Pay cash or keep loan? Sorry, kinda wordy
 

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 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.

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.

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.

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.

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.

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.

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.

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.

Assuming that you can consistently earn 7 percent on invested money, you should keep all 3 loans to maximize your balance.

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 :)

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

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.

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.