Author Topic: Should I take out a small car loan just to boost credit score?  (Read 31836 times)

Dicey

  • Walrus Stache
  • *******
  • Posts: 9739
  • Age: 61
  • Location: NorCal
Re: Should I take out a small car loan just to boost credit score?
« Reply #50 on: May 04, 2012, 11:07:51 AM »
Thanks, arebelspy!
On one hand, this looks like a possible subject hijacking, on the other, even if it is, it suits me perfectly! I am 100% convinced of the value of taking out a big mortgage and not paying it off early. I am a SAVER,  but I live in an expensive area and housing is a huge percentage of my budget. If I am to make all my other goals, dumping my cash into the house is not my best option. The whole concept of paying today vs. repaying back with inflated dollars is lost on most folks. It's kind of like playing the "Don't Pass" line in Craps. Your odds are better, but you're doing the opposite of most everyone else at the table. And yes, I know gambling is not frugal and I haven't done much of it since my college days, but I understood the rules of the game and rarely came up short. Tell me that all the folks who bought more house than they could afford with mortgages they didn't understand weren't gambling. Worse, they did it with money they didn't have and couldn't afford to lose. And now I'm supposed to cry for them as they walk away from their mortgages that (in a number of cases) they can still afford but don't want to any more because they owe more than it's worth. Boo-Hoo.

One of the many lessons that brought me to your conclusion was fairly serendipitous. One Saturday, I paid my mortgage and proudly included for the first time an extra $100 principal payment. My next stop was the library. While browsing the New Books section, I came upon Ric Edelman's "Ordinary People, Extraordinary Wealth". It is no exaggeration to say that the book is one of the best financial books I've ever read.The first chapter explains this mortgage theory clearly and concisely. It was not the first time I'd heard this concept, but it helped me finally understand it. I highly recommend it to anyone wanting to learn more about how mortgages can work for you.

velocistar237

  • Handlebar Stache
  • *****
  • Posts: 1422
  • Location: Metro Boston
Re: Should I take out a small car loan just to boost credit score?
« Reply #51 on: May 04, 2012, 01:06:49 PM »
Let me see if I have this right. The basic idea is that you can get a perpetual, tax-free mortgage that periodically adjusts for inflation, and this is good because you can find conservative investments that beat your mortgage rate.

How big is the effect? If I have the cash to buy a rental property, but I borrow instead, and I can get an 8% ROI on the rental and an 8% return on investments, what would the total return with this strategy be?

While browsing the New Books section, I came upon Ric Edelman's "Ordinary People, Extraordinary Wealth".

Thanks for the recommendation; I have requested this book from the library.

velocistar237

  • Handlebar Stache
  • *****
  • Posts: 1422
  • Location: Metro Boston
Re: Should I take out a small car loan just to boost credit score?
« Reply #52 on: May 04, 2012, 01:27:39 PM »
How big is the effect?

Nevermind. I see it in the blog post.

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 27553
  • Age: -999
  • Location: Traveling the World
Re: Should I take out a small car loan just to boost credit score?
« Reply #53 on: May 04, 2012, 09:13:20 PM »
How big is the effect?

Nevermind. I see it in the blog post.

Yes, that scenario two is based off an earlier post I wrote, and shows some of the benefits.  This refinancing idea to pull out tax-free money is a separate idea, that's equally powerful.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

heybro

  • Stubble
  • **
  • Posts: 184
Re: Should I take out a small car loan just to boost credit score?
« Reply #54 on: May 05, 2012, 12:18:50 AM »
why do you need a good credit score? once your debt is paid, you should NEVER need credit again!

Dicey

  • Walrus Stache
  • *******
  • Posts: 9739
  • Age: 61
  • Location: NorCal
Re: Should I take out a small car loan just to boost credit score?
« Reply #55 on: May 05, 2012, 07:27:49 AM »
Hey, "Bro",
The time to improve your credit score is before you need it. It's process that takes time. I'd liken it to planting crops or building a big, fat emergency fund. They're both "just in case" and must be started well before the presence of need.

I'm been reading MMM since the beginning (alas, I still forget there's no "o" in "mustache"). This is the first question I've posted on the forums. I have been amazed at how little criticism there has been. The very thought-provoking feedback I received here helped me make what I believe is a good decision, but only time will tell.

While I do appreciate that you took the time to reply; was your comment meant to be helpful?

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 27553
  • Age: -999
  • Location: Traveling the World
Re: Should I take out a small car loan just to boost credit score?
« Reply #56 on: May 05, 2012, 07:29:49 AM »
why do you need a good credit score? once your debt is paid, you should NEVER need credit again!

