Common Sense Check: Investing While Having a Loan

[idnative1948]

We went through this scenario with our planner last month on a 30K vehicle we wanted to pay cash for. In the end we went with an auto loan from our CU at 1.5%. First auto loan in nearly 18 years and will be deducted from checking weekly as was our 15 year mortgage that we had paid off in 12 years, 7 months. For our situation it was a no brainer.

 

[Mallardsx2]

Pay cash for the car.

When the house is paid off in a few year I will NEVER take out another loan again.

No more money to the rich bankers from this guy. I cant stomach it.

 

[Beartooth83]

Cash for the wheels. Invest or save whatever your monthly payments would have been.

 

[Rawmeat]

Pay cash for the car.

When the house is paid off in a few year I will NEVER take out another loan again.

No more money to the rich bankers from this guy. I cant stomach it.

This is fine if you really don't like being in debt.

BUT, you might be leaving a LOT of money on the table. If you can invest LONG TERM with the money that would instead have been used for cash sale, you are very likely to come out way ahead.

On cheap interest loans I always make minimum payments and invest the extra money. Especially if your 401k and ira's are not maxed out.

Now like I said, has to be LONG TERM. If history is any indicator there has never been a 15 year period of the stock marker where you would have lost money. SO although we never KNOW what the stock market will do, chances are it will gain 10% annually over the long term. The worst ever 20 year period saw 2.5% gains, the best 20 year period saw 18% gains. Take it for what it is worth.

 

[Rawmeat]

Take the cheap loan. It is a no brainer.

Stock market is very volatile.

I am in because I have always been in it.

Would stay on the sidelines for a new 20 grand investment. My opinion
+

^This. Although I would take the money and max out my retirement accounts now. Trying to predict the stock market is futile.

I guess my risk meter pegs out way before yours does. I'd take the paid for house every time. So likewise I'll take the paid for truck every time as well.

I'd suggest paying cash for the truck, and then invest/save what would have been your payment every month instead. Same thing with the mortgage.

Bad things happen, I'd like to be free from monthly payments when they do.

Here is the problem with this strategy. If you invested that extra money right away, instead of monthly you are more likely to have a much higher return of the long term. I recently ran the numbers on the difference in money saved on interest at 3.75% compared to gains at a moderate 7% on $170,000 over a 30 year loan. It was over $1 million dollars. You could always invest about half in short term bonds and half in stocks and still have all that money available if you needed it. If the stock market is up, pull from the stocks. If it is down, pull from the bonds.

The last 10 years have been a pretty continuous bull market. Cracks are starting to show, however, and last time around we had a 50% or so drop in the market. Long term returns are more like 2-3% over inflation.

On the other hand, it may be worth paying the 3.5% for financial flexibility.

Good luck.

Where in the heck are you getting 2-3% after inflation numbers from? Whoever is telling you that is either uninformed or lying. Here is a more realistic look http://www.simplestockinvesting.com/SP500-historical-real-total-returns.htm



PLEASE, everyone stop trying to predict the stock market. It is terrible advice and strategy to do it. Invest, diversify, and hold long term. Yes, there is some risk, but the longer you hold it the lower the risk.

I had a coworker that was sure that the market would drop during an election year and put all his money into bonds. Well a couple years later he has lost out on more than 30% in gains. Most money in the stock market isn't lost when the stock market goes down, it is not being in when there are gains.

 

[Jfelkins]

Id say pay cash for the car...then again...I work for Dave Ramsey.

 

[RedRaider13]

Id say pay cash for the car...then again...I work for Dave Ramsey.

I'm on the Dave Ramsey bandwagon, cash for the truck.

 

[claybreaker]

I'm not using all of my cash for a car. As presented, we don't know if don't know if the OP as additional cash or not.

... Part of me says find a less expensive car (hehe). But that wasn't the point of the exercise.

 

[tim629]

i agree with whomever said "pay cash and invest the car payment"


then by the time you are ready for the next vehicle it will have paid for itself and then some

 

[rlmmatt]

I understand not wanting to make payments, almost everything I own is paid off because you don't get good borrowing credit running your own business. Why due I want to show alot, so I can pay uncle sam and then pay the bank loan interest so I get it but it's not smart money.

