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It's easier to expend a large amount of cash on a one-time basis if you can reasonably expect similar influxes on a regular basis.
If I know I am getting a $20,000 bonus each year and I invest $10,000 each year of that, maybe this year I pay off a $12,000 auto loan and only invest $6500, but next year I invest $18,000 of that bonus.
If you aren't getting a regular bonus, then a large outlay of cash on this type of thing may not be worth it, because you won't have a similar opportunity with a large amount of cash coming up again.
Hmmmm. Everybody in my family (me included) pays cash only for cars, and we don't get bonuses. If I told my folks that I would (or that they should) go out and get loan(s) on paid for cars, they would know I had lost my mind. Getting a loan when you don't need it is a waste of money, yes, even at low rates.
A lot of folks here may not realize that not paying off a loan is exactly the same decision as borrowing, the reason that borrowing seems so "unorthodox" and yet keeping a loan around seems so reasonable, is status quo bias - a well known psychological phenomenon where the status quo is perceived as the more desirable option simply because it is the status quo. If the car is financed, the status quo is owing money, while if it is owned outright, the status quo is not owing money.
But this has no bearing on the actual financial impact of the decision, though emotionally it can be very different.
Hmmmm. Everybody in my family (me included) pays cash only for cars, and we don't get bonuses. If I told my folks that I would (or that they should) go out and get loan(s) on paid for cars, they would know I had lost my mind. Getting a loan when you don't need it is a waste of money, yes, even at low rates.
A lot of folks here may not realize that not paying off a loan is exactly the same decision as borrowing, the reason that borrowing seems so "unorthodox" is status quo bias - a well known psychological phenomenon where the status quo is perceived as the more desirable option simply because it is the status quo. If the car is financed, the status quo is owing money, while if it is owned outright, the status quo is not owing money.
But this has no bearing on the actual financial impact of the decision, though emotionally it can be very different.
Would you get the same rate for the same period for borrowing against a paid-off asset as you would for a loan on a purchase?
How about doing both?
pay off half of the loan, and invest the rest. Perhaps fund both of your IRAs early this year....
This ^ was my thought as well. Sounds like a wise plan.
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Hmmmm. Everybody in my family (me included) pays cash only for cars, and we don't get bonuses. If I told my folks that I would (or that they should) go out and get loan(s) on paid for cars, they would know I had lost my mind. Getting a loan when you don't need it is a waste of money, yes, even at low rates.
Agree to disagree. If you buy a $20,000 car in cash that could have been financed at 0.9% interest instead of financing the loan and putting that $20,000 into an investment that gives you even 3% return, paying for the car in cash was quite literally the "waste of money".
To each their own, and there is something to be said about not having a loan over your head. But if we're talking just 100% pure numbers, buying something in cash to avoid a small loan when you're money could have made more invested elsewhere is quite simply just a waste of money.
Would you get the same rate for the same period for borrowing against a paid-off asset as you would for a loan on a purchase?
Depends on the car and what rate we're talking about for the purchase. From what I have gathered, most credit union financing deals would give the same rate in either case, as long as we're comparing new to new or used to used and the age and mileage is the same. However, the chance for "special deals" through the dealer is lost if the car is bought with cash.
A lot of people don't realize that you don't have to already have a loan in place in order to "refinance" a vehicle.
Hmmmm. Everybody in my family (me included) pays cash only for cars, and we don't get bonuses. If I told my folks that I would (or that they should) go out and get loan(s) on paid for cars, they would know I had lost my mind. Getting a loan when you don't need it is a waste of money, yes, even at low rates.
A lot of folks here may not realize that not paying off a loan is exactly the same decision as borrowing, the reason that borrowing seems so "unorthodox" and yet keeping a loan around seems so reasonable, is status quo bias - a well known psychological phenomenon where the status quo is perceived as the more desirable option simply because it is the status quo. If the car is financed, the status quo is owing money, while if it is owned outright, the status quo is not owing money.
But this has no bearing on the actual financial impact of the decision, though emotionally it can be very different.
What are you talking about? Nowhere did I say OP should take out a loan against a paid-off car.
What are you talking about? Nowhere did I say OP should take out a loan against a paid-off car.
It's the same decision. Suppose, hypothetically, OP wrote to us to say that the car was paid off yesterday but was feeling some remorse and the local credit union was offering a 1.9% loan on it and OP was asking if it was a good idea. The result of taking the loan would put OP back in exactly the same spot as is the case now...
For me, 2% is my breakpoint on car loans, because my CDs are earning that much or more (my medium term money...not as liquid as checking account, but more liquid than retirement funds, specifically for things like cars). What I mean is that if I can get a car loan for sub 2%, I will take the loan. If not, I will pull money out of my CDs and pay cash. So if I were paying lower than 2% interest, I wouldn't be in too much of a rush to pay it off.
For me it isn't a question of whether I would invest that money and make more than the interest rate. It is already invested at a set rate, so if the car loan interest is higher, then the CDs are losing me money. If it is lower, then the CDs are a net gain over paying off the loan.
I do not currently have a car loan, but when I buy my next car, that will be my rule.
but was feeling some remorse and the local credit union was offering a 1.9% loan on it and OP was asking if it was a good idea.
I think that a loan of the same interest rate would be very difficult to get for a paid off vehicle rather than financing a new purchase. Current home equity rates for example are 4.5%.
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