might also explore refinancing those loans, which could allow you to switch to a fixed (and potentially lower) interest rate.

•   You’re not using income-driven repayment or loan forgiveness: Federal student loans come with a variety of borrower protections, but you may not require any of them for managing your student loan debt. If you don’t need an IDR plan and you aren’t pursuing loan forgiveness, for instance, you might focus on paying off your federal loan debt.

•   You’re considering filing for bankruptcy: If you’re in dire financial straits, you might be looking into potentially erasing or restructuring your debts through bankruptcy. Although it’s possible to discharge student loans in bankruptcy, the process is notoriously difficult. It may be easier to discharge a car loan through bankruptcy than a student loan.

Develop a Debt Repayment Strategy

Once you’ve decided which loans to pay off first, it’s important to develop a strategy for repayment. Here are some steps to take.

Create a Budget and Debt Snowball

Start with making a budget so you have a clear sense of your income and expenses. Track your spending, and look for areas where you could cut back. By reducing your spending, you might find room in your budget to direct extra payments toward your debt.

There are debt pay-off strategies that can help. For example, with the debt snowball method, you pay off the loan with the smallest balance first. Then you work on paying off the next smallest loan and so on. The debt avalanche, in contrast, targets the loan with the highest interest rate first, and then the loan with the next highest interest rate, and it can save you the most money in the long run.

The debt snowball may not save you as much money as the debt avalanche, but it can be psychologically rewarding to pay off a debt in full before moving onto the next one.

Seek Additional Income Sources

After budgeting and cutting down on spending, you might explore ways to increase your income. This could mean going for a promotion and raise at work or finding a new job. You could also consider taking on a side hustle, such as driving for a ride-sharing service or doing freelance tutoring.

By setting up additional income streams, you’ll have more cash to put toward your loans and get out of debt faster.

Negotiate with Lenders

If you’re looking to modify payments or adjust your interest rate, try negotiating directly with your lender. Notify the lender that you’re having difficulty repaying the loan and see if they might be willing to work with you. Depending on the type of loan it is, the lender might offer a repayment plan or reduce the loan interest rate, for instance. Although there’s no guarantee of success, it’s worth a try.

The Takeaway

While there’s no one-size-fits-all answer to whether you should pay off a car loan or a student loan first, paying off the loan with the highest interest rate can generally save you the most money. For many borrowers that may be their car loan.

If your student loans have high interest rates, you might consider student loan refinance. If you’re eligible for a lower rate, it may help make your payments more manageable. However, refinancing federal student loans makes them ineligible for federal benefits like income-driven repayment, so you’ll want to keep that in mind as you weigh your options.

Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.

FAQ

Is it better to pay off higher interest debt first?

Paying off high-interest debt first usually makes the most financial sense, since it will save you more money in the long run. However, it’s important to keep up with the minimum payments on all your debts so you don’t end up in delinquency or default.

Can I deduct student loan interest on my taxes?

It depends on your income. The student loan interest deduction lets you deduct the interest you pay on student loans, up to $2,500 a year if your modified adjusted gross income (MAGI) is less than $80,000 for single filers and $165,000 if you’re married and filing jointly. If you earn between $80,000 and $95,000 ($165,000 and $195,000 if married filing jointly), you can make a partial deduction. Anything more than that and you cannot take the student loan interest deduction.

What happens if I default on my car loan or student loans?

A car loan is secured by your vehicle, and if you default on the loan, the lender can repossess your car. Student loans are unsecured, so a lender can’t take your personal property. However, the government can garnish your wages, tax refunds, and Social Security benefits if you default on a federal student loan. Defaulting on private and federal student loans can also damage your credit, and a private lender could potentially take you to court to try to collect the money.

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SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.

SOSLR-Q324-022

Being the cosigner on a loan is a commitment that shouldn’t be taken lightly. It may be tempting to help out a loved one by agreeing to be their financial backup, but you could be putting your own credit reputation in jeopardy if the primary borrower on the loan doesn’t follow through on his or her obligation.

Here’s what you need to know before you sign on that dotted line.

What Is a Cosigner?

