Pay cash or keep loan? Sorry, kinda wordy

[ElDiabloJoe]

So, I am curious as to the prevailing conventional wisdom. Is it better to pay off a low interest loan or to invest that cash for growth and pay off the loan monthly? The idea being that while the amount is growing at approximately 7% interest (standard over time, S&P assumption) and the loan is at less interest, when the loan is paid off, there is still some cash growth earnings remaining that would not be there had one paid the loan off in cash up front.

Example:

15 year mortgage at 2.5% (fixed) with a balance of $130,000. If one had the payoff amount in cash is it best to pay it off or set $130,000 aside in a stock market index fund that auto pays the note each month?

Example 2:

Auto loan at 5% (fixed) with a balance of $53,000.

Example 3:

Boat loan at 1.75% (fixed) and a balance of $21,000

[Altavia]

There's better financial guys here than me so I'm sure they will chime in.

For me, if you rule out the emotion of being debt free, as you said, there's better places to put that money at this point in time.

Loans can also be looked as an inflation hedge. If inflation is outpacing the interest, you are ahead doing nothing.

[LeRoySmith]

So, I am curious as to the prevailing conventional wisdom. Is it better to pay off a low interest loan or to invest that cash for growth and pay off the loan monthly? The idea being that while the amount is growing at approximately 7% interest (standard over time, S&P assumption) and the loan is at less interest, when the loan is paid off, there is still some cash growth earnings remaining that would not be there had one paid the loan off in cash up front.

Example:

15 year mortgage at 2.5% (fixed) with a balance of $130,000. If one had the payoff amount in cash is it best to pay it off or set $130,000 aside in a stock market index fund that auto pays the note each month?

Example 2:

Auto loan at 5% (fixed) with a balance of $53,000.

Example 3:

Boat loan at 1.75% (fixed) and a balance of $21,000

My personal approach has always been pay off the loans 1st. I'm sure I've lost money over time but the peace of mind I gain from not having a loan is worth it to me.

I've even gone so far as to make car payments to myself in advance of buying a car rather than making the payments after the purchase.

As always inflation is slowly chewing away at any cash held.

[retiredguy123]

I don't even look at the numbers. I hate debt and I pay cash for everything. The only loan I ever had was an assumed mortgage for $35K about 45 years ago. I couldn't sleep, so I saved up and paid it off in 3 years. I have been debt free ever since.

[Kenswing]

For us it came down to how much I valued a peaceful household. :p I'm debt-averse. My wife is downright debt-phobic. When we built our house here we took out a mortgage simply as a hedge in case our home in WA didn't close as planned. We had a 3.1% rate. Within two months my wife was asking when we were going to pay it off. At four months I couldn't take it anymore. :1rotfl: So yes. I understand I lost the opportunity on a lot of money but I get to live a blissful existence because of it.

But she was okay with us taking out a car loan. Because we have no payments our credit score has suffered. One thing she prides herself on was her credit score. I'm sure as soon as her score is back where she wants it I'll be hearing the same toon to pay off the car too.

[retiredguy123]

I know some people will disagree, but the psychological effect on those who use or depend on debt is more important than any financial calculation. For example, when McDonald's started accepting credit cards, they found that their average transaction increased by 50 percent because it was easier for customers to justify spending more money when using a credit card. I don't have the statistics, but I believe that those who have always been debt free tend to accumulate much more wealth than those who regularly borrow money.

[LeRoySmith]

For us it came down to how much I valued a peaceful household. :p I'm debt-averse. My wife is downright debt-phobic. When we built our house here we took out a mortgage simply as a hedge in case our home in WA didn't close as planned. We had a 3.1% rate. Within two months my wife was asking when we were going to pay it off. At four months I couldn't take it anymore. :1rotfl: So yes. I understand I lost the opportunity on a lot of money but I get to live a blissful existence because of it.

But she was okay with us taking out a car loan. Because we have no payments our credit score has suffered. One thing she prides herself on was her credit score. I'm sure as soon as her score is back where she wants it I'll be hearing the same toon to pay off the car too.

