POLL: Prepay car loan (1.75%)

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Prepay Loan (1.75% for 3 years) or Invest

Prepay Loan
22
42%
Invest
31
58%
 
Total votes: 53

ThankYouJack
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POLL: Prepay car loan (1.75%)

Post by ThankYouJack » Fri Jan 30, 2015 9:42 am

Say you have a $30k car loan for 3 years at 1.75% and you were just given $30k in cash. What would you do?

BogleBoogie
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Re: POLL: Prepay car loan (1.75%)

Post by BogleBoogie » Fri Jan 30, 2015 9:48 am

Guaranteed 1.75% return for 3 years ain't bad. My savings account is currently giving me about .05%.

zimmer0
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Re: POLL: Prepay car loan (1.75%)

Post by zimmer0 » Fri Jan 30, 2015 10:11 am

half n half :sharebeer

WHL
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Re: POLL: Prepay car loan (1.75%)

Post by WHL » Fri Jan 30, 2015 12:10 pm

Pay it off

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Aptenodytes
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Re: POLL: Prepay car loan (1.75%)

Post by Aptenodytes » Fri Jan 30, 2015 12:31 pm

BogleBoogie wrote:Guaranteed 1.75% return for 3 years ain't bad. My savings account is currently giving me about .05%.
To answer the question as posed we need to assume that the poster has his financial life in order and does not need to divert the $30K to an emergency fund. Therefore the comparison to a savings account rate is not really relevant.

Compared to an average portfolio return, the prepay option fails. Only the rarest of highly conservative portfolios have expected returns so low.

But suppose you want to depress your bond holdings for three years as an offset for paying off this loan early. Then you need to compare to your expected bond returns, not total portfolio returns. For many people, that comparison will suggest the prepayment makes sense. E.g. if you are in intermediate treasuries, you are getting about 1.2%.

But before you move so fast, think about:

Will you really carry out the offset and stick with it? You'd be increasing your equity exposure each month, by an amount equal to your former car payment. Then at the end of three years shift again to your former AA. Will you really do that? Seems like a big hassle for a tiny benefit. Maybe you'll say -- too complicated, I'll just invest the savings each month according to my AA. But then you are in a situation where you need to compare the loan rate to the overall portfolio return, and that doesn't look so good.

I voted to keep the loan as is.

dabretty
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Re: POLL: Prepay car loan (1.75%)

Post by dabretty » Fri Jan 30, 2015 12:57 pm

I'd invest (keep the loan). For the same reason I'm in no rush to pay off a fixed mortgage @ 3.25%. But everybody has their own opinion in this area.

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BrandonBogle
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Re: POLL: Prepay car loan (1.75%)

Post by BrandonBogle » Fri Jan 30, 2015 12:59 pm

Personally, I value the liquidity given the low rate. I have the same opinion about the 2.875% prepay mortgage thread. If the proceeds would instead go to a relatively-safe asset that could be liquidated quickly, I would put the money there instead (in my personal scenario, that is Vanguard's LT Muni Bond Fund).

That said, if the Op (or whomever is considering this) has their life in order and ample liquidity, while I would still do the above, my advice is to do it either way that makes you comfortable. With that given, the financial ramifications either way are too small to honestly care one way or the other (IMO).

And to the crowd asking whether if you did NOT have the loan and could get it, would you take it and invest it -- for me, yes. That is exactly what I did with my car. I took a no-loan car, got a 1% loan on it, and invested the funds. Mom took a house, got a 2.875% mortgage on it, and invested the funds prior to retirement to allow a liquidity cushion.

DTSC
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Re: POLL: Prepay car loan (1.75%)

Post by DTSC » Fri Jan 30, 2015 1:00 pm

I try not to borrow to buy a depreciating asset. So I'd pay it off. If you don't have a loan, you can raise your car insurance deductible and save on the premiums too.

ThankYouJack
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Re: POLL: Prepay car loan (1.75%)

Post by ThankYouJack » Fri Jan 30, 2015 1:14 pm

Thanks for the replies. I'm planning to prepay because it's only a 3 year loan and I don't think the investment gains will be that significant. Let's say this:

I put the $30,000 towards an investment. It returns 4% annually. I need to make the $856.01 monthly payments out of this investment for 3 years. How much left would I have at the end of three years?