If someone isn’t a good candidate for a loan, a lender may allow them to add a better-qualified cosigner to their application. This can help a high-risk borrower improve their chances for getting a loan or better loan terms. Plus, cosigning can help the cosigner and primary borrower build credit.

Essentially, a cosigner agrees to take over financial obligations should the main borrower miss payments or default on the loan. They won’t get the borrowed funds, and if the loan is used to purchase an asset, like a car or home, they won’t be listed as a co-owner. But they are just as responsible as the main borrower for making sure the debt is paid.

This is a different arrangement from using a co-borrower, where that person takes on the loan with the main borrower and has part ownership in whatever the loan buys.

Primary Responsibilities of a Cosigner

What is the responsibility of a cosigner on a loan? Being a cosigner means you’re willing to accept two important roles. Let’s take a closer look at both.

Financial Obligation

It’s important to fully understand your financial obligation before accepting the role of cosigner.
To be clear, you aren’t just serving as a character witness, telling the lender that you trust your friend or loved one will make good on the loan. You’re signing an agreement that says you’ll pay if he or she doesn’t.

This means if the primary borrower is delinquent, you should be ready for the lender to come to you for the missing payment or payments. And if the borrower defaults, the lender may ask you for the balance. You also may have to pay any late fees or collection costs.

If you can’t fulfill your role as cosigner, the lender can use the same methods to collect as it would with a primary borrower, which includes taking you to court.

Credit Risk

Cosigning a loan can have the same effect on your credit as if you applied for and got the loan for yourself.

A lender will likely perform a hard credit inquiry, which can lower your credit score temporarily by just a few points. And the account can show up on your credit reports, just as it does for the main borrower. That means it can potentially impact your credit scores, your future borrowing, and your own financial goals.

Types of Loans That May Require a Cosigner

Although most major credit card issuers don’t accept cosigners, lenders will allow a cosigner on many different types of debt if a borrower’s application needs a boost. Examples include:

•   Student loans

•   Mortgages

•   Leases

•   Auto loans

•   Personal loans

No matter the type of loan, it’s a good idea to consider the potential risks before agreeing to cosign.

Recommended: Personal Loan Guide

Legal Implications of Cosigning

When you’re the cosigner on a loan, you’re signing a contract that outlines your legal obligations and the consequences if you don’t follow through on your commitment. This includes making monthly payments if for some reason the primary borrower won’t or can’t.

In this way, the arrangement is different for a guarantor vs. cosigner: A guarantor is only responsible if the borrower defaults, while a cosigner is responsible if the borrower misses one payment.

It may feel awkward, but as a cosigner, it’s your responsibility to monitor the account and ensure payments are made on time — even if the borrower or the lender doesn’t notify you that there’s a problem.

It’s also important to note that, depending on state law, the lender may decide to sue a cosigner for late payments or even the full amount due before trying to collect from the main borrower. A lender also may take action to collect from a cosigner before moving to take the car, home, or other asset that’s being used as collateral to secure a loan.

Impact on the Cosigner’s Credit

When someone offers to cosign a loan, it’s usually with the intention of helping out a person they care for until that person can establish their own good credit reputation. But if all goes well, the cosigner could benefit, too.

If the main borrower stays on track and makes timely payments, and those favorable account updates appear on the cosigner’s credit reports every month, it could result in a boost to the cosigner’s credit score.

The big drawback, of course, is that any negative information (such as late or missed payments or if the debt goes to collections) can also affect the cosigner’s credit. And even if the main borrower does everything right, becoming a cosigner can affect your debt-to-income (DTI) ratio and your credit utilization. This, in turn, could impact the interest rate or other terms you’re offered if you apply for your own loan or credit card down the road.

Additional Risks of Being a Cosigner

Along with the financial risk and the potential impact on your credit, it’s important to consider the effect cosigning a loan might have on your personal connection with the main borrower. You both may go into the arrangement with the best intentions, but if things go sideways, it could put stress on even the strongest relationship. A serious conversation about your expectations — and theirs — may help.

Remember: Even though you aren’t directly giving that person the funds they need, you are lending him or her your good credit reputation for the length of the loan. And you’ll both have to deal with the fallout if the arrangement doesn’t work out.

