Why shouldn't I borrow from Cref account to buy a car?

[Carini]

Doesn't it make more sense to borrow from myself, at a lower interest rate, and pay myself back rather than pay more interest and give the money to the bank?  Is there something crazy I'm missing about doing this? 

[vivophoenix]

do not know what a CREF account is, keeping it real.

But if it is an investment account, they idea is that you might lose out on market gains. or if you lose your job you might not be able to pay it back.

also: MMM way, if you do not have the cash to buy it, you can not afford it. try saving up or buying a cheaper car?

according to google, cref is a teacher's pension account?

[Carini]

do not know what a CREF account is, keeping it real.

But if it is an investment account, they idea is that you might lose out on market gains. or if you lose your job you might not be able to pay it back.

also: MMM way, if you do not have the cash to buy it, you can not afford it. try saving up or buying a cheaper car?

according to google, cref is a teacher's pension account?

Sorry about that. It's a 403(b) for people that work in education.  And I don't agree with the "if you don't have the cash to buy it, you shouldn't ever buy it theory.  If the purchase will allow you to earn more money in the long run, it makes perfect sense. This car will allow me commute to a new position where I'll be making a lot more money, even after factoring in the cost of the commute. 

[onlykelsey]

Doesn't it make more sense to borrow from myself, at a lower interest rate, and pay myself back rather than pay more interest and give the money to the bank?  Is there something crazy I'm missing about doing this?

some thoughts:
1. It sounds like you can't afford a car. So you're starting from a sort of weird place by assuming you need to buy one. Agree with vivophoenix: if you don't have cash, you shouldn't buy it.  If you're talking about bridging financing for a 3K car you can pay off in three months, that may be different.
2. You lose market gains, so the interest rate is higher than you think.
3. Do you have to pay the loan back if you become unemployed, leave teaching or change jobs?  If so, this is a definite no.

[onlykelsey]

Looks like this article sums it up pretty well: http://www.403bwise.org/wisemoves/403bloan_wc.html

Remember to look in to whether you can take a loan out on your 403(b) balance at your new job, because it sounds like for most plans, you have to pay back the loans in full to change jobs (so you can't borrow the money UNTIL you get a new job).  I did a 401(k) loan and it took ~2 months for my money to show up in my new employer's account, so you may be looking at a 3-5 month lag.

It also sounds like a default triggers some pretty severe consequences, even if you're late one day.

If you haven't been able to save money for a car until now, think honestly about what will change when you take this new job and run the numbers.

[Carini]

Doesn't it make more sense to borrow from myself, at a lower interest rate, and pay myself back rather than pay more interest and give the money to the bank?  Is there something crazy I'm missing about doing this?

some thoughts:
1. It sounds like you can't afford a car. So you're starting from a sort of weird place by assuming you need to buy one. Agree with vivophoenix: if you don't have cash, you shouldn't buy it.  If you're talking about bridging financing for a 3K car you can pay off in three months, that may be different.
2. You lose market gains, so the interest rate is higher than you think.
3. Do you have to pay the loan back if you become unemployed, leave teaching or change jobs?  If so, this is a definite no.

The collateral amount that I borrow stays in the market and continues to earn interest for me, also.  Of course I would have to pay the loan back if I became unemployed, but not in a lump sum or anything. The terms would stay the same.

So everyone on MMM buys a vehicle with cash?  You really don't think it makes sense to borrow money for a good commuting vehicle, even if it allows you to earn 30% more than you're currently making?  I don't agree with this logic.  Let's get back to my original question.  Borrowing the money from my 403(b) means:

-lower interest rate
-money stays in collateral and still collects interest in market
-I'm paying the money back to myself
-I have 5 years to pay it back if I wanted a longer term (which I don't)


What are the downsides to borrowing this from my 403(b)?

[Carini]

Looks like this article sums it up pretty well: http://www.403bwise.org/wisemoves/403bloan_wc.html

Remember to look in to whether you can take a loan out on your 403(b) balance at your new job, because it sounds like for most plans, you have to pay back the loans in full to change jobs (so you can't borrow the money UNTIL you get a new job).  I did a 401(k) loan and it took ~2 months for my money to show up in my new employer's account, so you may be looking at a 3-5 month lag.

It also sounds like a default triggers some pretty severe consequences, even if you're late one day.

If you haven't been able to save money for a car until now, think honestly about what will change when you take this new job and run the numbers.

You're correct that sometimes you have to pay the loan in full if you leave; that is not the case with my current or possible new employer. You bring up some good questions, but I've checked into those details. Thanks.