Gropes & Ray
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Re: POLL: Prepay car loan (1.75%)

Post by Gropes & Ray » Fri Jan 30, 2015 2:00 pm

I voted to invest, but then I remembered that I paid off a 1.49% loan 18 months early because I wanted to free up the cash flow. There was no safe investment to keep the money in for 18 months that paid more than 1.49%

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Aptenodytes
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Re: POLL: Prepay car loan (1.75%)

Post by Aptenodytes » Fri Jan 30, 2015 3:28 pm

ThankYouJack wrote:Thanks for the replies. I'm planning to prepay because it's only a 3 year loan and I don't think the investment gains will be that significant. Let's say this:

I put the $30,000 towards an investment. It returns 4% annually. I need to make the $856.01 monthly payments out of this investment for 3 years. How much left would I have at the end of three years?
Huh? Why did you ask for advice then? Do you know that most of our portfolios are up about 30% the last three years?

ThankYouJack
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Re: POLL: Prepay car loan (1.75%)

Post by ThankYouJack » Fri Jan 30, 2015 3:41 pm

Aptenodytes wrote:
ThankYouJack wrote:Thanks for the replies. I'm planning to prepay because it's only a 3 year loan and I don't think the investment gains will be that significant. Let's say this:

I put the $30,000 towards an investment. It returns 4% annually. I need to make the $856.01 monthly payments out of this investment for 3 years. How much left would I have at the end of three years?
Huh? Why did you ask for advice then? Do you know that most of our portfolios are up about 30% the last three years?
Well if my math question comes out way ahead to invest, that would change my mind to invest. I'm using 4% roughly for expected returns - http://www.bogleheads.org/wiki/Historic ... ed_returns

My portfolio has done great too in the last 3 years, but I realize it could go down just as much too.

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Aptenodytes
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Re: POLL: Prepay car loan (1.75%)

Post by Aptenodytes » Fri Jan 30, 2015 3:44 pm

ThankYouJack wrote:
Aptenodytes wrote:
ThankYouJack wrote:Thanks for the replies. I'm planning to prepay because it's only a 3 year loan and I don't think the investment gains will be that significant. Let's say this:

I put the $30,000 towards an investment. It returns 4% annually. I need to make the $856.01 monthly payments out of this investment for 3 years. How much left would I have at the end of three years?
Huh? Why did you ask for advice then? Do you know that most of our portfolios are up about 30% the last three years?
Well if my math question comes out way ahead to invest, that would change my mind to invest. I'm using 4% roughly for expected returns - http://www.bogleheads.org/wiki/Historic ... ed_returns

My portfolio has done great too in the last 3 years, but I realize it could go down just as much too.
You can't know the future returns so you go with expectations. If you make all your investment decisions in this way you end up ahead at the end of the day. But if for each one you say "eh, not that big a deal, I'll go with the lower returns" then at the end of the day you may end up far far behind.

ThankYouJack
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Re: POLL: Prepay car loan (1.75%)

Post by ThankYouJack » Fri Jan 30, 2015 4:05 pm

Aptenodytes wrote:
ThankYouJack wrote:
Aptenodytes wrote:
ThankYouJack wrote:Thanks for the replies. I'm planning to prepay because it's only a 3 year loan and I don't think the investment gains will be that significant. Let's say this:

I put the $30,000 towards an investment. It returns 4% annually. I need to make the $856.01 monthly payments out of this investment for 3 years. How much left would I have at the end of three years?
Huh? Why did you ask for advice then? Do you know that most of our portfolios are up about 30% the last three years?
Well if my math question comes out way ahead to invest, that would change my mind to invest. I'm using 4% roughly for expected returns - http://www.bogleheads.org/wiki/Historic ... ed_returns

My portfolio has done great too in the last 3 years, but I realize it could go down just as much too.
You can't know the future returns so you go with expectations. If you make all your investment decisions in this way you end up ahead at the end of the day. But if for each one you say "eh, not that big a deal, I'll go with the lower returns" then at the end of the day you may end up far far behind.
Well, you will end up ahead at the end of the day if your expectations are correct :)
But I'm wondering if there is a 4% return how much ahead?

