Author Topic: Paying off low-interest loans  (Read 5403 times)

NateDogg

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Paying off low-interest loans
« on: January 23, 2013, 11:18:10 AM »
Question for the financial wizards here.

Background:
I have decent net worth, building up to retire at the latest at age 40 in 2020. I have a car loan at 2.9% interest, and a mortgage at 3.375%. (BTW, I'd sell the new car, but it was for the wife anyway, and I haven't yet convinced her of the mustachian benefits. We'll own it for a minimum of 10 years and 200k miles. Plus the luxury is, well, luxurious). No other debt.

Is it better to pay off loans sooner or invest money, expecting double the interest rate that I'm paying?

bo_knows

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Re: Paying off low-interest loans
« Reply #1 on: January 23, 2013, 01:39:06 PM »
Is it better to pay off loans sooner or invest money, expecting double the interest rate that I'm paying?

Assuming that you have your other financial ducks in order (a modest emergency fund of some sort, no other debts, etc), the mathematically paying them off is not the best bet, if you are pretty certain you can make more in the market. 

This is a pretty typical question these days because mortgage rates are so low.  This is a psychology vs. math question, that only you can answer. Do you hate the idea of debt enough to crush it immediately, or are you confident in the market right now that it can beat 3%?

smedleyb

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Re: Paying off low-interest loans
« Reply #2 on: January 23, 2013, 02:57:02 PM »
Question for the financial wizards here.

Background:
I have decent net worth, building up to retire at the latest at age 40 in 2020. I have a car loan at 2.9% interest, and a mortgage at 3.375%. (BTW, I'd sell the new car, but it was for the wife anyway, and I haven't yet convinced her of the mustachian benefits. We'll own it for a minimum of 10 years and 200k miles. Plus the luxury is, well, luxurious). No other debt.

Is it better to pay off loans sooner or invest money, expecting double the interest rate that I'm paying?

I hear ya about the wife, brother.  Give it time, take it slow, communicate a lot.  And you'll know if you've failed when the projected 10 years 200K becomes 3 years and 50K  and a new loan.  :)  Chris Rock said women can never go back in lifestyle.  I know that's a silly generalization from a brilliant comedian, but there's some truth there!   Just let her know "it's all down hill from here for us baby, automotively speaking."  Ease here into it over the next couple of years.

As far as your question, pay off the car aggressively to feel the true cash-flow pain of purchasing a fancy (new?) luxury car.  Let the pain sear itself into your brain (and wallet) so this never happens again.  Got it?!!

Good luck. 


Peter

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Re: Paying off low-interest loans
« Reply #3 on: January 23, 2013, 05:00:04 PM »
If you are comfortable investing, and comfortable having a car loan, then you should be comfortable paying off your car loan and taking out an investment loan which will be tax deductible. You will be in the exact same situation but your loan will be organized into your investments and be tax deductible.

Also, with your car and mortgage paid off you should have access to a larger line of credit, which you can keep handy to invest aggressively in the event of a market collapse.

Nords

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Re: Paying off low-interest loans
« Reply #4 on: January 23, 2013, 05:35:36 PM »
If you are comfortable investing, and comfortable having a car loan, then you should be comfortable paying off your car loan and taking out an investment loan which will be tax deductible.
Where does one obtain an "investment loan" with a 2.9% interest rate, or the before-deduction equivalent?  Got a link?

Another Reader

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Re: Paying off low-interest loans
« Reply #5 on: January 23, 2013, 06:36:20 PM »
Nords, you beat me to it!

I took the 60 month car loan in the mid-2's because my dividend stocks pay better than that.  I was going to write a check, but when they asked if I wanted a sub three percent loan to go with the car, I looked at the checking account and the cash balance in the investment accounts and decided those employees would work harder for me elsewhere.  I'm tapped out of deductible interest on the house, so it made pretty good sense to me as a source of investment capital.  Heck, Pentagon wants to do car loans at 1.49 percent right now and they are paying 1.60 percent on two year CD's and 1.90 on 5 year CD's.  Maybe we will go the way of Japan if this keeps up.

Richard3

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Re: Paying off low-interest loans
« Reply #6 on: January 24, 2013, 03:44:48 PM »
The point of low interest car loans is not to make money on collecting the interest. It's to make money on selling the car.



Another Reader

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Re: Paying off low-interest loans
« Reply #7 on: January 24, 2013, 05:42:47 PM »
That would be the point if I hadn't already negotiated the price of the car.  The dealer got a little something from the lender or from Toyota for doing the loan, or they would not have asked.  Otherwise, it would have been a whole lot of paperwork for nothing, as I was going to pay cash.  Since the interest rate was below what my local credit union and several others were offering (but above Pentagon CU), I don't think there was a lot in for them in the deal overall. 

Because the Bay Area and Los Angeles car markets are so competitive, there is a lot of price transparency, especially on the "commodity" cars like the Corolla and the Camry.  The Corolla is at the end of the model cycle and Toyota has big incentives to the dealers to push them out the door.  You will never know what the dealer knows, but with some homework and patience, you will come out of the negotiation with a reasonable price and terms.


mlipps

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Re: Paying off low-interest loans
« Reply #8 on: January 24, 2013, 06:15:10 PM »
Question for the financial wizards here.

Background:
I have decent net worth, building up to retire at the latest at age 40 in 2020. I have a car loan at 2.9% interest, and a mortgage at 3.375%. (BTW, I'd sell the new car, but it was for the wife anyway, and I haven't yet convinced her of the mustachian benefits. We'll own it for a minimum of 10 years and 200k miles. Plus the luxury is, well, luxurious). No other debt.

Is it better to pay off loans sooner or invest money, expecting double the interest rate that I'm paying?

I hear ya about the wife, brother.  Give it time, take it slow, communicate a lot.  And you'll know if you've failed when the projected 10 years 200K becomes 3 years and 50K  and a new loan.  :)  Chris Rock said women can never go back in lifestyle.  I know that's a silly generalization from a brilliant comedian, but there's some truth there!   Just let her know "it's all down hill from here for us baby, automotively speaking."  Ease here into it over the next couple of years.


I think what you meant to say was PEOPLE can never go back in lifestyle. There are plenty of women and men here who have done just that, no need to be sexist.