Ha! We were exactly the same, our credit score hovered around 820 no matter what we did to try to raise it, we bought a new car and had a loan on it to try to boost the credit score a little. After the 3rd month of making payments we paid it off because the feeling of owing money is way worse than an 820 score.

[retiredguy123]

Ha! We were exactly the same, our credit score hovered around 820 no matter what we did to try to raise it, we bought a new car and had a loan on it to try to boost the credit score a little. After the 3rd month of making payments we paid it off because the feeling of owing money is way worse than an 820 score.
My credit score is 810 and the only debt I have is my credit card balance, which I pay off in full every month. I have never had a car loan in my life.

[ElDiabloJoe]

I am generally debt-averse, however I appreciate that debt can be used as a leveraging tool to create more wealth. So, personal feelings about debt and preference aside, I'm hoping for answers to my examples based on which methodology is best in a fiscal sense as opposed to a preferred sense.

[Caymus]

Don't pay off the mortgage or boat as long as US Treasuries are yielding more. Pay off the car. Personally, at my age I base my decisions on safe fixed income rates and not market returns, even though I'm about 70/30 equities/fixed income.

If investment rates drop you can always pay off the other loans.

[retiredguy123]

I am generally debt-averse, however I appreciate that debt can be used as a leveraging tool to create more wealth. So, personal feelings about debt and preference aside, I'm hoping for answers to my examples based on which methodology is best in a fiscal sense as opposed to a preferred sense.
Assuming that you can consistently earn 7 percent on invested money, you should keep all 3 loans to maximize your balance.

[GoRedSox!]

I agree with all of those who say the peace of mind of being debt-free is worth more than a few dollars that may or may not materialize.

I certainly would not put money at risk versus paying off debt.

However, if you have a guaranteed CD FDIC-insured or a Treasury backed by the full faith and credit of the US government that is at a higher interest rate, any tax implications aside, you are not really putting money at risk and then it's just the difference in interest versus the peace of mind.

I might still pay it off but that's just me. Free advice and that could be all it's worth :)

[petsetc]

My take is that cash and cash flow are (king) the real things to consider. Big amounts (home mortgage, boat, bond with low to reasonable interest rates are best left alone. I do pay off small amounts because I find them a annoying.

I am 75 yo and the rationale for my take is that once you payoff a larger amount, although you feel good being debt-free, the availability of that money is tied up in an illiquid asset and now gone and if you should suddenly have a need for the cash, we all know that the only times "they'll" lend you money is when you don't need it.

And that fact that I'll die before my mortgage is paid off is OK. Just sayin"

JMHO

[Plinker]

For us it came down to how much I valued a peaceful household. :p I'm debt-averse. My wife is downright debt-phobic. When we built our house here we took out a mortgage simply as a hedge in case our home in WA didn't close as planned. We had a 3.1% rate. Within two months my wife was asking when we were going to pay it off. At four months I couldn't take it anymore. :1rotfl: So yes. I understand I lost the opportunity on a lot of money but I get to live a blissful existence because of it.

But she was okay with us taking out a car loan. Because we have no payments our credit score has suffered. One thing she prides herself on was her credit score. I'm sure as soon as her score is back where she wants it I'll be hearing the same toon to pay off the car too.

You may be surprised to know that credit card companies call people who pay their charges off in full at the end of the month “deadbeats” and “zeros” as they make no interest off their purchases. One of my favorite quotes from Mark Twain is: “I am more concerned about the return of my money than on my money”. This is especially true now that we are retired. The emotional security that many people feel from being completely debt free is real. Granted, the math can work to your advantage if you have loans at very low rates. Personally, my wife and I are deadbeats and zeros and consider it a compliment. We have a real feeling of contentment when we put our heads on our pillows knowing we don’t owe anybody a penny on planet earth.