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BrandonBogle
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Re: POLL: Prepay car loan (1.75%)

Post by BrandonBogle » Fri Jan 30, 2015 4:10 pm

DTSC wrote:I try not to borrow to buy a depreciating asset. So I'd pay it off. If you don't have a loan, you can raise your car insurance deductible and save on the premiums too.
Agree on the sentiment, but the devil is always in the details, no? We are not necessarily talking about borrowing to afford buying the asset. The purchase and the loan are two separate transactions since the Op has the fund to pay off the loan (and thus, to have bought the car cash). So while I agree you should not borrow to buy a depreciating asset, this is not the Op's scenario -- still good advice for others who may not be in the same scenario though!

As for the car insurance change, again, it depends on the details. My previous auto loan on the same vehicle (again, I could have paid cash for the car, but the loan at 0% was when I was getting 6%+ on CDs, so it didn't make sense to pay cash) was with insurance that had a $1,500 deductible. I have since lowered the deductible to $500 b/c at my last policy renewal (last week actually), it was a grand total of $25/year difference for a $1,500 deductible to a $500 deductible for me. So again, generally good advice, but the specifics of the Op's situation is key.

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nisiprius
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Re: POLL: Prepay car loan (1.75%)

Post by nisiprius » Fri Jan 30, 2015 5:00 pm

Image
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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Re: POLL: Prepay car loan (1.75%)

Post by Meg77 » Fri Jan 30, 2015 5:10 pm

Both. I didn't answer the poll because I think you should pay off the loan in full and then DCA whatever the payment was into a brokerage account (or retirement account if you aren't maxing those out). So essentially I think yes to paying off the car but also yes to investing an extra $30K - just over time versus lump sum.
"An investment in knowledge pays the best interest." - Benjamin Franklin

DVMResident
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Re: POLL: Prepay car loan (1.75%)

Post by DVMResident » Fri Jan 30, 2015 5:43 pm

I vote for invest.

We really don't have a complete picture, but in almost all scenarios you'll make more investing. Heck, even the conservative vehicles like iBonds are paying 1.48% and EE held to maturity give 3.5% (granted, longer duration).

If you have any unfilled tax advantage space left -- no brainier, take the loan, and fill the tax advantaged space. If you have no space left, you could either way. Personally, I'd take the loan. Whatever you're comfortable with and matches your behavioral spending patterns.

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avenger
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Re: POLL: Prepay car loan (1.75%)

Post by avenger » Fri Jan 30, 2015 6:19 pm

I'd pay cash.

My former self took a loan. But he also didn't have the cash.
cheers ... -Mark | "Our life is frittered away with detail. Simplify. Simplify." -Henry David Thoreau | [3 fund portfolio: VTI, VXUS, SV fund (yield 3.01%)]

Triple digit golfer
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Re: POLL: Prepay car loan (1.75%)

Post by Triple digit golfer » Fri Jan 30, 2015 6:23 pm

Gropes & Ray wrote:I voted to invest, but then I remembered that I paid off a 1.49% loan 18 months early because I wanted to free up the cash flow. There was no safe investment to keep the money in for 18 months that paid more than 1.49%
How does paying off a loan early free up cash flow?

EnjoyIt
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Re: POLL: Prepay car loan (1.75%)

Post by EnjoyIt » Fri Jan 30, 2015 6:58 pm

To answer your question, I think I need more information. Are you maximizing all your tax deferred space? How old are you? Do you have other debt? How old is the car? How long do you plan on keeping the car? If you paid it off, will you save up another 30K to purchase your next car, and when do you plan on that purchase?

Math says to invest.
Psychology says to pay of your debt.

My belief in the order of money allocation is:
1) high interest rate debt 7% and above
2) tax deferred space
3) HSA
4) back door Roth
5) mid interest rate debt 4-7%
6) taxable investment account to be able to retire at a certain date and 4% withdrawal rate (early retirement goal)
7) debt below 4% or extra savings depending on how I feel. I am starting to think maybe splitting the money based on my asset allocation is the right way to go I am 70/30 so if I have extra cash it should be placed 70/30 stock/bonds or in this case stocks/debt.

Another consideration is how secure your job is over the next 5 years. if you are a nurse or physician, you are almost guaranteed work somewhere. If you are currently in the oil and gas industry maybe not so much. The more secure the job, the more comfortable you can sit with low interest rate debt.

At the end of the day, there is no wrong answer.

DVMResident
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Re: POLL: Prepay car loan (1.75%)

Post by DVMResident » Fri Jan 30, 2015 7:13 pm

EnjoyIt wrote: My belief in the order of money allocation is:
1) high interest rate debt 7% and above
Shouldn't this be relative to the prevailing interest rates?