So you pay off the car and invest the payments. As shown above you loose 5k over a 60 month loan. Let's say the stock market does crash you loose your portfolio either way, whether you invest the 20k or the monthly payments. What happens in a pinch if something goes wrong. You can pull out of the market if need be and not make the 12% or less say a modest 5% and still have your bills paid. If you pay off the car and have something happen then you have to place it on credit at a high interest rate until you can pay it off.


Easy decision borrow at 3.5%, invest the rest, if you need it you can get to it and enjoy the extra money at the end.

My grandfather's words of wisdom who started with nothing and did very well for himself.
Always make your money work for you and always keep it moving.
He would borrow on his house for a lower interest rate to fund business deals then pay the house off and due it again.

Keep your money working for you, and if something happens you can get to it. Finance the car

 

[MTGomer]

Nothing wrong with having a loan and investing. Especially in this market with these interest rates.

I’m not going to stop making thousands of dollars a month in the market so I can use the money invested to pay off a little loan so I can stop paying $50 worth of interest.

Paying cash for a vehicle is a good idea too. But don’t stop yourself from investing just because you have a loan on something.

 

[fmnjr]

It can be seen from the answers to your dilemma that there are lots of ways to go about taking care of business.

From the circumstances you describe, it seems to me you are at a stage of life when you should be concerned with aggressively saving/investing all you can. Why? So when you reach geezer-hood you have the resources required to live in a manner that is suitable for such a one.

Therefore, if it were my option, I'd find a cheap vehicle that would suffice for my need, keep my investments going and look for ways to increase my leverage. Believe it or not, there are cheap vehicles out there that would work. Furthermore, the insurance premiums you'll save will be helpful. If you're handy with a wrench, you can save even more by doing routine maintenance yourself. Been doing it all my life, it pays.

 

[Williboss]

I like the variant A

 

[LeoOtrue]

I would go for the B plan, but I would find a better loan offer instead of paying 8,5%. To be honest, I think this is a better idea than paying cash for the car at once, because you will have the possibility to invest, but the choice belongs to you. Frankly speaking, I would find a better loan credit company, that will offer me a better loan conditions and a secured payment rate. So to say, try to find something that will fit your needs here https://credit-10.com/ro/ I am pretty sure you will find something useful for you, it will make your life easier. I had more than 2 loans from this company, I think this is the best company on the market now

 

[Pucky Freak]

Thread resurrection from the bull market days of 2018!

And no, that’s not a bull moose or elk. The days where HT members were collectively many millions of dollars richer...

Lots of unknown variables in the OP: existing debt, income, net worth, emergency fund, etc.

With all those unknowns, and no matter the market condition, I’d always pay cash for the car.

In an overall poor financial position, I’d pay 2k for a vehicle, $250 to go hunting, and throw the rest towards more pressing needs.

In an overall strong financial position I’d pay 17k for a vehicle, and 3k for hunting.

It’s always foolish to leverage a vehicle loan against gains made in the market. Too many variables, unknowns, and worse case scenario your truck is repo’d while you withdraw investment money to buy groceries. No thanks.

I know zero people who have ever taken out a 20k car loan against their paid for 20k truck to invest in the market. If that strikes you as a silly idea, your doing the exact same thing in reverse by financing a vehicle you have the ability to pay cash for.

My wife and I just paid 13k cash for a used vehicle that we spent 12 months saving for. It can be done - you just need a good plan and the dedication to follow it.

 

[noharleyyet]

"Lots of unknown variables in the OP: existing debt, income, net worth, emergency fund, etc."

He gone.....

 

[2rocky]

Just a thought...A loan for a depreciating asset actually has a higher annual cost than just the interest rate....

Your car's value decreases around 20% to 30% by the end of the first year. From years two to six, depreciation ranges from 15% to 18% per year, according to recent data from Black Book, which tracks used-car pricing. As a rule of thumb, in five years, cars lose 60% or more of their initial value.

 

[TN2shot07]

Just a thought...A loan for a depreciating asset actually has a higher annual cost than just the interest rate....

Your car's value decreases around 20% to 30% by the end of the first year. From years two to six, depreciation ranges from 15% to 18% per year, according to recent data from Black Book, which tracks used-car pricing. As a rule of thumb, in five years, cars lose 60% or more of their initial value.

It makes it even better that you can now stretch those payments out on a new one to 84 months. The average buyer doesn’t keep a vehicle that long, and will be extremely upset and confused when they have a huge negative equity balance on that vehicle they now want to trade a couple years in!