[LeRoySmith]

Another huge consideration is what kind of mess will you leave behind? I am near death, many of us are, and what we leave behind someone has to deal with. I have things arranged so that it will be very easy for my wife and family to deal with it and move forward with as little issue as possible. Something to think about if you care about the aftermath.

[thelegges]

OPM (other people’s money) our percentage in investment makes us double and more than any interest rate today.

If you have interest at 2% and investment brings in 9%, is not hard to figure. However some freak out over any loan, worried about what’s can go wrong. So you will find cash poor, but paid debt.

You really need an investment guy to guide you. None of can gage your comfort zone.

[Stu from NYC]

I find it comforting to have no loans. Only exception is remainder of the bond which is at a lower interest rate. However when we add in the service charge to the interest rate at some point figure the bond will be paid off early.

[jimbomaybe]

OPM (other people’s money) our percentage in investment makes us double and more than any interest rate today.

If you have interest at 2% and investment brings in 9%, is not hard to figure. However some freak out over any loan, worried about what’s can go wrong. So you will find cash poor, but paid debt.

You really need an investment guy to guide you. None of can gage your comfort zone.
I agree totally , when mortgage rates tanked I took a large mortgage rather than paying cash and added the money that was to pay off a housing purchase to the investment plan, investment counselor/ tax planer smiled and nodded, but I am comfortable with that, if a person isn't go another way, your comfort level is very important

[Papa_lecki]

In general, my opinion is don’t go to the internet for financial advice.

[manaboutown]

Leverage (debt) is what got me where I am today. During my twenties, thirties and early forties I bought for no or little down and have since managed several rental income producing properties. Over the years rental income has amortized all but a now relatively insignificant amount of remaining debt in the 3% range. In 2022 and 2023 I sold two significant partnership properties and put 40% of the aftertax proceeds into T bills paying 5%+, the remainder into common stocks and ETFs. That being said leverage works both ways. My working adult life has spanned an extended period of inflation so it worked out in my favor. All my life I have avoided incurring personal debt. I have always paid my credit cards off every month. With a couple exceptions I paid cash for cars throughout my life.

[Topspinmo]

So, I am curious as to the prevailing conventional wisdom. Is it better to pay off a low interest loan or to invest that cash for growth and pay off the loan monthly? The idea being that while the amount is growing at approximately 7% interest (standard over time, S&P assumption) and the loan is at less interest, when the loan is paid off, there is still some cash growth earnings remaining that would not be there had one paid the loan off in cash up front.

Example:

15 year mortgage at 2.5% (fixed) with a balance of $130,000. If one had the payoff amount in cash is it best to pay it off or set $130,000 aside in a stock market index fund that auto pays the note each month?



Example 2:

Auto loan at 5% (fixed) with a balance of $53,000.

Example 3:

Boat loan at 1.75% (fixed) and a balance of $21,000

Well I have no loans and reason I don’t.


I don’t like paying any interest. I rather receive interest. For me if I pay off my loan it’s gone, if I don’t and invest money and lose it now I’m really stuck trying to pay off high interest plus the payment. But, that’s me. They’re no debt like no debt.

[CarlR33]

Well I have no loans and reason I don’t.


I don’t like paying any interest. I rather receive interest. For me if I pay off my loan it’s gone, if I don’t and invest money and lose it now I’m really stuck trying to pay off high interest plus the payment. But, that’s me. They’re no debt like no debt.
Yes, till now no one mentioned the interest paid over the loan on say a 30 year mortgage for example?

[thelegges]

Yes, till now no one mentioned the interest paid over the loan on say a 30 year mortgage for example?

Today’s rates a fair to good investment guy will tell you to take the largest loan. Then 30 days take cash towards principal to basically bring loan down to 7-15 years. Your yearly interest becomes minimal, we have never kept a 30 year mortgage for more than 10 years.

I can’t remember the last time our cars didn’t have zero interest, and never carry balance on CC’s.

[jimbomaybe]

Today’s rates a fair to good investment guy will tell you to take the largest loan. Then 30 days take cash towards principal to basically bring loan down to 7-15 years. Your yearly interest becomes minimal, we have never kept a 30 year mortgage for more than 10 years.