Apparently you didn't read the thread.  This question was answered multiple times, in different posts.  Here's one example:

WTF is peoples obsession with their credit score - why do you care? Are you planning to take out a major loan in the next three years, is your current one rubbish?

Because of the thousands of dollars it can save you or make you.

Small example: Right now lots of people are complaining about trying to get loans for housing, that the credit markets are tight.  Despite that, of the 5 houses I've purchased in the last few years, I've got loans on three of them due to my excellent credit scores. (The other two were purchased with cash.)  Just like cash gives you opportunities, so does good credit, by giving you access to leverage and other people's money.   It's not for everyone, but it can be advantageous if you are smart about it.

I don't "obsess" about it.  In fact, I've never done anything to actively say "this will boost my credit score" that I wasn't doing otherwise.  However I wouldn't do something that would hurt my score, because I actively use it to make me money.

...so sure, you could pay off all debt and never use credit.  That is the way to go for some people.

OR you could utilize it in a smart, careful way and make way more money and hit financial independence WAY earlier!

I personally choose the latter.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 27553
  • Age: -999
  • Location: Traveling the World
Re: Should I take out a small car loan just to boost credit score?
« Reply #57 on: May 05, 2012, 07:32:34 AM »
Hey, "Bro",
The time to improve your credit score is before you need it. It's process that takes time. I'd liken it to planting crops or building a big, fat emergency fund. They're both "just in case" and must be started well before the presence of need.

I'm been reading MMM since the beginning (alas, I still forget there's no "o" in "mustache"). This is the first question I've posted on the forums. I have been amazed at how little criticism there has been. The very thought-provoking feedback I received here helped me make what I believe is a good decision, but only time will tell.

While I do appreciate that you took the time to reply; was your comment meant to be helpful?

It's a common question he had.  He just didn't bother to read that it was already addressed.  But I'd be happy to discuss the merits of debt free versus smart debt utilization with him once he has done so.

I don't think jabs at his username help the conversation any either.  ;)
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

velocistar237

  • Handlebar Stache
  • *****
  • Posts: 1422
  • Location: Metro Boston
Re: Should I take out a small car loan just to boost credit score?
« Reply #58 on: May 05, 2012, 07:33:36 AM »
why do you need a good credit score? once your debt is paid, you should NEVER need credit again!

Given all the above discussion about how refinancing can help you get to FI faster, I take it this is a joke.

And if your personal philosophy is to pay down debt quickly, you'll never need credit again right after you take out your last loan, long before your debt is paid off.

Dicey

  • Walrus Stache
  • *******
  • Posts: 9739
  • Age: 61
  • Location: NorCal
Re: Should I take out a small car loan just to boost credit score?
« Reply #59 on: May 06, 2012, 10:06:06 AM »
"I don't think jabs at his username help the conversation any either.  ;)"

Sorry it looked like a "jab" to you. I thought his handle was funny and clever, as both of my brothers are referred to as "Bro" in my family, and my dad is "Pops". So many conversational subtleties are lost in the blogosphere...Apologies to those who read it differently than intended.

Still haven't figured out the quote thing.

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 27553
  • Age: -999
  • Location: Traveling the World
Re: Should I take out a small car loan just to boost credit score?
« Reply #60 on: May 06, 2012, 05:21:09 PM »
Ah, I gotcha!

Nowadays the word "bro" is synonymous with "douchebag."  And the quotes around the word bro made it also look sarcastic.

Take a look at the first three definitions:
http://www.urbandictionary.com/define.php?term=bro

(The first part of definition 1 is what you mean, but the second part of definition one, definition 2, and definition 3 are the most common definition nowadays - and the quotes helped make it seem that's what you were going for).

No worries if that's not what you were intending, thanks for clarifying.  :)

To quote something, just hit the "quote" button in the upper right of that post that you want to quote.

Or, when replying, go down to the replies (under the box you're typing in) and hit "insert quote".
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

Dicey

  • Walrus Stache
  • *******
  • Posts: 9739
  • Age: 61
  • Location: NorCal
Re: Should I take out a small car loan just to boost credit score?
« Reply #61 on: May 06, 2012, 07:05:49 PM »
Holy Crap! I am getting old. To add to the tale a bit: to distinguish/diminish him, my older "Bro" called our younger "Bro" "pud", probably an earlier version of db from the olden days when boys would never dare utter the word douche or any of its lovely variations publicly. Imagine my surprise when my Real Estate Broker informed me that the townhouse I was about to buy was legally referred to as a "PUD". Eleven years later it still makes me laugh and think of my brother's antics when we were growing up. A long time ago, indeed!
Thanks for the quote tips.

