posted in: Investment Advice

Should I pay off car loans and credit cards before investing?

It’s one of the most common questions I get asked, and it’s a good one. You’ve got a car loan, maybe a credit card, and some spare cash or borrowing power. Do you clear the debt first, or put the money to work in an investment? The honest answer is that it depends. But “it depends” isn’t a cop-out, because once you understand how your debt is actually structured, the right call usually becomes obvious.

In this article, I’ll walk through the four things that decide it: the difference between a guaranteed cost and a potential return, the hidden trap of frontloaded interest, the opportunity cost of paying debt down too soon, and the way an existing loan quietly eats into your borrowing capacity.

A Guaranteed Cost Beats a Potential Return

Start by looking at the numbers in isolation. High-interest debt, like a credit card or a car loan, carries a cost you pay every single month, no matter what. An investment carries a return you hope to earn. Those two things are not the same, even when the percentage looks identical.

If you start putting money into an investment that’s going to earn 9% per annum over the long term, versus you’ve got a car loan which might be 9% per annum and it’s a guaranteed charge you’re getting every month, well, sometimes it’s worth paying that out. Because you’ve got a potential return of 9% with shares. It’s definitely not guaranteed, but you’ve got a guaranteed cost of 9%. So it can be worth clearing that first.

That’s the key distinction. A 9% return on shares is a maybe. A 9% cost on a loan is a certainty. When you can wipe out a guaranteed cost, you’re locking in a known result instead of chasing an uncertain one.

Watch for Frontloaded Interest

Here’s where it gets interesting, because paying a loan off early doesn’t always save you anything. It comes down to how the contract is written.

Sometimes what these companies do is what’s called frontload the interest. So they work out what interest you’re supposed to pay over the 5-year loan term and they jam it on the front. And in that situation, you’ve incurred the interest on your loan contract from day one. So if you pay that off quicker or put the money elsewhere, it actually doesn’t matter. It won’t make a difference to what you repay. So it’s important to look at what the contract says. Leases are quite commonly structured that way.

This is the part most people miss. If the interest has already been baked in from day one, then rushing to clear that debt buys you nothing. The money would be better off somewhere it can actually grow. So before you make any decision, read the contract and find out whether the interest is frontloaded.

The Opportunity Cost of Paying Debt Down Too Soon

Clearing debt feels responsible. But every dollar you throw at a loan is a dollar you can’t put into a growth asset, and over the long term that trade-off can cost you far more than the loan ever did.

If you’ve got equity in your home and the ability to go purchase an investment property, and you’ve got a car loan that’s going to take you another 5 years to pay off, but you can afford an investment property instead of paying that off sooner, well, maybe it’s worth getting that growth asset into your portfolio.

The maths is about scale. A car loan is small and shrinking. A growth asset compounds.

A $40,000 car loan, at the end of the day, it’s not a huge amount of money compared to what an investment property might make you.

So the question isn’t just “can I afford to keep the loan?” It’s “what could that money be doing instead?” Sometimes the smarter move is to keep the small debt and get the growth asset working sooner.

How Debt Quietly Affects Your Borrowing Capacity

There’s one more factor that changes everything if property is on your radar, and it catches a lot of people out.

An important consideration here on the investment property side is what impact that loan or that credit card might have on your borrowing capacity. Because even though you might have a year left on that car loan, if the repayments are $1,000 a month, the banks will assume you have that $1,000 a month repayment forever. So we might need to pay it off in order to get you that investment property.

This is the catch that flips the decision. You might be perfectly happy to ride the loan out over its last year, but the bank doesn’t see it that way. They treat that monthly repayment as permanent. So even a small, nearly finished loan can shrink the amount you’re able to borrow. In that case, paying it off isn’t about the interest at all, it’s about unlocking the purchase you actually want. And there are usually ways to structure the debt so it works in your favour rather than against you.

So, Should You Pay Off Debt or Invest?

There’s no single answer, and anyone who gives you a flat rule is ignoring half the picture.

There’s no sort of right or wrong answer. It depends on the way you look at it. But you’re asking the right questions.

Here’s the principle to hold onto. The decision is rarely about the headline interest rate. It’s about the structure underneath it: whether the interest is already locked in, what the money could earn somewhere else, and what the debt is doing to your ability to borrow. Work those three things out and the answer stops being a guess.

Book a quick Wealth Planning Consultation and we’ll help you see where you stand, what’s possible, and how to make it happen.

• Stop feeling uncertain about your financial future
• You won’t need to make big sacrifices
• You won’t drown in paperwork or endless meetings

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About the Author: Ethan Stein is a financial planner with expertise in investment structuring, superannuation strategy, shares, property investment and other planning strategies. This article reflects general financial commentary only and does not constitute personal financial advice.

Financial Disclaimer: The information provided in this article is for general knowledge and informational purposes only and does not constitute financial advice. Individual circumstances vary significantly. It is essential to consult with a qualified and licensed financial planner before making investment decisions. Past performance of any asset class is not indicative of future results.