Car Loan pay off or VTSAX

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Abk911
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Car Loan pay off or VTSAX

Post by Abk911 »

Dear Friends:

What do you advise on below situation:

Car loan at 3.74 % and 45 months to go.
Cash pay off is 28025
per month current payment is 667

Should I pay off or invest 28000 in VTSAX curretnly 28k is in ally savings 1.6 pct
Unladen_Swallow
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Re: Car Loan pay off or VTSAX

Post by Unladen_Swallow »

Pay off car loan. This is no contest.
"I think it's much more interesting to live not knowing than to have answers which might be wrong." - Richard Feynman
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anon_investor
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Re: Car Loan pay off or VTSAX

Post by anon_investor »

Unladen_Swallow wrote: Fri Feb 21, 2020 2:53 pm Pay off car loan. This is no contest.
+1. Although a better question is why do you even have such a large car loan. :oops:
HomeStretch
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Re: Car Loan pay off or VTSAX

Post by HomeStretch »

Pay off loan and promise yourself to only pay cash going forward for vehicle purchases.
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ruralavalon
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Re: Car Loan pay off or VTSAX

Post by ruralavalon »

In my opinion, pay off the 3.74% car loan.
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PackersFan12
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Re: Car Loan pay off or VTSAX

Post by PackersFan12 »

I have a similar situation, though my car loan is ~$6,400 at 3.24% interest. I'm making the monthly payments of $280 per month, though I wonder if I should just try to pay it off or continue to invest in Roth IRA, HSA, 457 Roth...etc.
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1789
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Re: Car Loan pay off or VTSAX

Post by 1789 »

Pay off car loan
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blackholescion
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Re: Car Loan pay off or VTSAX

Post by blackholescion »

Are we all pretending that stocks won’t return 3.75% over the next 45 months? Even with a pull back, you should still see those numbers. Regardless, if that 28k is earmarked for something, get it out of the 1.6% account ASAP.
DesertDiva
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Re: Car Loan pay off or VTSAX

Post by DesertDiva »

ruralavalon wrote: Fri Feb 21, 2020 2:56 pm In my opinion, pay off the 3.74% car loan.
+1
HomeStretch wrote: Fri Feb 21, 2020 2:55 pm Pay off loan and promise yourself to only pay cash going forward for vehicle purchases.
+1
bryanm
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Re: Car Loan pay off or VTSAX

Post by bryanm »

To those posters suggesting paying off the loan: is the advice the same if OP has a mortgage at 3.74%? That is, should new funds go to pay off the mortgage before being invested in stocks? If the answer is different, why?

(For simplicity, let's assume that my hypothetical OP, like the vast majority of Americans, takes the standard deduction. Therefore no tax advantage for the mortgage interest.)
17outs
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Re: Car Loan pay off or VTSAX

Post by 17outs »

I think this is less of a which investment is better type of question and more of a behavioral shift. I choose to have no debt. After this decision was made I can invest heavily and get great satisfaction from the gains and reaching my goals. Sort of like if you were saving for three things at the same time and it would take longer than if you have saved for 1 thing until you got it and then moved on the second and then the third.

Debt is a mindset. Once you choose to eliminate it you can truly reach to the sky for your financial goals while having 0 monkeys on your back holding you down.
Trader Joe
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Re: Car Loan pay off or VTSAX

Post by Trader Joe »

Abk911 wrote: Fri Feb 21, 2020 2:47 pm Dear Friends:

What do you advise on below situation:

Car loan at 3.74 % and 45 months to go.
Cash pay off is 28025
per month current payment is 667

Should I pay off or invest 28000 in VTSAX curretnly 28k is in ally savings 1.6 pct
I would first pay off this debt asap.
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anon_investor
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Re: Car Loan pay off or VTSAX

Post by anon_investor »

blackholescion wrote: Fri Feb 21, 2020 4:56 pm Are we all pretending that stocks won’t return 3.75% over the next 45 months? Even with a pull back, you should still see those numbers. Regardless, if that 28k is earmarked for something, get it out of the 1.6% account ASAP.
I am guessing you were no investing from 2001 to 2009?
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BolderBoy
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Re: Car Loan pay off or VTSAX

Post by BolderBoy »

Abk911 wrote: Fri Feb 21, 2020 2:47 pmShould I pay off or invest 28000 in VTSAX curretnly 28k is in ally savings 1.6 pct
Some time back a wise BH guru suggested that one way to make the decision is this:

Would I take out a loan for [fill in your auto loan info] in order to buy VTSAX?

It is usually not a good idea to take out a loan in order to invest in the market.
"Never underestimate one's capacity to overestimate one's abilities" - The Dunning-Kruger Effect
Unladen_Swallow
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Re: Car Loan pay off or VTSAX

Post by Unladen_Swallow »

All the investing acumen cannot overcome poor behavioural choices.

