It is not uncommon at an initial conversation for new clients to ask about paying off a low interest rate debt. Maybe it's a mortgage locked in at 3.5%, a student loan at 2.50% or a car loan at 4%. In these types of scenarios I don't have an, "always do this," answer. Here is what I do say:
To start, my general recommendation is:
any loan under 4%, always pay the minimum
loans between 4-6% are up to the client and their personal risk level, preferences, etc.
any loan above 6% I suggest paying off soon as possible
However, there's always caveats. For years, every mortgage I saw was under 6%; I've seen a few over 6% now and I still suggest minimum payments, especially if paying extra would mean foregoing tax-advantaged retirement account contributions. Calculating an "effective mortgage interest rate" may be a consideration, as well, especially for taxpayers who itemize their deductions. Just because a loan's interest rate is under 4% doesn't mean you shouldn't pay it off early. While the math and probabilities say you are almost certain to achieve better investment returns than 4%/yr if you instead invest your extra funds, it's important to understand there is also an intangible, psychological aspect to debt and mental well-being. Some people are just really debt averse - it keeps them up at night, annoys them, etc.
Consider this example - When my wife and I were first married she had a student loan with a remaining balance of about $8000. The payment was $99/month and the interest rate 2.125%. We dutifully paid the $99/mo for a few years and, after a while, found ourselves making more money. Still, we paid $99/mo. More time went by and, increasingly, I started to hate that darn payment every month. We had the funds to wipe it away with a single payment but we didn't, for the reasons noted above. Finally, one day, I decided to pay the remainder off, perhaps $2500. Twelve years later and I still don't regret that "financially stupid" decision. Was it the best, mathematical, financial decision? No. But it felt good. The intangible benefits of eliminating that debt and not seeing the monthly payment every month on our checking account statement vastly exceeded the opportunity cost of potential investment returns.
Indeed, there is great value in being able to live life with a positive emotional state. How we live each day matters, to ourselves and those around us. It is true what they say, "You can't put a price tag on happiness." So, if paying off a low interest debt is going to make you happy, and your financial plan can allow for it, I say go for it!
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