Mactrader

  • Stubble
  • **
  • Posts: 142
  • Age: 38
  • Location: Ann Arbor, MI
Re: Should I take out a small car loan just to boost credit score?
« Reply #62 on: May 07, 2012, 08:07:02 AM »
I call people bro all the time, it's all in how you say it. Which, on the internet we lack voice inflection so the quotes seemed to say it in 'that way' which suggests the douchebag connotation. Looks like we've beaten that dead horse though. :)

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 27553
  • Age: -999
  • Location: Traveling the World
Re: Should I take out a small car loan just to boost credit score?
« Reply #63 on: May 13, 2012, 08:10:43 PM »
One of the many lessons that brought me to your conclusion was fairly serendipitous. One Saturday, I paid my mortgage and proudly included for the first time an extra $100 principal payment. My next stop was the library. While browsing the New Books section, I came upon Ric Edelman's "Ordinary People, Extraordinary Wealth". It is no exaggeration to say that the book is one of the best financial books I've ever read.The first chapter explains this mortgage theory clearly and concisely. It was not the first time I'd heard this concept, but it helped me finally understand it. I highly recommend it to anyone wanting to learn more about how mortgages can work for you.

Thanks for the recommendation Diane.  I checked it out from the library on your recommendation.

It doesn't describe the refinancing idea I was discussing, but it does give many, many good arguments for why one ought to carry a mortgage and invest any money they'd put towards paying down the principal. 

The rest of the book was pretty good as well.

Definitely worth the read for anyone, but especially someone who is on the fence about paying down a mortgage or not (I.e. not an anti-debt zealot).
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

Dicey

  • Walrus Stache
  • *******
  • Posts: 9739
  • Age: 61
  • Location: NorCal
Re: Should I take out a small car loan just to boost credit score?
« Reply #64 on: May 13, 2012, 08:30:29 PM »
Wow! ARS, that's a quick response. I love how clearly Ric Edelman explains complex topics. I just finished listening to the podcast of last week's radio show, in which Ric mentioned that this topic is covered in a Forbes article this week, so here is the link:

http://www.forbes.com/sites/financialfinesse/2012/05/08/why-you-might-never-want-to-pay-your-mortgage-off/

Lots of good stuff to think about!

catalana

  • Stubble
  • **
  • Posts: 119
  • Location: UK
Re: Should I take out a small car loan just to boost credit score?
« Reply #65 on: May 14, 2012, 03:42:41 AM »
Not sure whether this is stretching the original topic, but it seems worthwhile to point out that the higher returns you get from leveraging reflect the higher risk you are taking.  It is entirely possible for leveraging to trip you up either a) if at some point your money is earning a lower return elsewhere or b) the asset upon which you are leveraged stops earning the anticipated income, which is particularly relevant if you own a single rental property.  You can de-risk by having assets in various locations / asset classes (don't forget you can leverage on assets other than property).

There is nothing like having to find the mortgage payment each month on an empty property  ;)

So........ when comparing potential returns PLEASE always at least acknowledge the risk element of leveraging, even if you don't do the full maths behind it.

Devils Advocate

  • 5 O'Clock Shadow
  • *
  • Posts: 84
Re: Should I take out a small car loan just to boost credit score?
« Reply #66 on: May 14, 2012, 04:19:17 AM »
Leveraging will maximize your profits and increase your losses. 

It's not a completely rosy picture as you describe.

DA

velocistar237

  • Handlebar Stache
  • *****
  • Posts: 1422
  • Location: Metro Boston
Re: Should I take out a small car loan just to boost credit score?
« Reply #67 on: May 14, 2012, 10:16:49 AM »
Thanks for the recommendation Diane.  I checked it out from the library on your recommendation.

I also picked it up and skimmed it this weekend. It seemed like the author was recommending having a big mortgage, too, as in a big house, which doesn't sound right. It would be best to keep your own housing expenses low and get more mortgages through owning rentals, if so desired.

It feels odd to be seconding real estate advice from a book that came out in 2001.

Devils Advocate

  • 5 O'Clock Shadow
  • *
  • Posts: 84
Re: Should I take out a small car loan just to boost credit score?
« Reply #68 on: May 14, 2012, 11:57:03 AM »
Real estate and the markets are cyclical. They go up and down. Too be leveraged in 2007 and 2008 on real estate may not have been a good idea depending on where said real estate was located.

Obviously after a big drop in real estate, bargains were to be had by those unfortunate souls who leveraged themselves to the hilt.