Living life on credit is a poor behavioural choice.

I don't understand all this unproven and I'll informed slogans of "live on credit and invest it all in stocks". Especially for regular purchases like cars....given there is money to pay it off. And cars are short term loans as well. Stocks can be very volatile in the short term. There is no logic here. If it is too much car is another question that is none of my business, so I won't address it.
"I think it's much more interesting to live not knowing than to have answers which might be wrong." - Richard Feynman
Unladen_Swallow
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Re: Car Loan pay off or VTSAX

Post by Unladen_Swallow »

bryanm wrote: Fri Feb 21, 2020 6:18 pm To those posters suggesting paying off the loan: is the advice the same if OP has a mortgage at 3.74%? That is, should new funds go to pay off the mortgage before being invested in stocks? If the answer is different, why?

(For simplicity, let's assume that my hypothetical OP, like the vast majority of Americans, takes the standard deduction. Therefore no tax advantage for the mortgage interest.)
My advice would be absolutely the same.

In the order I advice:

1. Emergency fund
2. Max tax advantaged space
3. Pay off mortgage

Only then start investing extra money in stocks in Taxable.
"I think it's much more interesting to live not knowing than to have answers which might be wrong." - Richard Feynman
mortfree
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Re: Car Loan pay off or VTSAX

Post by mortfree »

^^^^^

Recipe to become house rich, cash poor.
Unladen_Swallow
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Re: Car Loan pay off or VTSAX

Post by Unladen_Swallow »

mortfree wrote: Fri Feb 21, 2020 7:35 pm ^^^^^

Recipe to become house rich, cash poor.
Perhaps you need more accurate information.
"I think it's much more interesting to live not knowing than to have answers which might be wrong." - Richard Feynman
mortfree
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Re: Car Loan pay off or VTSAX

Post by mortfree »

Unladen_Swallow wrote: Fri Feb 21, 2020 7:41 pm
mortfree wrote: Fri Feb 21, 2020 7:35 pm ^^^^^

Recipe to become house rich, cash poor.
Perhaps you need more accurate information.
Interested in giving me advice?
Age: 42

Taxable
VTI: 30k
Individual stocks: 95k
Un-invested cash: 14k
Upcoming bonus: 10k-12k

Max Roth: 100k balance
Max 401k: 510k balance

EF: 40k cash at 1.5%

Car loan: 5000 at 0.9% 16 payments remain ($300)

Mortgage 180k at 3.875% (target 20 more years after some extra payments). $940 for PI

What should I do?
Unladen_Swallow
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Re: Car Loan pay off or VTSAX

Post by Unladen_Swallow »

I'm just a couple of years older than you (45 soon). I can share with you what I would do if If I were in your shoes:

Pay down mortgage with extra money (car loan will pay off by then on it's own). And this only because you have very little remaining on car loan with an inexpensive rate.

Then I would resume taxable.

We are all a sum of our experiences and personal philosophies combined with certain analytical evaluations. So consider it as you feel appropriate.

We paid off our home at 39. It took some robust single mindedness on my part. We are both 45 and will consider retirement at 50. Our taxable account is a significant portion of our investments currently. We expect it to support us in our early years of retirement.
mortfree wrote: Fri Feb 21, 2020 8:15 pm
Unladen_Swallow wrote: Fri Feb 21, 2020 7:41 pm
mortfree wrote: Fri Feb 21, 2020 7:35 pm ^^^^^

Recipe to become house rich, cash poor.
Perhaps you need more accurate information.
Interested in giving me advice?
Age: 42

Taxable
VTI: 30k
Individual stocks: 95k
Un-invested cash: 14k
Upcoming bonus: 10k-12k

Max Roth: 100k balance
Max 401k: 510k balance

EF: 40k cash at 1.5%

Car loan: 5000 at 0.9% 16 payments remain ($300)

Mortgage 180k at 3.875% (target 20 more years after some extra payments). $940 for PI

What should I do?
"I think it's much more interesting to live not knowing than to have answers which might be wrong." - Richard Feynman
mortfree
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Re: Car Loan pay off or VTSAX

Post by mortfree »

Unladen_Swallow wrote: Fri Feb 21, 2020 8:40 pm I'm just a couple of years older than you (45 soon). I can share with you what I would do if If I were in your shoes:

Pay down mortgage with extra money (car loan will pay off by then on it's own). And this only because you have very little remaining on car loan with an inexpensive rate.

Then I would resume taxable.

We are all a sum of our experiences and personal philosophies combined with certain analytical evaluations. So consider it as you feel appropriate.

