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Is there a financial rule of thumb on when to pay off a loan versus keep it because the loan has a low interest rate? I have about $5,000 left on an auto loan with a 2.84% rate. There doesn't seem to be outstanding investment activity right now, which makes it even more tempting to pay it off. The alternative to paying it off would be to dump that money in my Roth.
There is no danger that I will lose my job anytime soon, so that isn't an issue. Do you think a lot of the satisfaction from being free of cheap debt is more psychological rather than logical?
Is there a financial rule of thumb on when to pay off a loan versus keep it ...
There are many. The more sensible tend toward secured, appreciating assets.
But even there is still requires having the NET income required to manage comfortably.
Quote:
I have about $5,000 left on an auto loan with a 2.84% rate.
The alternative to paying it off would be to dump that money in my Roth.
How old? How many miles? How much $$ in servicings to this point? How long until it's trade time again?
Yes, I find being debt free is more psychological. I purchased a rental property almost a year ago, it cost me $20k out of pocket but is returning $700 in cash flow every month, mortgage gets paid down $100 every month house appreciates in value and huge tax advantages.. I could have simply put that $20k toward my current 3.5% primary mortgage but nothing would have changed in my life.. the rental was a far better use of funds.
You could even look at doing something outside the box. Look on Craigslist or Facebook marketplace for a great deal on lawn equipment or a car or something, go to an auction and buy some farm equipment cheap. Clean it up a bit, take great pictures and repost it online. It is very easy turning $1,000 into $2,000 each month. Heck I turned $40 into $500 last week off 1 item.
With that said, the people who follow David Ramsey and live like they’re broke for 4 years to pay off every ounce of debt they have all seem pretty happy about the decision.
Is there a financial rule of thumb on when to pay off a loan versus keep it because the loan has a low interest rate? I have about $5,000 left on an auto loan with a 2.84% rate. There doesn't seem to be outstanding investment activity right now, which makes it even more tempting to pay it off. The alternative to paying it off would be to dump that money in my Roth.
There is no danger that I will lose my job anytime soon, so that isn't an issue. Do you think a lot of the satisfaction from being free of cheap debt is more psychological rather than logical?
There are several factors at play here.
1. Interest rate
2. Alternate use of funds -save/invest/spend/give/other. You MUST be BRUTALLY HONEST about this one. A lot of people say they will invest but then just spend the money. In such cases it is usually better to just pay the debt off. This is particularly tricky for financial gurus who are married to a spend-happy individual. Paying debt off may keep funds away from a “shopper”.
3. Investment asset allocation. If you have bonds earning 2.5% (even if this is only part of a “ balanced” fund or portfolio), it makes no sense to carry a 2.84% debt in order to retain investment potential. Go more aggressive with the portfolio and use your “bond” money to pay off the debt.
4. Voluntary and involuntary liquidation. Having liquid assets has the advantage of giving you flexibility if you need the money sooner than expected. However, it also leaves you vulnerable to a forced liquidation in the event of claiming certain government benefits, bankruptcy, or a lawsuit.
5. Simple personal preference. If you don’t like paying bills or having debt hang over your head, just pay it off
Can your investments return significantly more than 2.84%? Most of us do considerably better than that. Historical averages for a moderately allocated portfolio have been in the range of about 6% inflation adjusted or over 8% non inflation adjusted.
Your comments on investing are more than worrisome. You seem to be expecting some sort of outstanding opportunity right now. That is not an outlook consistent with long term investing.
Can your investments return significantly more than 2.84%? Most of us do considerably better than that. Historical averages for a moderately allocated portfolio have been in the range of about 6% inflation adjusted or over 8% non inflation adjusted.
Your comments on investing are more than worrisome. You seem to be expecting some sort of outstanding opportunity right now. That is not an outlook consistent with long term investing.
Of course I've done significantly better than 2.84% since I've been investing, which is one of the reasons I asked this question. All of my investing has been focused on long-term.
My question basically comes down to opportunity cost of paying off the loan versus paying the installments with a relatively low interest rate and having more cash on hand. You are right that long-term I will make more than the interest rate by investing. But with the economy slowing down, it could be a while before there are significant gains again. So yes, while investing is long-term, the auto loan is more of a short-term consideration.
The more I think about it, the more I'm inclined to just pay it off. Given the recent market, I dont see that money as doing a whole lot as an investment during the amount of time left on the loan. Most likely I will make more on saved interest than gains in investing from that same period.
The more I think about it, the more I'm inclined to just pay it off. Given the recent market, I dont see that money as doing a whole lot as an investment during the amount of time left on the loan. Most likely I will make more on saved interest than gains in investing from that same period.
We bought our house for cash 18 months ago. Paid off my 1.9% car loan last month. We are totally debt free. Maybe not the best/smartest use of our money but there is great psychological satisfaction in not owing anyone a dime. We are retired and in more of a “spend down” mode rather than saving.
Yeah exactly, it depends to me on allocation and situations much more than some mindless zombie appeal to “historical 6-8% returns” that aren’t based in any actual reality of short term investing. There’s more value to me in paying off a 2.95% mortgage than there is throwing more money into investments because I have already 97% of my money in long term appreciating assets and investments. That’s quite enough. Money off the top goes to cash first, then to paying off the mortgage, then to stocks last just to diversify. I don’t care if stocks may or may not overall have 6% gains, I’ll take the immediate savings to my monthly expenses because that’s the guaranteed result. I’d do the same thing if I were you OP, pay it off.
Location: Was Midvalley Oregon; Now Eastside Seattle area
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My RoT: approx and depends on the times, investments need to get 300-500 basis pt s above interest of debt rate.
OK you have a depreciating product,
investments may be peaking now,
Roth investments need to show a gain early on, else a a tax efficient fund or trading in taxable may be better.
JMO. YMMV. Retired.
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