So now leverage into a bargain may be a good financial decision. However, ask those who were leveraged in 07, 08 and you may get a different answer. 

DA


arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 27553
  • Age: -999
  • Location: Traveling the World
Re: Should I take out a small car loan just to boost credit score?
« Reply #69 on: May 14, 2012, 02:01:21 PM »
Real estate and the markets are cyclical. They go up and down. Too be leveraged in 2007 and 2008 on real estate may not have been a good idea depending on where said real estate was located.

Obviously after a big drop in real estate, bargains were to be had by those unfortunate souls who leveraged themselves to the hilt.

So now leverage into a bargain may be a good financial decision. However, ask those who were leveraged in 07, 08 and you may get a different answer. 

If they were speculating, sure.

If they were cash flow positive and basing their purchase on solid fundamentals, and not appreciation speculation, they're not hurting too bad.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

Dicey

  • Walrus Stache
  • *******
  • Posts: 9739
  • Age: 61
  • Location: NorCal
Re: Should I take out a small car loan just to boost credit score?
« Reply #70 on: May 15, 2012, 12:12:57 AM »
"It seemed like the author was recommending having a big mortgage, too, as in a big house, which doesn't sound right."

Funny you should mention that. On last Saturday's radio show (which I listen to via podcast on Sundays to avoid evil advertising) Ric clarified that that big, long mortgage should only be attached to a house you can afford. He is not advocating overspending on said house in the first place. So, if you want/need/can afford a big house, go for it, but make sure to get a big, fat, cushy fixed-rate mortgage, especially now, while interest rates are so skinny minnie. And be sure to save and invest the difference.

Glad you liked the "old" financial book. He's written a number since, but OP/EW is still my favorite.

Dicey

  • Walrus Stache
  • *******
  • Posts: 9739
  • Age: 61
  • Location: NorCal
Re: Should I take out a small car loan just to boost credit score?
« Reply #71 on: May 16, 2012, 11:21:34 PM »
Here's an update on the loan story: I paid off about half the loan yesterday. I couldn't stand to wait until 30 days had passed. Since the billing cycle had closed, I went ahead and moved $2600 from the sub-account I established with the loan proceedings. Now my utilization is under 50%. The monthly payments are set up automatically, so they will proceed until the loan is paid off in 11.5 months. If I can stand to wait that long. It's too soon to run my credit, I'll probably wait until the six month mark to peek at the scores. Thanks again for all the advice.

Mr Mark

  • Handlebar Stache
  • *****
  • Posts: 1150
  • Location: Planet Earth
  • Achieved Financial Independence summer 2014. RE'18
Re: Should I take out a small car loan just to boost credit score?
« Reply #72 on: May 19, 2012, 03:02:31 PM »

Leverage does increase risk of larger losses, but in business can reduce risk and boost returns. But borrowing to live in a big house or drive an expensive car is not leverage. It's debt. You can't use the 'but I get 5% return on my other investments and this only costs me 3%!' argument.

Unless you are renting the property, you're consuming it by living in it. Relying on increasing house prices to pay off the loan is silly (you still have to live somewhere), and doesn't change your net gain (as recently posted by MMM?)

So, leveraging productive capital can work. Borrowing to consume is non-Mustashian.

Dicey

  • Walrus Stache
  • *******
  • Posts: 9739
  • Age: 61
  • Location: NorCal
Re: Should I take out a small car loan just to boost credit score?
« Reply #73 on: May 19, 2012, 04:50:54 PM »
Hi Mr. Mark,
Thanks for chiming in, but I'm a bit confused. Fortunately, it's a fairly normal state for me, so if the answers to my questions are obvious, I beg your forbearance. I'm fairly certain this post is not about leverage. As the title states, it has to do with increasing credit score. Specifically, the possibility of increasing my credit score. The thread has taken some interesting turns along the way, but this concept of leverage is a complete curveball.

Did I use the " 'but I get 5% return on my other investments and this only costs me 3%!' argument"?
Was it clear that I am not a renter?
Was it also clear that I have the cash to spare?
Did I ever state that I was "Relying on increasing house prices to pay off the loan"?
Does a used minivan which was my former company car-which-I-paid-cash-for-and-can-also-write-off-the-interest* count as an "expensive car"?

*AHA! I don't think I had considered this point until now: I am paid a stipend which in no way covers the actual cost of operating said vehicle to conduct company business. I completely forgot that I can write off all unreimbursed auto expenses (See how spoiled I was to have a company car all those years? Good thing I saved the difference.) So apparently I'm attempting to boost my credit score for no net cost. Yippee! Can this really be true? Fortunately, I pay a CPA (very mustachian) to keep me on the right side of the tax laws. If I can't write it off, he'll be sure to set me straight.