Do Cosigners Have Any Rights?

Before you cosign most types of loans, you are entitled to receive a separate disclosure that outlines your rights and obligations. This document, labeled “Notice to Cosigner,” is required under the Federal Trade Commission (FTC) Credit Practices Rule, and it includes warnings about your financial commitment, your credit risk, and potential debt collection methods.

After you cosign, you have the right to ask for updates about the loan’s payment history and outstanding balance at any time.

How to Protect Yourself as a Cosigner

Here are a few steps that could help you safeguard yourself and your relationship with the main borrower before agreeing to cosign on a loan:

•   Talk to the main borrower about their current finances. Are you sure they can cover the monthly loan payments along with their other obligations? Are you clear about what the money will be used for, the total amount being borrowed, and why a cosigner is needed? A personal loan calculator can help you determine what the monthly payments might be, depending on the interest rate and loan term.

•   Ask the main borrower for progress updates. Since it will be your responsibility as a cosigner to ensure payments stay on track, discuss how you can monitor the main borrower’s progress in a way that works for both of you.

•   Ask the lender to keep you in the loop. If you want to receive copies of loan statements, let the lender know. And be sure that you’ll be notified ASAP if there are late or missed payments.

•   Carefully read the “Notice to Cosigner.” This brief document can help you understand your rights and obligations.

•   Get copies of all relevant loan documents. Keep any important paperwork handy so you can refer to it when necessary.

•   Keep an eye on your credit. Your bank, credit card company, or a money tracker app may allow you to check your credit score for free. And you can go to AnnualCreditReport.com to get free credit reports from each of the three major credit bureaus.

Alternatives to Cosigning

If you aren’t comfortable with the risks involved with cosigning, here are some alternatives you may want to consider:

•   Take out the loan yourself and ask your loved one to repay you. Although there’s still a risk that you won’t get all your money back, as long as you stay on track with your loan payments, your credit will stay intact.

•   Fund the loan from your own savings. If you have the means to lend the money directly to your loved one, a family loan can remove credit risk from the borrowing equation. Unfortunately, bypassing the lender also eliminates both the borrower and cosigner’s opportunity to build credit through timely payments. To keep things more formal, and help avoid default risk, you can write up a payment plan and charge interest as part of your agreement.

•   Just say no. If you aren’t comfortable with a cosigning arrangement, it may make sense to follow your gut and turn down the request.

Removing Yourself as Cosigner

Getting your name off a loan you’ve cosigned can be extremely difficult, which is yet another good reason to give the arrangement a lot of thought before you agree to it. Here are some options to explore:

•   Cosigner release: Student loan borrowers may have more luck applying for a cosigner release than other types of borrowers. But even if it’s an option (which you should be sure of before cosigning), the primary borrower still will have to agree to it and meet certain criteria before applying for the release. And the lender will have to approve it, too.

•   Refinancing the loan: With this option, the old loan is paid off and the primary borrower gets a whole new loan that doesn’t require the current cosigner.

•   Paying off the loan: If it’s a secured loan, such as a home or car loan, the borrower could agree to sell the asset and pay off the loan, removing the cosigner from any financial responsibility. If it’s an unsecured loan, and the main borrower or the cosigner has the means to pay it off early, they might decide to do so in order to end the arrangement and move on.

Recommended: Average Personal Loan Interest Rates and What Affects Them

The Takeaway

Agreeing to cosign a loan for a friend or loved one is a generous act. But even in a best-case scenario, it can be a lopsided arrangement, with the cosigner taking on most of the risk and the primary borrower seeing most of the benefits.

If you decide to go forward, it’s important to find a loan that fits the borrower’s budget to improve the chances of their success. As a cosigner, it also can be helpful to monitor payment progress as well as any changes to your own credit score.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.

FAQ

What happens if the primary borrower defaults on the loan?

As a cosigner, you are responsible for making sure the primary borrower’s loan is repaid on time. If the borrower is delinquent or defaults, you can expect the lender to come to you for payment.

Can a cosigner be removed from a loan?

It’s possible but difficult for a cosigner to be removed from a loan. It can be helpful to ask the lender about your options before you agree to cosign.