I can’t remember the last time our cars didn’t have zero interest, and never carry balance on CC’s.
This discussion like all such discussion here demonstrate the emotional/ psychological relationship people have with money, some are much more risk sensitive no matter what the numbers and statistics say. I have talked to people who would never think of investing in any form of stock equites , "you can lose money! "never considering the whole universe of risk and that not being so invested is in itself a risk , your money , your comfort level, your decision

[dewilson58]

23 responses..............probably will get another 23.

As you can see, THERE IS NO ONE CORRECT ANSWER.

Leveraging investments with debt is a personal preference, period.

[Stu from NYC]

In general, my opinion is don’t go to the internet for financial advice.

OK but this has been an interesting and thought provoking thread

[retiredguy123]

Don't pay off the mortgage or boat as long as US Treasuries are yielding more. Pay off the car. Personally, at my age I base my decisions on safe fixed income rates and not market returns, even though I'm about 70/30 equities/fixed income.

If investment rates drop you can always pay off the other loans.
The OP is assuming that he can make 7 percent on the money not being used to pay off the loans. This is based on the S&P stock index, not Treasuries. So, since all 3 loans have an interest rate that is less than 7 percent, the logical thing to do is to not pay off any of the loans. Personally, I don't agree with the 7 percent assumption, but that is the OP's assumption.

[Topspinmo]

23 responses..............probably will get another 23.

As you can see, THERE IS NO ONE CORRECT ANSWER.

Leveraging investments with debt is a personal preference, period.


IMO there is? Don’t get loan it you don’t have:coolsmiley:

[Topspinmo]

This discussion like all such discussion here demonstrate the emotional/ psychological relationship people have with money, some are much more risk sensitive no matter what the numbers and statistics say. I have talked to people who would never think of investing in any form of stock equites , "you can lose money! "never considering the whole universe of risk and that not being so invested is in itself a risk , your money , your comfort level, your decision


agree, but don’t cry when get shaft by some financial shyter. Plenty of examples that for sure.

[jimbomaybe]

agree, but don’t cry when get shaft by some financial shyter. Plenty of examples that for sure.
You have to do your own due diligence as well, the professional credentials of the person you deal with, who is part of a established financial firm, a free dinner is not going to attract me, in fact the opposite. Credit/ leverage can be your master or servant, your portfolio should have a mix of different assets. What percent of leverage you have is part of that, when 30 yr mortgage interest rates were in 2-3 % range that was below the historical averages of return of the indexes , corporate America took advantage of that and bought back its own stock, buying a home has demonstrated over many decades to be a stable investment. So if looking to buy at a time like that it makes sense to me to use OPM, without changing my cash flow

[DARFAP]

So, I am curious as to the prevailing conventional wisdom. Is it better to pay off a low interest loan or to invest that cash for growth and pay off the loan monthly? The idea being that while the amount is growing at approximately 7% interest (standard over time, S&P assumption) and the loan is at less interest, when the loan is paid off, there is still some cash growth earnings remaining that would not be there had one paid the loan off in cash up front.

Example:

15 year mortgage at 2.5% (fixed) with a balance of $130,000. If one had the payoff amount in cash is it best to pay it off or set $130,000 aside in a stock market index fund that auto pays the note each month?

Example 2:

Auto loan at 5% (fixed) with a balance of $53,000.

Example 3:

Boat loan at 1.75% (fixed) and a balance of $21,000
There's good debt and bad debt. The three examples you provide I would place in the good (low interest) debt category. Bad debt example would be carrying a large credit card balance and only making minimum payments. In my case, I have a very low interest mortgage and car loan. I also have a second car loan at 0%. I've got the assets available to pay them all off, if need be. However, as long as I'm in the situation, I feel comfortable letting my investments sit and continue to grow (and they are).

[Stu from NYC]

agree, but don’t cry when get shaft by some financial shyter. Plenty of examples that for sure.