When I began writing what I thought would be a rather short post, I was struggling mightily for the words to phrase my response tactfully. Whilst biting my tongue, I realized that this whole experiment might actually be tax-deductible! So Thank You Very Much Mr. Mark, but please remember that this forum is designed for us to assist each other. It helps to read the subject question thoroughly and at least scan the responses if you're going to take the time to compose and post a reply. If I am being an idiot (or as my boss likes to say: eye-dee-ten-tea) and I have asked for advice, you are free to reply, but please do so nicely. Staying on or around the subject is also appreciated.

I've come to my own conclusion with the help of some very wise Mustachian input (and learned how to spell the M word correctly in the process). I'm one who likes to hear the rest of the story, so I'm posting progress reports until I figure out if the tactic actually worked.

grantmeaname

  • Magnum Stache
  • ******
  • Posts: 4732
  • Age: 26
  • Location: NYC
  • Cast me away from yesterday's things
Re: Should I take out a small car loan just to boost credit score?
« Reply #74 on: May 19, 2012, 06:00:50 PM »
He was replying to the conversation higher up by Devils Advocate and others, not your specific question.

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 27553
  • Age: -999
  • Location: Traveling the World
Re: Should I take out a small car loan just to boost credit score?
« Reply #75 on: May 19, 2012, 09:03:11 PM »

Leverage does increase risk of larger losses, but in business can reduce risk and boost returns. But borrowing to live in a big house or drive an expensive car is not leverage. It's debt. You can't use the 'but I get 5% return on my other investments and this only costs me 3%!' argument.

Unless you are renting the property, you're consuming it by living in it. Relying on increasing house prices to pay off the loan is silly (you still have to live somewhere), and doesn't change your net gain (as recently posted by MMM?)

So, leveraging productive capital can work. Borrowing to consume is non-Mustashian.

I strongly disagree with multiple things you said.  Yes, borrowing to consume is non-Mustachian, but you have to live somewhere, so you might as well do it in the mathematically best way possible.  (That of course includes not getting a bigger place than you need.)  And the best way possible is using a mortgage, especially at today's rates.

The biggest part I disagree with (and your basic argument):
Quote
You can't use the 'but I get 5% return on my other investments and this only costs me 3%!' argument.

Of course I can!  You do the math, decide that where you live it's much cheaper to own than rent, so you buy.
Scenario one: You have the cash to purchase it outright.  Or you can put it in an investment that averages 5% over the next 30 years (your number.. I'd be shocked if you couldn't earn higher than that over the next 30 years, at least 7-8).  Getting the (tax deductible) 3% mortgage and keeping the difference invested will net you much more over the next 30 years.

Scenario 2: You don't have the cash, so you're forced to get a mortgage.  Then you get some extra cash, and think about paying it down.  Or you could invest it.  The latter is better.

I don't know why you say you can't use that argument on your primary residence. Of COURSE you can use it.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 27553
  • Age: -999
  • Location: Traveling the World
Re: Should I take out a small car loan just to boost credit score?
« Reply #76 on: May 19, 2012, 09:22:06 PM »
To clarify, I'm not saying your primary residence is an investment. It's not (unless you rent out some of it or something.)

It's a necessary place to live. But when you have money to invest, you could either invest it in paying down 3%, tax deductible debt (where it immediately gets trapped) or you could invest it in a 5% earning, compounded investment (where it's easily accessed and is liquid). I'd choose the latter.

The fact that the debt is a mortgage on your primary residence is irrelevant to the decision.  Thus my issue with the quoted sentence.

Appreciate your viewpoint though, and I know not everyone will agree with me. :)
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

Dicey

  • Walrus Stache
  • *******
  • Posts: 9739
  • Age: 61
  • Location: NorCal
Re: Should I take out a small car loan just to boost credit score?
« Reply #77 on: May 20, 2012, 12:00:48 AM »
He was replying to the conversation higher up by Devils Advocate and others, not your specific question.
That was not clear to me, as I indicated. Regardless, I am grateful to him for the A-Ha! moment that his comment sparked. He made my day. I think it will be a lot easier to let this loan play out, knowing that the interest is tax deductible.

Mr Mark

  • Handlebar Stache
  • *****
  • Posts: 1150
  • Location: Planet Earth
  • Achieved Financial Independence summer 2014. RE'18
Re: Should I take out a small car loan just to boost credit score?
« Reply #78 on: May 20, 2012, 09:00:59 AM »
To clarify, I'm not saying your primary residence is an investment. It's not (unless you rent out some of it or something.)

