Author Topic: Lump Sum against loan, or invest the funds?  (Read 2049 times)

SandyBoxx

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Lump Sum against loan, or invest the funds?
« on: October 10, 2014, 07:59:20 PM »
Hi everyone,

I have a dilemma as to where to best utilize the excess cash in our business:

Last month we replaced a business asset on which we put 25% down ($52,432.16) and now have a 48 month loan for $151,000 at 5.8% on the remainder. 

This month we sold the original asset for $85,000 cash.

We can not pay out the entire loan without penalty (think greater of 3 mos interest or IRD - just like a Canadian mortgage), however we can make a large pre-payment.

My question to you is:

Would you recommend putting the $85K (or more) against this loan to offset the $18,474.13 we will pay in interest, or invest it into an index-based investment like Tangerine's Streetwise funds (MER 1.07%)?

Thank you in advance,

AK

matchewed

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Re: Lump Sum against loan, or invest the funds?
« Reply #1 on: October 11, 2014, 06:10:23 AM »
Depends on what you think the return would be on the investment vs. the 5.8% interest rate on the loan. Mind you with a 1.07% expense ration that whatever returns you anticipate (guess) needs to be lopped off by that amount. If you assume a 6% return on investment you will really be getting a 4.93% return. Bluntly that expense ratio is shit and I wouldn't touch it with a 10 foot pole.

I'd probably pay off a near 6% loan as quickly as possible without incurring any more fees or interest as I had to, but that is just based off of my views on the future.

RichMoose

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Re: Lump Sum against loan, or invest the funds?
« Reply #2 on: October 11, 2014, 06:25:52 AM »
Take as much of the guaranteed 5.8% return as you can without penalty. Have you considered setting up accounts with Questrade instead and using it to purchase ETF's? You could easily get your MER down to about .15% with a 4-fund Canadian Couch Potato formula: http://canadiancouchpotato.com/model-portfolios/

SandyBoxx

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Re: Lump Sum against loan, or invest the funds?
« Reply #3 on: October 11, 2014, 09:29:26 AM »
@matchewed   I don't mind blunt at all - it actually made me laugh out loud!  I knew that with the loan being well over 5% the chances were lousy that there would be a better option - but I thought it would be prudent to ask, just in case I was missing something obvious.

@TuxedoEagle  Thank you for your feedback.  I am going to call and find out for sure just how large a payment we can make.  I've had  the paperwork for a Questrade account on my desk all week, and am sorting my way though it - I will definitely be going this route after the loan is paid off.

Cheers, and thank you for the quick advice