We paid off our home at 39. It took some robust single mindedness on my part. We are both 45 and will consider retirement at 50. Our taxable account is a significant portion of our investments currently. We expect it to support us in our early years of retirement.
mortfree wrote: Fri Feb 21, 2020 8:15 pm
Unladen_Swallow wrote: Fri Feb 21, 2020 7:41 pm
mortfree wrote: Fri Feb 21, 2020 7:35 pm ^^^^^

Recipe to become house rich, cash poor.
Perhaps you need more accurate information.
Interested in giving me advice?
Age: 42

Taxable
VTI: 30k
Individual stocks: 95k
Un-invested cash: 14k
Upcoming bonus: 10k-12k

Max Roth: 100k balance
Max 401k: 510k balance

EF: 40k cash at 1.5%

Car loan: 5000 at 0.9% 16 payments remain ($300)

Mortgage 180k at 3.875% (target 20 more years after some extra payments). $940 for PI

What should I do?
Thanks - appreciate the advice.

I had a paid off home at age 39 as well but had to move to a different area unexpectedly 1 year later.

I could pretty much pay this new mortgage off now but would have nothing left in taxable/liquid assets.
Blue456
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Re: Car Loan pay off or VTSAX

Post by Blue456 »

HomeStretch wrote: Fri Feb 21, 2020 2:55 pm Pay off loan and promise yourself to only pay cash going forward for vehicle purchases.
+1
Blue456
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Re: Car Loan pay off or VTSAX

Post by Blue456 »

mortfree wrote: Fri Feb 21, 2020 8:44 pm I could pretty much pay this new mortgage off now but would have nothing left in taxable/liquid assets.
You net worth is still the same.
Triple digit golfer
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Re: Car Loan pay off or VTSAX

Post by Triple digit golfer »

bryanm wrote: Fri Feb 21, 2020 6:18 pm To those posters suggesting paying off the loan: is the advice the same if OP has a mortgage at 3.74%? That is, should new funds go to pay off the mortgage before being invested in stocks? If the answer is different, why?

(For simplicity, let's assume that my hypothetical OP, like the vast majority of Americans, takes the standard deduction. Therefore no tax advantage for the mortgage interest.)
If there are only 45 months left on the mortgage, yes. 3.74% guaranteed 4 years is a good return.

If 20 years left? I wouldn't pay it down, but if I had significantly more in a taxable account than the balance, I would consider paying it off. But I likely would just keep it invested.
sd323232
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Re: Car Loan pay off or VTSAX

Post by sd323232 »

Pay off car!! Debt free life is key to success
mortfree
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Re: Car Loan pay off or VTSAX

Post by mortfree »

Blue456 wrote: Fri Feb 21, 2020 8:47 pm
mortfree wrote: Fri Feb 21, 2020 8:44 pm I could pretty much pay this new mortgage off now but would have nothing left in taxable/liquid assets.
You net worth is still the same.
House rich, cash poor in that case. House is 400k

I am purposely trying to shift my net worth more towards taxable investments and cash on hand.
Unladen_Swallow
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Re: Car Loan pay off or VTSAX

Post by Unladen_Swallow »

mortfree wrote: Fri Feb 21, 2020 8:44 pm
Thanks - appreciate the advice.

I had a paid off home at age 39 as well but had to move to a different area unexpectedly 1 year later.

I could pretty much pay this new mortgage off now but would have nothing left in taxable/liquid assets.
Let what you have in Taxable remain. New extra monies can just go to mortgage. Raises, bonuses, all of it.

You can certainly do it again, or at least reduce the burden of it considerably as you get older. Even halving the number of years is a great benefit in my book.
"I think it's much more interesting to live not knowing than to have answers which might be wrong." - Richard Feynman
Puretaxableindexer
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Re: Car Loan pay off or VTSAX

Post by Puretaxableindexer »

It's best to pay off the car loan, then invest.
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1789
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Re: Car Loan pay off or VTSAX

Post by 1789 »

bryanm wrote: Fri Feb 21, 2020 6:18 pm To those posters suggesting paying off the loan: is the advice the same if OP has a mortgage at 3.74%? That is, should new funds go to pay off the mortgage before being invested in stocks? If the answer is different, why?

(For simplicity, let's assume that my hypothetical OP, like the vast majority of Americans, takes the standard deduction. Therefore no tax advantage for the mortgage interest.)
No matter what stock market does the value of a car decreases over time. The value of a house not always decrease and it gains value over time more or less.So i would not treat them same even with same interest rate debt. A car cannot be an investment.
"My conscience wants vegetarianism to win over the world. And my subconscious is yearning for a piece of juicy meat. But what do i want?" (Andrei Tarkovsky)
bryanm
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Re: Car Loan pay off or VTSAX

Post by bryanm »

1789 wrote: Sat Feb 22, 2020 1:34 am
bryanm wrote: Fri Feb 21, 2020 6:18 pm To those posters suggesting paying off the loan: is the advice the same if OP has a mortgage at 3.74%? That is, should new funds go to pay off the mortgage before being invested in stocks? If the answer is different, why?