It's a necessary place to live. But when you have money to invest, you could either invest it in paying down 3%, tax deductible debt (where it immediately gets trapped) or you could invest it in a 5% earning, compounded investment (where it's easily accessed and is liquid). I'd choose the latter.

The fact that the debt is a mortgage on your primary residence is irrelevant to the decision.  Thus my issue with the quoted sentence.

Appreciate your viewpoint though, and I know not everyone will agree with me. :)

Arebelspy,
What I was trying to say [poorly, and totally off thread] was that the decisions on spending for consumption should be seperate from the decisions on how to finance it. There should almost be a 'chinese wall' between the two sides of the household accounts.

Too often a low interest rate on a loan is used to justify the amount of debt taken on for for the purchase itself - and you end up with a bigger house, bigger car(s), new furniture. This increases your consumption, especially because the house you live in is primarily a consumable expense, not an investment.

On the financing side, the goal is as rapid a growth in Stash as possible. Yes, if you can borrow at 3% after tax, and invest (with no risk) at 5-7% after tax - within limits I'm sure you're aware of - that is of course usually a good thing (but is not as easy as it looks). And in businesses this leveraging is usual, and lowers risk, but is almost always to do with capital expenses.


Diane C,
Was totally refering to a comment earlier, off thread, apologies. Didn't mean to set you off!

As for your loan, I don't think it's a big deal. The marginal benefit of a rise from 800 to 800+ is low but not zero, and the fees and trouble of your loan seems a bit of an effort to me. But the after-tax cost for a short period on a small loan will be tiny. So, why not?

What I would question is your "18 month EF"  statement in the original post. 18 month emergency fund?  That looks like a place some effort on your financials would pay big time.

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 27553
  • Age: -999
  • Location: Traveling the World
Re: Should I take out a small car loan just to boost credit score?
« Reply #79 on: May 20, 2012, 09:48:30 AM »
Too often a low interest rate on a loan is used to justify the amount of debt taken on for for the purchase itself - and you end up with a bigger house, bigger car(s), new furniture. This increases your consumption, especially because the house you live in is primarily a consumable expense, not an investment.

Ah yes, good point.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

Mr Mark

  • Handlebar Stache
  • *****
  • Posts: 1150
  • Location: Planet Earth
  • Achieved Financial Independence summer 2014. RE'18
Re: Should I take out a small car loan just to boost credit score?
« Reply #80 on: May 20, 2012, 07:03:05 PM »
Too often a low interest rate on a loan is used to justify the amount of debt taken on for for the purchase itself - and you end up with a bigger house, bigger car(s), new furniture. This increases your consumption, especially because the house you live in is primarily a consumable expense, not an investment.

Ah yes, good point.

I hope on re-reading my earlier post you can see what I meant, and I think we're in violent agreement. I shudder at the idea of Arebelspy disagreeing with multiple things I say!

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 27553
  • Age: -999
  • Location: Traveling the World
Re: Should I take out a small car loan just to boost credit score?
« Reply #81 on: May 20, 2012, 07:13:10 PM »
Yes, it absolutely makes sense now!  I totally misinterpreted it.

Though I like when people disagree with me. As long as they're able to do it without getting offended, I often get along with them better, despite our disagreements.

But no, I very much agree the "but I can invest at higher" to load up on consumer debt (and then not invest) is a terrible argument.

Although I like the idea of "violent agreement"-- like we're coming to blows agreeing with each other!  :D
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

catalana

  • Stubble
  • **
  • Posts: 119
  • Location: UK
Re: Should I take out a small car loan just to boost credit score?
« Reply #82 on: May 22, 2012, 02:40:14 AM »
On the financing side, the goal is as rapid a growth in Stash as possible. Yes, if you can borrow at 3% after tax, and invest (with no risk) at 5-7% after tax - within limits I'm sure you're aware of - that is of course usually a good thing (but is not as easy as it looks). And in businesses this leveraging is usual, and lowers risk, but is almost always to do with capital expenses.
This man knows his beans.

I would be interested to know how it lowers risk however....  ;)  I would suggest the least risky route is the no debt route and finance your investments (whether you're an individual or a business) from generated cashflow.  If you have a link detailing how it reduces risk I would be very interested.

Mr Mark

  • Handlebar Stache
  • *****
  • Posts: 1150
  • Location: Planet Earth
  • Achieved Financial Independence summer 2014. RE'18
Re: Should I take out a small car loan just to boost credit score?
« Reply #83 on: May 22, 2012, 08:19:56 AM »

We're well off thread now.

