Link to discussion.If the decision is close: If the decision is close, it is likely to be better to keep the loan. One reason is that you can refinance your loan if interest rates fall, so the effective cost of the loan to you could be slightly less than it's interest rate. For comparison, the Treasury cannot refinance its bonds so it can not take advantage of lower rates. Most municipal bonds have only limited call provisions. In addition, if the choice is between investing in a 401(k) or IRA and paying down the loan, investing in the 401(k) or IRA will give you more tax-deferred investments, which will remain valuable even after you have paid off the loan.
I was going to change that section because I didn't necessarily think that paying down loans should be forgone for purchasing bonds when the decision is close, but I wanted to come to a consensus on here before doing anything. My original thought was that getting yourself out of debt is most of the time the best decision because it reduces your risk, is a guaranteed, tax-free investment, in addition to psychological factors.
The reason as far as I can gather, for purchasing bonds, if the decision is close, could be illustrated in the following example:
If the rates are close, there may still be an advantage in keeping the loan due to changing rates. Let's assume you have $10,000 to either pay down a 5% loan, or invest in a 5% treasury bond. If rates fall to 2% next year, for example, and you had paid off the loan, you are stuck buying treasury bonds at 2% in the future. However, if you had bought treasury bonds, then you may be able to refinance your 5% loan at 2%, and are also holding a 5% treasury bond.
Is my example above correct? What do others think is the best way to present the information?
Also can others explain the muni-bonds and call-provisions?
Let's try to keep the discussion focused on just that aspect of paying loans vs. investing and how it relates to the best way to present it on the wiki, not necessarily the topic in general, please.
Mods can move this to another forum if that's more appropriate.