When is money "free enough"?

[Nutria]

Obviously there's no economic reason to quickly pay off a 0% loan. But what about 1%, 2% (like my car loan), 3%, 4%, even 5 or 6%, etc.

When at what point to you think in practical terms that it's better to be liquid than to quickly pay off a low interest loan?

[sv2007]

It would depend on your particular situation.

Different people has different risk tolerances, i.e. same situation is viewed differently in terms of risk/comfort level. The situation is different too: job industry/performance (in-demand with good growth potential); investment acumen and amount of diversified investments, so many situations. Also, not just the individual; there's the external parts too, today's overall low interest rates makes even a 2% CD look golden (try that in 1993, when I hold CDs so I know the rates), but will interest stay this low? for how long?

So, it cannot be a simple advice of x%.

Now, let's assume that there is no personal situation risks.

Say you dump your $1 into repaying a long term x% debt; later (as in my national debt thread, 97gun's hyperinflation becomes a reality, it would be great to not have paid the debt so early). At today's interest rate, is it more likely for the inerest to rise or fall (to 0?) in the future? But that money really should also be invested outside anyway, so you are getting more than just counting on fed raising rates.

Once you add personal situation, then if the above makes you 50/50, then this easily pushes you into keeping $ outside.

[sv2007]

oh , BTW, I don't think money is ever free even at 0% unless there's no inflation and I live forever. I think this is an important concept to building wealth.

[corn18]

Like previous posters have mentioned, it depends. If you take a loan at 0% and don't have a lifestyle imbalance issue, then mathematically, that is the better option. But if you take a 0% loan and buy a car that you can't / shouldn't afford, then that is a bad idea. If you could pay cash and take the 0% loan instead and don't spend the cash on something silly, then that makes sense.

As for where the cutoff is, who knows. I would say <2% is ok because as time goes by, that 2% is essentially offset by inflation so you are actually paying 0%. If you have a 0% loan, you are paying less than 0% due to inflation. For those that think you pay more for 0%, I haven't found that to be true. I negotiated my last car as a cash deal, settled on a price and then asked them what they could do for financing. They could only do 1.9% but they gave me an additional $750 off the price of the car if I financed through them. So I did that. Saved $750 and then paid the loan off 13 days later (that cost me $14 in interest).

2 years ago, I paid off $100k of car loans that were all less than 1.9%. I am not wise with my money so the lack of liquidity was a good thing for me. Math said I should have at least carried the 0% loans, but I didn't trust myself to not spend the cash I had on hand to pay the loans off. Has been great for me.

[disneysteve]

When at what point to you think in practical terms that it's better to be liquid than to quickly pay off a low interest loan?

It really depends on your position. Do you have an adequate EF? Are you fully funding retirement? Any other debts? If you continue to carry the loan, what are you doing with that money instead?

Over the years, I've done it both ways. I've kept low interest loans for the duration and I've paid off low interest loans way early.

I paid off my student loans as quickly as I could (within reason) because I hated having them. From a strictly financial standpoint, it wasn't the best option because I would have made far more money investing those funds but I didn't want to still be paying my own student loans when my daughter was in college.

On the other hand, we've got about $1,500 left on my wife's car loan so we'll have taken about 3 years to repay that.

Part of the decision is driven by the interest rate. Part is driven by your cash situation. Part is driven by your personal feelings about the debt in question.

[97guns]

i just financed 12k on a car for 5 years at 4%, i thought it was a little high for my credit score but took the 5 years anyways. i consider my income as free money and have been spending with little thought lately, kinda like a drug dealer with money easy come easy go

[tripods68]

Ever since we began living a debt free lifestyle, we don't even comtemplate those kinds of trivial decisions anymore we pay for everything now. We don't carry any balance at all ever since we cut off all our credit cards. Our life and decision making if far simpler now more than ever.

Having said that, if you can pay in full do it. But I wouldn't keep it like its some pets you keep for a long time.

[greenskeeper]

even at zero percent I would never purchase a new car

[disneysteve]

even at zero percent I would never purchase a new car

Same here. The problem with new cars isn't the financing. It's the depreciation issue.

[kork13]

I've had a few low-rate loans (1%, 2%, and my mortgage is 2.75%), but I just can't stomach having the loan over my head. I don't necessarily funnel every last dollar to killing off the loans, but I definitely make extra principle payments. Does that make perfect financial sense? Not really... I could invest that extra money & earn way more in returns than I save in interest. But I'm just more comfortable getting out from under the loans.