Leveraging can (but doesn't always) reduce risk, because it enables a bigger spread of investment for the same capital.

So, if you're renting properties, instead of owning say, 1 property outright, you could leverage and own 2 or 3 rentals. This increases return of capital (borrow at 4%, rental return say 10%) and means all your eggs are not in one property. Plus with more rentals, you are less dependent on any individual tenant or vacancy.

No Leverage
1 house at 100k, rented for a net return of 10%, 10k income per year

Leverage?
3 houses at 100k, borrow 200k
Gross return is now 30k, less 12k mortage payments, 18k income per year!



arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 27553
  • Age: -999
  • Location: Traveling the World
Re: Should I take out a small car loan just to boost credit score?
« Reply #84 on: May 22, 2012, 08:30:09 AM »
I would suggest the least risky route is the no debt route and finance your investments (whether you're an individual or a business) from generated cashflow. 

Least risky?  Possibly.

Sub-optimal?  Definitely.  Why do you think many companies who hold Billions in cash still borrow money?

Rates are so low companies are borrowing money to keep it in cash to utilize when rates rise.

http://www.nytimes.com/2010/10/04/business/04borrow.html?pagewanted=all

http://www.usatoday.com/money/companies/management/story/2011-11-26/myth-of-corporate-cash-piles/51346848/1

So maybe being debt free is the least risky (maybe).  But it's not the way most businesses do it, for good reason.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

catalana

  • Stubble
  • **
  • Posts: 119
  • Location: UK
Re: Should I take out a small car loan just to boost credit score?
« Reply #85 on: May 23, 2012, 02:42:17 AM »
Thanks for that Mr Mark - very neatly explained.  It does move you down the risk scale, although one wonders how far, given that it is a single asset class and one assumes in a single region (otherwise costs would increase).

Are the figures accurate?  Here in the UK the interest rate is probably accurate at 6% but the net income figure at 10% looks kind of on the high side (unless you're investing in areas with higher proportion problem tenants).  A good gross with student/young professional tenants around here is 7-8%.

I would suggest the least risky route is the no debt route and finance your investments (whether you're an individual or a business) from generated cashflow. 

Least risky?  Possibly.

Sub-optimal?  Definitely.  Why do you think many companies who hold Billions in cash still borrow money?

Rates are so low companies are borrowing money to keep it in cash to utilize when rates rise.

http://www.nytimes.com/2010/10/04/business/04borrow.html?pagewanted=all

http://www.usatoday.com/money/companies/management/story/2011-11-26/myth-of-corporate-cash-piles/51346848/1

So maybe being debt free is the least risky (maybe).  But it's not the way most businesses do it, for good reason.
arebelspy - I have not disputed it is sub-optimal - I just get nervy when people don't look at the risk element when talking up leveraged returns.  I have seen too many folks look at leveraged returns from property and say "Hey, look at what I am making compared to sticking this money in a bank account"

Even Mr Marks response to me focused on the higher return - as evidenced by his exclamation mark.....  ;-)

However, I am willing to accept I may have a skewed view as I've owned a leveraged investment property in the past.  The housing boom saw lots of luxury apartments built in the area, which dropped the yield on my (older) apartment.  Being realistic about costs (another area I think people considering property investment underestimate) it pushed me below break-even.  Luckily that was 2005 and I sold out before the market crashed.

I work in corporate finance so have to look at both sides of the equation around borrowing to fund a business.  Borrowing instead of using equity reduces the weighted average cost of capital for my business and improves shareholder returns.  However unlike many individuals, my business has an accountant (me!) to produce forward cashflows, scenario modelling and summary financials and ratios to properly understand the impact of using debt to fund investment activities.

smedleyb

  • Guest
Re: Should I take out a small car loan just to boost credit score?
« Reply #86 on: May 23, 2012, 06:40:28 AM »
I would suggest the least risky route is the no debt route and finance your investments (whether you're an individual or a business) from generated cashflow. 

Least risky?  Possibly.

Sub-optimal?  Definitely. Why do you think many companies who hold Billions in cash still borrow money?

Rates are so low companies are borrowing money to keep it in cash to utilize when rates rise.

http://www.nytimes.com/2010/10/04/business/04borrow.html?pagewanted=all

http://www.usatoday.com/money/companies/management/story/2011-11-26/myth-of-corporate-cash-piles/51346848/1

So maybe being debt free is the least risky (maybe).  But it's not the way most businesses do it, for good reason.