Does cosigning affect my ability to get my own loans?

Yes. Even in a best-case scenario, where the borrower consistently makes on-time payments, cosigning a loan can affect your credit score, debt-to-income ratio, credit utilization, and other factors that lenders look at when you apply for a loan or credit card.

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SOPL-Q424-003

Quadruple witching refers to the simultaneous expiration of four popular investment contracts, creating wild market conditions. Given its name, it may just be the spookiest day of the year for investors – sorry, Halloween! Quadruple witching day occurs on the third Friday in March, June, September, and December.

The last hour of those trading days is known as the “quadruple witching hour”, when many derivatives contracts expire, often creating volatility in the markets. That’s because there may be higher market volume on those days as traders either close out or roll over their positions.

What is Quadruple Witching Day?

Quadruple witching, or quad witching, is trader’s terminology for the four dates on the calendar when four kinds of options contracts expire: stock options, stock index futures, index options, and stock futures.

Each of the contracts has expiration dates that will match up each quarter, which is why quadruple witching, or quad witching, happens in the third, sixth, ninth and twelfth month of the year respectively. The expiration for these contracts happen at the same time in the day — the afternoon.

While events like quadruple witching may not impact how and when you invest (especially if you’re investing for the long term), they are a good reminder of the investment risks that any investing strategy or approach brings.

How much attention individual investors pay to witching day may depend on their investing philosophy and their time horizon. Since quad witching can result in short-term volatility, many passive investors may ignore them entirely. On the other hand, active investors who try to time the market and get in and out of trades quickly in the most advantageous manner, may use them to inform their strategy and consider buying or selling witching hour stocks.

💡 Quick Tip: If you’re opening a brokerage account for the first time, consider starting with an amount of money you’re prepared to lose. Investing always includes the risk of loss, and until you’ve gained some experience, it’s probably wise to start small.

Contracts Involved in Quad Witching

To understand quadruple witching, you have to first understand the different options contracts involved. Stock index futures, stock index options, single stock futures and single stock options are all derivatives, meaning their value corresponds to the value or change in value of an underlying asset. The underlying assets are either stock market indexes, like the S&P 500, or individual company stocks.

Options contracts give holders the right, but not the obligation, to buy or sell a stock at a certain price at a future date. Futures contracts are contracts to purchase shares of a given stock at a certain price in the future.

For indices, futures and options are contracts on the value of an equity index. Investors often use these either to hedge or make outright speculations on the moves of an index. All four derivatives are complex investments that involve risks when playing the market, and they’re more often used by professional traders and institutional traders than retail investors.

Recommended: Is it Possible to Time the Stock Market?

How Does Quadruple Witching Affect the Market?

Quadruple witching days are those four days of the year when these types of contracts all expire, those who bought contracts and choose to exercise them will receive their stock or cash, or they make additional transactions to take advantage of arbitrage opportunities.

This can lead to more buying and selling of shares than is typical for a given day or, especially a given hour. Increased volume can mean more volatility in the markets and the possibility of large swings during the day.

One reason these days can cause hiccups in the markets is that while certain positions expire, investors may want to extend them. This means they have to “roll” the bet in order to keep it active, potentially forcing other players in the market to buy or sell, especially if the market is already volatile or choppy.

For trades that involve the transfer or automatic buying of stock, like options trades on individual shares, the quadruple witching date can mean automatic buying up of shares to fulfill the options contracts, leading to spikes even if there is no “fundamental” reason for them.

Overall, volumes in options trades can go up on quadruple witching days, which can sometimes have knock-on effects on the price of the underlying assets involved in options contracts.

The Takeaway

Quadruple witching day occurs on the third Friday in March, June, September, and December. The last hour of those trading days is known as the “quadruple witching hour”, when many derivatives contracts expire, often creating volatility in the markets. That’s because there may be higher market volume on those days as traders either close out or roll over their positions.

Quadruple witching offers an opportunity to understand how market mechanics can affect actual prices, but it may not impact the strategy for most long-term investors. More experienced investors and traders may find profitable opportunities, however, as the markets enter a period of volatility.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

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