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Ask Dave

The Wrong Way To Pay Off

Misty has a great way to pay off her car loan and free up budget money, or so she thinks.

QUESTION: Misty wants to know if she should cash out her 401k to pay off her car and free up money in the budget. Absolutely not, as Dave explains.

ANSWER: No, you need to sell the car! You don’t cash out your retirement plan to pay off a stinking car because they will charge you a 10% penalty plus your tax rate. So you’re going to lose 30% to 50% of your money to the government. That’s like borrowing your money at 40%! If you can’t pay off the car quickly to make room in the budget, you should probably sell the car.