The idea that corporations are flush with cash is a popular myth:

http://globaleconomicanalysis.blogspot.com/2012/05/cash-cow-liquidity-comparison-wheres.html


arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 27553
  • Age: -999
  • Location: Traveling the World
Re: Should I take out a small car loan just to boost credit score?
« Reply #87 on: May 23, 2012, 08:33:54 AM »
I would suggest the least risky route is the no debt route and finance your investments (whether you're an individual or a business) from generated cashflow. 

Least risky?  Possibly.

Sub-optimal?  Definitely. Why do you think many companies who hold Billions in cash still borrow money?

Rates are so low companies are borrowing money to keep it in cash to utilize when rates rise.

http://www.nytimes.com/2010/10/04/business/04borrow.html?pagewanted=all

http://www.usatoday.com/money/companies/management/story/2011-11-26/myth-of-corporate-cash-piles/51346848/1

So maybe being debt free is the least risky (maybe).  But it's not the way most businesses do it, for good reason.

The idea that corporations are flush with cash is a popular myth:

http://globaleconomicanalysis.blogspot.com/2012/05/cash-cow-liquidity-comparison-wheres.html

Yes!  That article exactly proves my point.  They could pay off ALL that debt.  Yet they choose not to do so, they still hold all that debt in order to hold cash.

The point is that they are flush with cash.  They have 4.55 Trillion in cash.  The fact that they have 4.50 Trillion in liabilities is because they use leverage and hold debt.

If they wanted, they could pay off that debt and operate off cash flows (not all, but many).  They don't, though, despite holding 4.55 Trillion in cash.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

smedleyb

  • Guest
Re: Should I take out a small car loan just to boost credit score?
« Reply #88 on: May 23, 2012, 09:09:23 AM »

Yes!  That article exactly proves my point.  They could pay off ALL that debt.  Yet they choose not to do so, they still hold all that debt in order to hold cash.

The point is that they are flush with cash.  They have 4.55 Trillion in cash.  The fact that they have 4.50 Trillion in liabilities is because they use leverage and hold debt.

If they wanted, they could pay off that debt and operate off cash flows (not all, but many).  They don't, though, despite holding 4.55 Trillion in cash.

Exactly.  By "myth" I was referring to the idea that corporate America is sitting on trillions of cash free and clear.  Fact is they only have cash because they've issued debt to acquire it.  In the context Shedlock is writing, the reality of the corporate balance sheet precludes the idea of companies stepping into the stock market and buying their stock hand over first. 

As he states, sentiment moves markets, and not cash levels -- real or fictitious.   

Mr Mark

  • Handlebar Stache
  • *****
  • Posts: 1150
  • Location: Planet Earth
  • Achieved Financial Independence summer 2014. RE'18
Re: Should I take out a small car loan just to boost credit score?
« Reply #89 on: May 23, 2012, 01:21:44 PM »
Thanks for that Mr Mark - very neatly explained.  It does move you down the risk scale, although one wonders how far, given that it is a single asset class and one assumes in a single region (otherwise costs would increase).

Are the figures accurate?  Here in the UK the interest rate is probably accurate at 6% but the net income figure at 10% looks kind of on the high side (unless you're investing in areas with higher proportion problem tenants).  A good gross with student/young professional tenants around here is 7-8%.

....

I work in corporate finance so have to look at both sides of the equation around borrowing to fund a business.  Borrowing instead of using equity reduces the weighted average cost of capital for my business and improves shareholder returns.  However unlike many individuals, my business has an accountant (me!) to produce forward cashflows, scenario modelling and summary financials and ratios to properly understand the impact of using debt to fund investment activities.

No, the figures were just to make the example clear, although they're not far off. In reality it would probably be even better because the interest payments would be tax deductable. And the foreclosure problem in the US has created a real buying/investment opportunity for rentals, with lower prices for rental units and more demand from tenants. If you find the right deal, yields can even be much higher than 10%.

And I agree, getting into leveraging can be complicated for individuals to manage, and investors need to be wary of over-leveraging, especially if they forget about cash flow... leveraging increases returns on capital employed when things are good, but also means a small drop in asset value can wipe out your equity completely.


Dicey

  • Walrus Stache
  • *******
  • Posts: 9739
  • Age: 61
  • Location: NorCal
Re: Should I take out a small car loan just to boost credit score?
« Reply #90 on: May 23, 2012, 11:41:11 PM »
So far off topic, and yet so interesting! I am certainly enjoying the ride. Thanks for all the ideas and good conversation. I love "violent agreement"!