[onlykelsey]

I'm not sure if you saw my post with the list of pros and cons?  It sounds like it's similar to a 401(k) loan, which I've done, so I'm not saying it's always an awful idea.  But it's very plan specific.  Big things to consider:

1. effective interest rate will fall (maybe not by much, but I guess it depends on the market which you can't control)
2. most plans (says the article) require you to pay off a loan before you change jobs.  If this is true for your plan, it doesn't sound like taking out a loan is an option.  It's true for my 401(k) loan and (anecdata) two of my teacher friends who I talk to personal finance about. (see you addressed thsi)
3. If you can wait to buy a car, maybe you can do it once your 403(b) is set up at the new place, but in my experience it takes several months to get the money transferred to the new employer's plan.
4. Like I mentioned, I'd run numbers on why you think you'll be able to pay off a car quickly if you haven't saved money for it until now.
5. If you need to borrow money, it seems like it makes sense to get the minimum car necessary for your commute (maybe 4K? I've been out of the car market for a while)

I don't know what other people on MMM do with cars (I sold mine and use public transit, put 75% down on my last one and financed the remaining 25% at 1.9%), but I don't think the response you've gotten is surprising given MMM's "your debt is an emergency!" thing.

Another thing that might be worth considering (but that depends on state law) is whether your loans would be secured or unsecured and what that means under your state law in terms of repossession (and maybe tax treatment).  Can't answer that one, but it's something to look in to.

[Giro]

Car loans are generally very cheap interest rates if you have good credit.  I would not take money out of the market right now because the market is flat.  I would just get an auto loan from a credit union at 3% or whatever.  I think the market will earn more than that over the next few years while you are paying off a cheap car loan.

just my .02

[AZDude]

Seems like if you want to go the car payment route, that unless you have bad credit you can get something like 2.9% rather easily from a myriad of lenders. What rate are you getting on the 403(b) loan?

Seems like more risk, so I would imagine the rate difference would need to be rather large to make it worth it. If you are getting 0% or 1% or something, then maybe its a good idea.

5 year loan on $10,000 car at 2.9% = $1,614 over the life of the loan.  At 1%, it is $1,076. So you save $540 over five years. Is that worth the risk that you take the new job, hate it, get offered some awesome job outside of education but cannot take it because you would then have to immediately pay back the loan?

[WerKater]

And I don't agree with the "if you don't have the cash to buy it, you shouldn't ever buy it theory.  If the purchase will allow you to earn more money in the long run, it makes perfect sense. This car will allow me commute to a new position where I'll be making a lot more money, even after factoring in the cost of the commute.

You are right in principle. But is this car that you have in mind actually the cheapest way to get you to this higher-paying job? How about public transport or a cheaper car? have you done the math on whether the car works out as the investment you imagine? Cars can be ridiculously expensive.

[pbkmaine]

Here's the interesting thing about loans from defined contribution plans: you contribute to them pre tax, but pay them back after tax. If your marginal tax rate is, say 15%, it costs you an extra 15% to get the money back in your account.

[onlykelsey]

  At 1%, it is $1,076. So you save $540 over five years. Is that worth the risk that you take the new job, hate it, get offered some awesome job outside of education but cannot take it because you would then have to immediately pay back the loan?

This is a good point.  Another one I thought of: in my 401(k), I can only make my scheduled payments (over 24 months, for me), OR pay off the full huge amount in full.  That's sort of limiting, as I'd really like to pay off about 1/3 of it so i'm less leveraged and pay less interest, but I can't make extra payments or change the schedule or pay from my savings account, as I would be able to with a private loan. 

Of course if you're getting a huge raise, hopefully you can just make it a 6-month loan and pay virtually no interest.

Also agree with pbkmaine, which is what I was saying about effective interest rate (but a lot less clearly).

[seattlecyclone]

You're right that a car purchase can make sense if it's what you need to get a higher-paying job. However if you really don't have the cash to buy any car without raiding the retirement accounts, buy the cheapest car possible to keep the size of the loan down. Then if you do get that new job, consider moving closer to keep your commute distance and time to a minimum.

[frugaliknowit]

How much cash do you have available?

[Trudie]

By taking the money out of the investment account your true cost of borrowing the money is any interest you would pay on the loan to yourself, plus the OPPORTUNITY COST of the earnings you forgo from keeping the money invested.

So, if you pay yourself 2% interest (for instance) and you would earn 6% (conservatively) on those investments in a year, your true APR is 8%.  Lousy deal.

I follow the principle that you should avoid -- at all costs -- borrowing money to buy depreciable assets.  If at this point in your career you cannot avoid it, then I would say borrow for the shortest term possible, pay it off early, and start a sinking fund for all the expenses that will come with car ownership.

[Jack]

So everyone on MMM buys a vehicle with cash?

Probably not, but at least the smart ones do!

You really don't think it makes sense to borrow money for a good commuting vehicle, even if it allows you to earn 30% more than you're currently making?

False dichotomy. Being able to commute to a job never requires borrowing money for a "good" vehicle, because you can always commute in a shitty $1000 beater instead (if not a $100 bicycle, or a $0 set of legs).

And if you can't afford to pay cash for a more expensive car, then paying cash for a $1000 beater is exactly what you should do!