Even if it were a 0% loan, I'm sure that I would try to let it go to invest elsewhere, but I also know that I would also probably end up prepaying the loan anyway. Long story short -- for me, loaned money can never be "free enough".

[sv2007]

. i consider my income as free money and have been spending with little thought lately, kinda like a drug dealer with money easy come easy go

You probably already know, but it's worth repeating. Money's the same, and should be treated them the same no matter how it's earned.

Easy come, easy go, should be viewed as not on the money but on how it pleases one self to spend _any_ type of money.

[amarowsky]

Ever since we began living a debt free lifestyle, we don't even comtemplate those kinds of trivial decisions anymore we pay for everything now. We don't carry any balance at all ever since we cut off all our credit cards. Our life and decision making if far simpler now more than ever.

Having said that, if you can pay in full do it. But I wouldn't keep it like its some pets you keep for a long time.

While I understand not carrying a credit card balance, this doesn't seem like the best course of action. Especially for something like a mortgage, car, or large home repair/replacement cost. If you have good enough credit or are patient enough to take advantage of an especially low interest rate (I would consider anything <2%) it would seem like the opportunity cost of money being invested elsewhere would justify accepting the line of credit.

The simplicity of paying for things in full with cash is nice. But I don't know if its worth the difference in what someone could earn by accepting a small exposure to risk and leveraging that to burrow money at a low rate over a modest term to long term.

[bjl584]

My truck loan was 4.9%. I paid it off almost 2 years early.

I don't know if it would have been better to invest the money. I guess it would have depended what I invested it in. But, shelling out $300 a month on a payment was eating at me, so I just wrote a check one day and ended it. I feel better having retired that note, and I have an extra $300 in my pocket every month, so in my book it was a winning move.

[Nutria]

My truck loan was 4.9%. I paid it off almost 2 years early.

I'd have paid that off early too!!

I don't know if it would have been better to invest the money. I guess it would have depended what I invested it in. But, shelling out $300 a month on a payment was eating at me, so I just wrote a check one day and ended it. I feel better having retired that note, and I have an extra $300 in my pocket every month, so in my book it was a winning move.

But you have $10+ thousand less in the bank. Unless you're replenishing the bank with that $300/month, it's a losing move.

[amarowsky]

My truck loan was 4.9%. I paid it off almost 2 years early.

I don't know if it would have been better to invest the money. I guess it would have depended what I invested it in. But, shelling out $300 a month on a payment was eating at me, so I just wrote a check one day and ended it. I feel better having retired that note, and I have an extra $300 in my pocket every month, so in my book it was a winning move.

Yea @ 4.9% I would take that immediate/guaranteed amount of interest payments saved. It is difficult to guarantee almost 5% for 2 years.

My wife and my car's are @ 1.99% over 6 years for both cars at roughly $34,750. If I paid an extra $200 a month starting from the beginning it would cut down the loan in terms of time by 21 months with $1517 in interest instead of paying $2145.

If we invested the $200 a month @ 7% compounded annually return over 6 years it would be $17713.

If you paid off extra $200 a month, you would be paid off roughly 21 months earlier. Investing the full $712 (200 + my payment of 512 currently) for the remaining 21/72 months for full loan yields you roughly $15962 at same interest rate, then add $600 you save in interest to equal $.

$17811>$16562 by $1,249. Hypothetical difference from early pay off to investing at 7% yield.

There is a valid argument for potential savings in insurance if I were to choose to immediately drop my full coverage. And the savings are significant, but not massive. I have considered paying extra in lump sums to remove them from my credit as to increase my debt to income ratio.

I find that paying off on a house on a low interest rate to be hard to justify in certain situations. With a low rate (mine is 3.5%) on a 15 year loan currently owing 69/75k, home is valued at 148k, plus considering appreciation of the house, inflation of the dollar, and tax write off, I would argue the real interest rate is closer to 2.8% now, and will probably be closer to 2% or less if/when inflation kicks back in within the next 10 years.

The strongest reason for investing the money in a lower risk higher yield scenario is for higher liquidity. That is if you personally can find low-moderate risk for middle-high yield. And then a bird in the hand is way better than two in the bush.