(For simplicity, let's assume that my hypothetical OP, like the vast majority of Americans, takes the standard deduction. Therefore no tax advantage for the mortgage interest.)
No matter what stock market does the value of a car decreases over time. The value of a house not always decrease and it gains value over time more or less.So i would not treat them same even with same interest rate debt. A car cannot be an investment.
Yes, but in this case the car loan exists. So we’re not comparing a car to a home as an investment. We’re comparing a car loan to a mortgage. The value of the corresponding asset is irrelevant.
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1789
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Re: Car Loan pay off or VTSAX

Post by 1789 »

bryanm wrote: Sat Feb 22, 2020 1:45 am
1789 wrote: Sat Feb 22, 2020 1:34 am
bryanm wrote: Fri Feb 21, 2020 6:18 pm To those posters suggesting paying off the loan: is the advice the same if OP has a mortgage at 3.74%? That is, should new funds go to pay off the mortgage before being invested in stocks? If the answer is different, why?

(For simplicity, let's assume that my hypothetical OP, like the vast majority of Americans, takes the standard deduction. Therefore no tax advantage for the mortgage interest.)
No matter what stock market does the value of a car decreases over time. The value of a house not always decrease and it gains value over time more or less.So i would not treat them same even with same interest rate debt. A car cannot be an investment.
Yes, but in this case the car loan exists. So we’re not comparing a car to a home as an investment. We’re comparing a car loan to a mortgage. The value of the corresponding asset is irrelevant.
What i meant is when you get rid of the car (which is on a loan) there is zero chance you will pocket money. When you get rid of a house (which is on a loan) there is a high chance you can pocket some money. Hence paying debt with same interest loan for a house vs car is not same thing, imo.
"My conscience wants vegetarianism to win over the world. And my subconscious is yearning for a piece of juicy meat. But what do i want?" (Andrei Tarkovsky)
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grabiner
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Re: Car Loan pay off or VTSAX

Post by grabiner »

bryanm wrote: Fri Feb 21, 2020 6:18 pm To those posters suggesting paying off the loan: is the advice the same if OP has a mortgage at 3.74%? That is, should new funds go to pay off the mortgage before being invested in stocks? If the answer is different, why?

(For simplicity, let's assume that my hypothetical OP, like the vast majority of Americans, takes the standard deduction. Therefore no tax advantage for the mortgage interest.)
The main difference between the two situations is the duration of the loan. Paying down a 3-year car loan gives you a benefit in three years, just as buying a 3-year bond does. Paying down a 15-year mortgage gives you a benefit only in 15 years (or in 10 years if you sell the home 10 years from now). Therefore, it is more attractive to pay down the shorter-term loan at the same rate.

There is also a distinction between paying down a long-term loan and paying it off. If you pay off a 15-year mortgage, this gives you a benefit every month for the next 15 years, which has a 7-year duration. In addition, paying off a loan allows you to reduce your emergency fund.
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grabiner
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Re: Car Loan pay off or VTSAX

Post by grabiner »

bryanm wrote: Sat Feb 22, 2020 1:45 am
1789 wrote: Sat Feb 22, 2020 1:34 am
bryanm wrote: Fri Feb 21, 2020 6:18 pm To those posters suggesting paying off the loan: is the advice the same if OP has a mortgage at 3.74%? That is, should new funds go to pay off the mortgage before being invested in stocks? If the answer is different, why?

(For simplicity, let's assume that my hypothetical OP, like the vast majority of Americans, takes the standard deduction. Therefore no tax advantage for the mortgage interest.)
No matter what stock market does the value of a car decreases over time. The value of a house not always decrease and it gains value over time more or less.So i would not treat them same even with same interest rate debt. A car cannot be an investment.
Yes, but in this case the car loan exists. So we’re not comparing a car to a home as an investment. We’re comparing a car loan to a mortgage. The value of the corresponding asset is irrelevant.
This is the correct way to view it. A loan is an obligation to pay a certain number of dollars at a certain future date, and paying down a loan eliminates some of those payments. It is irrelevant what the loan is secured by, unless you default on it.

Suppose you have equal amounts owed on a car loan at X% and a mortgage loan at Y% with the same remaining term. If you pay one loan off now, you eliminate all of the payments on it, but must continue to make the payments on the other loan. Thus, if Y is greater than X, it is better to pay off the mortgage than the car loan, because it is guaranteed to save you larger future payments.
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