Car loans are generally very cheap interest rates if you have good credit.  I would not take money out of the market right now because the market is flat.  I would just get an auto loan from a credit union at 3% or whatever.  I think the market will earn more than that over the next few years while you are paying off a cheap car loan.

just my .02

That can be an even worse idea than borrowing from a retirement account, depending on the price of the vehicle. Car loans at good rates are only available for new or nearly-new cars (and by "nearly-new" I mean less than 10 years old or so), which are much more expensive than any reasonable Mustachian car budget.

I'd rather see the OP take out a $3,000 403b loan than a $10,000 auto loan. (But again, OP shouldn't take out any loan at all.)

[neo von retorch]

My credit union will let you take out a 1.49% 36 month loan to purchase any car given these two criteria:

# Minimum $3000 borrowed
# Maximum 100% of KBB retail value of purchased vehicle

Given that, I don't see any reason to do anything funkier like borrow from a retirement fund, where fine print might get you, or where you borrow pre-tax money and pay it back post-tax.

So a $3000 "beater" would cost $85 / month and a total of about $69 in interest.

[Miss Piggy]

I have to agree with some of the other responses. You've already paid yourself first. Leave that money in your CREF account and borrow from another source with a low interest rate.

[ooeei]

So everyone on MMM buys a vehicle with cash?  You really don't think it makes sense to borrow money for a good commuting vehicle, even if it allows you to earn 30% more than you're currently making?  I don't agree with this logic. 

This sounds like you trying to justify.  If this specific car is literally the only way to get to your new job, sure it might make sense.  Keep in mind a 2004 Honda Civic will get you from point A to point B with the same effectiveness as a 2016 Range Rover.  Based on your logic you could probably justify the Range Rover, the problem is you have to compare it to your other commuting options, not just to turning down the job.

If you need to take out a loan for a <$5000 car purchase, then I guess go for it, but you should re-assess your finances to prevent needing a loan for such a purchase in the future.  If you're looking at a car much over $5000, you should look at ALL of your options.  There's a middle ground between old job/no car vs new job/BMW.

[Jack]

Keep in mind a 2004 Honda Civic will get you from point A to point B with the same effectiveness as a 2016 Range Rover.

Or a 1994 Honda Civic, for that matter.

[vivophoenix]

you should also look at this:

http://www.commutesolutions.com/commute-cost-calculator/


you say you can keep your money in the market. that is a plus.

I say you cant afford it because you don't have any other cash you can use but cash that is meant for 10-50 years from now. you are holding your future retirement as collateral to purchase a vehicle.

that means you can not afford it.

maybe some numbers would help.

how much do you make now?
how do you currently get there
what is the raise
how far would you have to travel?

what type of vehicle are you looking at

what is the interest rate on the retirement loan?
 what have you been pre approved for a a credit union like DCU?

how much cash do you have right now?
how much would, gas, insurance, and other stuff cost?


if 30% more minus the cost to own minus time loss are a wash this isnt an investment. do not forget depreciate. you do not get the value of the car= the amount you pay

[robartsd]

I don't see how you'd be able to keep your money in the market and pay yourself the interest - the money has to come from somewhere and if someone else is providing it, I'd expect that they want to earn something on it.

As far as paying back pretax money with post-tax money goes, you're not paying income tax on the principle when you take out the loan, so the portion of the payment going to principle is post-tax money used for a post-tax purpose; however, if you are earning the interest in your retirement account, you're paying taxes on that interest before you pay it, and will again when you take the money out in retirement (but you'd be paying the tax on the interest if you were paying the interest to someone else too, so that's not such a big deal).

If you borrow against your retirement account, you are taking on more risk yourself - only do it if the savings vs. borrowing from a conventional loan is worth that risk.

As others have said, the biggest reason that you should not borrow from a retirement account for a car is that you shouldn't need to borrow money for a car that meets your needs, and you shouldn't borrow money for a nicer car than you need.

[bogart]

I've borrowed from my CREF account, so am not systematically opposed to the practice. 

Unless your employer's rules are different from my own or you're already invested in cash you cannot, in fact, leave your money in the market while borrowing against it.  You have to move some amount -- I think 110%? -- into the guaranteed part of the offerings.  So you lose out on whatever the market does while you're borrowing, for that amount of your total.  And, of course, you are paying interest (I'm seeing about 4% from CREF right now?).

As for

So everyone on MMM buys a vehicle with cash?   

No, I borrowed by buy the last two vehicles I've bought -- interest rates are so absurdly low right now it's hard (in my mind) to justify not doing so -- I expect the market to return more than the car loan costs.  But if you don't qualify for those absurdly low rates, I wouldn't be inclined to borrow.  And if you're looking at a CREF loan as cheaper than a car loan, I have to think you don't.

What's the job?  How long will it last?  And what will your commute look like?

[Bikeguy]

Any car over $3000, especially  if you don't have the cash,  is vanity.   Many very reliable commuter cars at $3000 and under. MMM has a blog post on how and what to pick.