Personal Finance

I owe $11k on my car - should I dump some of my stocks and pay off my debt?

Christy Bieber

Published: February 7, 2025 10:18 am

If you owe money on a car loan, should you sell your stocks to pay it off? This is a question that a Reddit user is currently considering. While the Redditor said that he likes the idea of not having a car payment, he has owned the stocks for a long time and doesn’t really want to sell them because he’s a little scared of the consequences.

So, what’s the best financial move for the original poster (OP)? Should he sell, or keep the stocks and the car loan?

Does it make sense to sell stocks to pay off a car loan?

Car payments aren’t a great thing to have, as you are paying interest on an asset that is going down in value all the time. Many people also consistently trade in their cars when they pay them off, so they end up always having a car loan — which can seriously interfere with their ability to accomplish financial goals since their money is tied up in vehicles that don’t increase their net worth over the long run.

However,  that does not necessarily mean that the OP here should sell his stock. In fact, he most likely shouldn’t do that for a few reasons. 

For one thing, he said the interest rate on his car loan is 6.06%. That’s a pretty reasonable rate, and the OP can likely make more in the stock market than 6.06% even with reasonably safe investments. In fact, he said he already has earned returns higher than the interest rate on the loan. Since the S&P 500 has consistently returned 10% average annual returns over the long haul, there’s pretty much no question that a better ROI is available by investing rather than paying off this low-interest debt. 

Worse, if the OP were to sell his stock, he might not put the money back once the car is paid off — which means he would lose out on all of the returns that the money would have made if he’d left it invested. Say, for example, he takes out $11,000 tomorrow instead of leaving the money invested for the next 30 years. In three decades, his $11,000 investment would have turned into $191,943.42. He’s far better off just getting stuck with car loan interest for a few more years than risking withdrawing the money, never putting it back, and missing out on almost $200K.

Finally, there’s the issue of taxes. If the OP were to sell his stocks at a profit, he’d have to pay capital gains taxes. If he has owned the stocks for over a year, those taxes would be assessed at the long-term capital gains tax rate, which is a more favorable rate and could be as low as 0% depending on the OP’s income.

Still, he might get hit with a tax bill depending on his earnings — and he could also potentially push himself into a higher tax bracket if he’s on the cusp between brackets.  Taking that hit seems unnecessary when he could leave the money invested and decide on a tax-efficient withdrawal strategy at an appropriate time. 

How to avoid a car loan

Rather than selling his stocks, the OP could decide to make extra payments on his loan if he wants to pay it off faster. However, with such a low rate, it probably doesn’t even make much sense to do that when he’s better off investing any spare cash he has.

Instead, his best bet is to invest aggressively, keep his affordable loan, and pay it off over time. However, the key is what happens next. He should absolutely not trade in the vehicle and get another loan again. Instead, he should drive the car until the wheels fall off. He can put the money he was making towards the car payments into a special savings account to save for his next vehicle purchase so he can pay for it in cash — and then once, he’s saved enough to do that, keep driving the car for as long as possible and divert the car payment funds to investments.

With this approach, the OP will never need to borrow to buy another car again, and he can hopefully keep his old car for long enough that he can put some extra into his investment accounts too. Sure, he won’t have the fanciest car on the block — but he’ll be well on his way to getting rich.