Financial Question

[Mahoney]

I'm looking for some advice on what to do with my car payment. Is it worth to pay off a 55k with 3.4% interest car note completely (save about $860/month by doing so) or invest (is it possible to make enough money in 5years of investment with that money that it would be worth it)

30year old, make about 100k/year, has extra money a month to save as is with car payment/mortgage.

Looking to sell current house and buy another next spring (thinking of having 55k debt in my name when buying next house)

This would also deplete most of my savings but would probably be able to put away almost 2k in the bank a month to save once the truck is paid off.

Or would it make more sense to put 20k down on the loaner and refinance/ save about $300 month by doing so and not depleting most of my savings?

 

[squeak]

I'm looking for some advice on what to do with my car payment. Is it worth to pay off a 55k car note completely (save about $860/month by doing so) or invest (is it possible to make enough money in 5years of investment with that money that it would be worth it)

30year old, make about 100k/year, has extra money a month to save as is with car payment/mortgage.

Looking to sell current house and buy another next spring (thinking of have 55k debt in name when buying next house)

This would also deplete most of my savings but would probably be able to put away almost 2k in the bank a month to save once the truck is paid off.

Only the interest rate can answer that question: It depends on how you plan on investing and what the rate of return is.

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[squeak]

Only the interest rate can answer that question: It depends on how you plan on investing and what the rate of return is.

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Just read the last part again. Also depends on home values in your area. Need to put down at least 20 percent to avoid pmi.

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[FastEddie]

Only the interest rate can answer that question: It depends on how you plan on investing and what the rate of return is.

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yes. the exercise is a comparison between what rate of return you would expect to earn over this period vs the interest rate on your loan.

 

[Mahoney]

*edited w/ 3.4% interest on car loan.

 

[jzweedyk]

Normally the bank would look at your monthly obligations. So the $ 860 a month would be looked at from that perspective. They may not care that you have the cash in the bank to pay it off. So it depends on how much a month would the new house be, and would you qualify if you had the truck payment. I suggest you talk it over with the bank or who ever will mortgage your new house.

As far as the interest goes, your probably (long term) would make more in a index fund, but you would have the payment to contend with.

 

[Simplejack]

rates are still too low to be using your cash. I say keep your cash. Imo basically the bank is your investor for the truck loan so why put your cash into something that will depreciate? you will be losing money in long term. bank will be making a few grand. 3.4 % is pretty good 90% or higher of your payment is probably going to principle. Round your payment up to 1k and pay over. I See rich people all time using other people's $$$ to invest and not there own. their money is making money. wait until you are about to get your next house then you can play with the numbers with the lender and you will have to flexibility to put down what cash u need to for down payment or if your debt to income is too high. just my .02cents but I'm not very bright.

 

[Mahoney]

I appreciate all the feedback, it all makes sense. Thank you

 

[zombiekiller]

do you know what your "cost of cash" is?

For instance: let's say that your investment strategy nets you an average of 7-10% in annual rate of return.

In this scenario, your cost of cash would be 10% of the total that you'd expend to pay off the truck ( annually).

Therefore after a 5 year term of inspection on your 55K, your cost of cash looks like: $33,578.05 (10% profit every year for 5 years) - $9,350 ( estimated interest on a 55k loan @ 3.4% APR for 5 years) = $24,228.05.

Now, based on your earnings, $25K over 5 years isn't anything to sneeze at.

I will also say that I'd rather have the extra 25K towards the downpayment on the house, based on the recent tax changes, the interest you're paying on a mortgage isn't the 30 cent dollars that it was pre-trump. I'd also rather have the monetary parachute that is usually a good idea within the first 3 years of home ownership.

If you came in here saying that your interest rate was 8-10%, then the entire conversation changes.

 

[sdorn]

Generally I agree you can probably find better uses for cash than to pay down debt at 3.4% unless you just need to lower your total outstanding debt for some reason. It's also a great idea to have a good sized emergency fund, so all in all probably best not to use a large chunk of your savings to retire that loan.

However, when doing the comparisons above you should make sure you are comparing apples to apples. Paying off non-mortgage debt that costs you 3.4% interest nets you a risk free, tax adjusted return of 3.4%. You aren't going to find any risk free investment that nets you a 3.4% tax adjusted return.

Instead you are going to be looking at investments that do carry some risk, potentially even risk of losing principal, and you are likely going to be paying taxes on those returns. Calculating the tax adjusted return is pretty easy, just reduce the return by your marginal tax rate (e.g. if you get a 10% return pre-tax and have a 25% marginal tax rate, you are really getting a 7.5% tax adjusted return). The calculation could be further complicated by whether the investment qualifies for long-term capital gains, or could potentially be exempt from federal and/or state taxes (or you may live in a state without an income tax).

As an example, interest on a $55k loan at 3.4% is about $1,870. You need after-tax money to pay for that, so assuming a 25% marginal tax rate you need to earn about $2493 to have $1,870 left after taxes. If you invest that $55k you need at least a 4.6% return to generate the $2493 ($1,870 after taxes) needed to cover the interest. That is just to break even. As of today, a 30 year treasury security pays slightly over 3.1% (or about 2.325% after tax assuming the same 25% marginal tax rate), so that is the highest risk free return available.

Average stock market returns are about 10% (or about 7.5% after tax), but that is over something like a 20 year period. Anything shorter than that and there is a much higher risk of loss. You could have a great year or two and do way better than 10% or you might have a bad year or two and lose 10% or more.