In the late 70s-mid-80's, I would load up on as much 7% debt as possible and use the debt to by T-notes/CDs. Easy, free money. In the 2010's, I'd avoid 7% debt like the plague.

The loan proposed by the OP is very close to risk free rates. Hence, the large number of ambivalent opinions plus the obligatory BH debt aversion.

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Toons
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Re: POLL: Prepay car loan (1.75%)

Post by Toons » Fri Jan 30, 2015 7:55 pm

Pay it off be done with it. :happy
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

523HRR
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Re: POLL: Prepay car loan (1.75%)

Post by 523HRR » Fri Jan 30, 2015 8:21 pm

DTSC wrote:I try not to borrow to buy a depreciating asset. So I'd pay it off. If you don't have a loan, you can raise your car insurance deductible and save on the premiums too.
+1

tj
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Re: POLL: Prepay car loan (1.75%)

Post by tj » Fri Jan 30, 2015 10:12 pm

Absolutely no reason to pay off a dirt cheap rate such as this.

I considered the same as you 2 years ago.

instead, I just opened a BBVA Buld My savings account and earn 5%/year for the past 2 years, but I have a very good cash flow cushion.

http://thefinancebuff.com/bbva-compass- ... 7-apy.html


And for the record, my 2011 Honda Civic with 50k miles is still worth at least double the outstanding loan balance, so I don't really understand the 'depreciating assets' argument.

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grabiner
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Re: POLL: Prepay car loan (1.75%)

Post by grabiner » Fri Jan 30, 2015 10:44 pm

Effectively, you are buying 36 CDs, maturing in 1 to 36 months, each with a 1.75% return; this is an average duration of 18 months. 1.75% risk-free and tax-free with an 18-month duration is a great deal.

The only reason not to do it is that you might have some better use for the money that was worth continuing to borrow. For example, if you aren't contributing enough to your 401(k) to get the full employer match, you should do that instead of paying off the debt.
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Sheepdog
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Re: POLL: Prepay car loan (1.75%)

Post by Sheepdog » Fri Jan 30, 2015 10:58 pm

Williams Shakespeare
Neither a borrower nor a lender be;
For loan oft loses both itself and friend,
And borrowing dulls the edge of husbandry.
This above all: to thine own self be true,
And it must follow, as the night the day,
Thou canst not then be false to any man.


Thank you, Bill. Good advice.

Pay off the debt!!
It's not what you gather, but what you scatter which tells what kind of life you have lived---Helen Walton

john94549
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Re: POLL: Prepay car loan (1.75%)

Post by john94549 » Fri Jan 30, 2015 11:23 pm

It's always impossible to tell, but the odds are a consumer debt is less attractive than a home mortgage or a HELOC. I'd pay it off and go for a long walk. This is not a huge issue.

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grabiner
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Re: POLL: Prepay car loan (1.75%)

Post by grabiner » Fri Jan 30, 2015 11:40 pm

john94549 wrote:It's always impossible to tell, but the odds are a consumer debt is less attractive than a home mortgage or a HELOC. I'd pay it off and go for a long walk. This is not a huge issue.
The reason it is less attractive is that it is short-term. If you choose not to pay down your 15-year mortgage, you keep the right to continue to borrow at that rate for 14 more years, even if interest rates rise. If you choose not to pay down your 3-year car loan, you won't be able to borrow at a low rate beyond those 3 years unless rates are still low. Thus, I would recommend paying down this car loan, but would not recommend paying down a 15-year mortgage at the same after-tax rate.
Wiki David Grabiner

EnjoyIt
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Re: POLL: Prepay car loan (1.75%)

Post by EnjoyIt » Sat Jan 31, 2015 2:43 am

DVMResident wrote:
EnjoyIt wrote: My belief in the order of money allocation is:
1) high interest rate debt 7% and above
Shouldn't this be relative to the prevailing interest rates?

In the late 70s-mid-80's, I would load up on as much 7% debt as possible and use the debt to by T-notes/CDs. Easy, free money. In the 2010's, I'd avoid 7% debt like the plague.

The loan proposed by the OP is very close to risk free rates. Hence, the large number of ambivalent opinions plus the obligatory BH debt aversion.
You are correct and I am taking today's rates into account. I can't guess the future, and the past is over with. All I have is the present rates to consider.

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