Have been to a number of financial dinners. Always ask for their credentials and amazed at the answers.

Such as
We have a computer program that tells us when to get in and out of the market.
Took some online courses
Was a math major so understand investments.

Amazing how if I do not raise this question nobody else will.

[Maker]

Also consider your tax return.
What is deductible, and what is not. Will you deduct slightly more than the standard deductible, thereby throwing away free money? Do you have huge medical deductions too?
What investment income will be taxable.

[Topspinmo]

Also consider your tax return.
What is deductible, and what is not. Will you deduct slightly more than the standard deductible, thereby throwing away free money? Do you have huge medical deductions too?
What investment income will be taxable.


What investment income will be taxable. ?

Any dollar you made supposed to be counted as income of course if you’ve got lawyer to get you out of paying taxes. IMO most famous mis quote “ My secretary paid more taxes than me.” Or “ you didn’t. Build that” IMO want wrong with system too many loopholes, deductions, and exemptions. Flat tax with NO exceptions. I don’t care how many kids you choose to have, how many rental property’s have, or where can hide money.

[Topspinmo]

This discussion like all such discussion here demonstrate the emotional/ psychological relationship people have with money, some are much more risk sensitive no matter what the numbers and statistics say. I have talked to people who would never think of investing in any form of stock equites , "you can lose money! "never considering the whole universe of risk and that not being so invested is in itself a risk , your money , your comfort level, your decision


“some are much more risk sensitive.”

Cause probably never had to earn it? If giving something and not earned it some have different attitudes. 100 grand lot money for most. And Some it just chicken feed cause somebody got deep pockets to alway bail them out. Few have ever been really hungry with no money, so they have different attitude.

[melpetezrinski]

So, I am curious as to the prevailing conventional wisdom. Is it better to pay off a low interest loan or to invest that cash for growth and pay off the loan monthly? The idea being that while the amount is growing at approximately 7% interest (standard over time, S&P assumption) and the loan is at less interest, when the loan is paid off, there is still some cash growth earnings remaining that would not be there had one paid the loan off in cash up front.

Example:

15 year mortgage at 2.5% (fixed) with a balance of $130,000. If one had the payoff amount in cash is it best to pay it off or set $130,000 aside in a stock market index fund that auto pays the note each month?

Example 2:

Auto loan at 5% (fixed) with a balance of $53,000.

Example 3:

Boat loan at 1.75% (fixed) and a balance of $21,000



House and boat loan keep.
Assumptions:
Invest in fixed income earning 5% risk free. If you invest in securities, that would be a much bigger discussion around other assets availalbe in case of a downturn in the markets. Would also need to know your expected tax rate on the capital gains of said investments.

Auto loan pay off.

[ElDiabloJoe]

House and boat loan keep.
Assumptions:
Invest in fixed income earning 5% risk free. If you invest in securities, that would be a much bigger discussion around other assets availalbe in case of a downturn in the markets. Would also need to know your expected tax rate on the capital gains of said investments.

Auto loan pay off.

Thank you all for the thoughtful replies and responses.

I'm a buy and hold kinda guy who is moderately risk-averse, so my stock market investments and property investments are usually a minimum of a decade long. Even my cars I keep well over 10 years, my last was 17 years. I have exactly zero children so I plan to spend everything I have - just got to make it last at least as long as I do. Therein likes the trick.

As for the tax rate on capital gains, my state of primary residence has zero income tax, and zero taxes on investments and capital gains - so federal tax only.

[melpetezrinski]

There's good debt and bad debt. The three examples you provide I would place in the good (low interest) debt category. Bad debt example would be carrying a large credit card balance and only making minimum payments. In my case, I have a very low interest mortgage and car loan. I also have a second car loan at 0%. I've got the assets available to pay them all off, if need be. However, as long as I'm in the situation, I feel comfortable letting my investments sit and continue to grow (and they are).


Typically, a car loan would be considered BAD debt unless it carries an extremely low interest rate. Autos fall under the category of considerable depreciating assets, so a loan to finance this purchase is not recommended. Even just purchasing a new vehicle is considered a poor financial move. Now, if this vehicle allows you to commute to work more efficiently or brings some other financial gains, then a loan can be advisable.

[retiredguy123]

Thank you all for the thoughtful replies and responses.

I'm a buy and hold kinda guy who is moderately risk-averse, so my stock market investments and property investments are usually a minimum of a decade long. Even my cars I keep well over 10 years, my last was 17 years. I have exactly zero children so I plan to spend everything I have - just got to make it last at least as long as I do. Therein likes the trick.

As for the tax rate on capital gains, my state of primary residence has zero income tax, and zero taxes on investments and capital gains - so federal tax only.
You have exactly the correct number of children.

[jimbomaybe]

“some are much more risk sensitive.”

Cause probably never had to earn it? If giving something and not earned it some have different attitudes. 100 grand lot money for most. And Some it just chicken feed cause somebody got deep pockets to alway bail them out. Few have ever been really hungry with no money, so they have different attitude.
I don't understand what you are saying

[Maker]

What investment income will be taxable. ?


Very simple example. If the interest you pay on the mortgage is $15000, it is more than the standard deductible so it can be deducted.
But the entire mortgage can be paid off at any time, but you put the funds into something very safe (govt backed CD, or something like that) (not stock market) that earns $15000. Have to pay income taxes on that.

So the earned money = deduction for mortgage. Net zero. Sounds good, except for the standard deductible got lost.

Instead... Pay off mortgage. No interest deduction, but no investment income. Net zero? No. You get the standard deduction now. That saves money on taxes.

This concept all shifts as the type of investment changes. Risk it in the stock market, and you could go up or down. That's your decision.

[retiredguy123]

Very simple example. If the interest you pay on the mortgage is $15000, it is more than the standard deductible so it can be deducted.
But the entire mortgage can be paid off at any time, but you put the funds into something very safe (govt backed CD, or something like that) (not stock market) that earns $15000. Have to pay income taxes on that.

So the earned money = deduction for mortgage. Net zero. Sounds good, except for the standard deductible got lost.

Instead... Pay off mortgage. No interest deduction, but no investment income. Net zero? No. You get the standard deduction now. That saves money on taxes.

This concept all shifts as the type of investment changes. Risk it in the stock market, and you could go up or down. That's your decision.
As I understand it, you can only benefit from the mortgage deduction for the amount that exceeds the standard deduction. So, if the standard deduction is $15K and your mortgage interest is $15K, your tax savings is zero, unless you have other deductible costs in excess of the standard deduction. Also, note that people over 65 get an additional $3,900 exemption that adds to the standard deduction.

[LeRoySmith]

zero taxes on investments and capital gains - so federal tax only.

I assume you mean no state taxes on capital gains, I'd guess there's no way around federal tax on capital gains?

I just read the timeline in your signature. It seems we are moving together the past 5 or 6 years.

[ElDiabloJoe]

I assume you mean no state taxes on capital gains, I'd guess there's no way around federal tax on capital gains?

Yes, exactly.

just read the timeline in your signature. It seems we are moving together the past 5 or 6 years.

You clearly have excellent taste.

[Maker]

As I understand it, you can only benefit from the mortgage deduction for the amount that exceeds the standard deduction. So, if the standard deduction is $15K and your mortgage interest is $15K, your tax savings is zero, unless you have other deductible costs in excess of the standard deduction. Also, note that people over 65 get an additional $3,900 exemption that adds to the standard deduction.

Not exactly. If mortgage interest paid = deduction....
You have no net money gain or loss.
You have lost the standard deduction, meaning you will pay more tax.

If income is $100k, standard deduction is $15k, potential mortgage interest of $15k, and CD interest 15K...

If mortgage int, and interest earned, taxes are income + interest earned - Mort int = 100 +15 -15 = $100k taxed. You pay 22% of 15k more taxable income in taxes.

No mortgage or interest, taxes based upon income - std ded = $85k taxed.