protectingtheus
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My wife and I will be buying a home in March. We have enough money to pay off the only car loan we have. We're trying to determine if paying off the 13K on the car loan would be better in the eyes of the lender than if we had the additional 13K ready for the downpayment/in savings. With or without the 13K we'll have enough for a 20% downpayment, so that won't be affected. Just trying to figure out what will look best to the lender.
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Fri Aug 17, 2012 2:41 pm |
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oldguy
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It appears that you'll look good to a lender in either case - so do what is best for YOU, not what is best for a lender or for a credit score. IMO, too many folks worry about their credit scores to the point of harming their own security.
Lenders are currently having trouble finding qualified borrowers that they can place their money with - you apparently have a good IT job, a low credit load, and adequate liquid cash - they'll be happy to see you. 
When I buy houses (rentals) I like to save up the 20% DP, but then NOT use it for a DP. I get the biggest loan that I can, mortgage money is the best source of "long, low" capital, You can get money at 4% 'fixed' for a 30-year period. Then invest your own money elsewhere at 10% to 12%. The 20% is your protection against calamity (foreclosue, job change, forced move) but there is no need to lock the 20% into house equity, keep it invested where it works for you.
Same with the car - if you have a <5% 5 year loan, keep it - and retain your own $13k in reserve, invested where it works for you.
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Fri Aug 17, 2012 3:03 pm |
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protectingtheus
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Are they still doing no down payments for houses though? Even with the amount of liquid assets I have? I was pretty involved in real estate investing a while back, but that was right when the bad times hit, so I jumped out and ran. I do understand what you're talking about using the extra 20% elsewhere. Sadly right now I don't know the best place to put it since it seems everything is a crapshoot.
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Fri Aug 17, 2012 3:11 pm |
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Wino
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quote:
Originally posted by oldguy
You can get money at 4% 'fixed' for a 30-year period. Then invest your own money elsewhere at 10% to 12%. The 20% is your protection against calamity (foreclosue, job change, forced move) but there is no need to lock the 20% into house equity, keep it invested where it works for you.
Same with the car - if you have a <5% 5 year loan, keep it - and retain your own $13k in reserve, invested where it works for you.
Although I'm not disagreeing with your logic, I am arguing against your belief in human nature and self restraint. Car loans and house loans, even at the same interest rate, are NOT equal.
Houses typically increase in value over time while cars are definitely going to decrease in value over time. I would recommend paying off car loans and buying cars for cash in the future if you're going to be buying property. It is not that the loan itself is bad, but the exposure to risk with a car loan is at least double the exposure on a house loan.
Car loans are dumb debts. Real estate loans (let's ignore over-priced bubble property) are smart debts. With discipline, I agree that the car debt can continue. The problem is that not many people have that discipline. Even if they go in to the house with this in mind, it is all too easy to buy another car, better furniture, a pool, a new ATV, then the next thing you know, all of the debt overwhelms the buyer and they are royally screwed.
How to stop the catastrophe? Don't do any unnecessary debt except real estate debt, and in that, only buy well-researched and well-reasoned properties. Don't ride the bubble, and you won't fall when it pops.
Wino
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Fri Aug 17, 2012 3:53 pm |
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protectingtheus
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Good points you have Wino. I've heard from people in the past that it is smarter to get a low interest rate on a car (4-5%) and invest your money. If you go and pay 23K cash on a car, yea you'll own it outright, but you'll lose all the money you could have invested elsewhere. Any thoughts on that?
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Fri Aug 17, 2012 4:02 pm |
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oldguy
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Yes, low down payment loans are available again (for better or for worse). They are a good thing for people who invest carefully and manage risk - and they are a bad thing for people who are bad with money, forever in debt. You can probably get a 3.5% DP, I've seen that advertised - and you'll pay PMI for a few years. I normally prefer PMI to the 80-10-10 type second mortgages.
quote:
Sadly right now I don't know the best place to put it since it seems everything is a crapshoot.
I hear that often from the young. Yet today, the Market is within 6% of the 1997 record high. I remember having that same issue when Jimmy Carter was prez, I guess every generation thinks that their particular era is a crap shoot. I recommend the book The Investment Answer by Goldie & Murray, it's only 55 pages, and it does a great job of simplifying investing - it will be in your public Lib. (It happens to agree precisely with what I've done for the past 50 yrs, lol).
I have to conclude that people listen to the Media - and that the Media lives on senasationalism. When the Market dipped in 2008 the Media joked about 401k's becoming 201's, how they wouldn't open they monthly statements, lol. And now that the Market is near new highs, they still talk as if it is 'low'.
If you are a serious longterm (30 years) invester, you avoid the crap shoot, you expect the Market to fluctuate wildly forever (it alwasys has), and have the patience to wait. The generic market historically privides an 11%/yr average return.
http://politicalcalculations.blogspot.com/2006/12/sp-500-at-your-fingertips.html
It appears that the most recent 30 years gave a 11.32%/yr return. Using the rule of 72, your money would double every 6 1/2 years. Or, $10,000 invested in 1982 would be $250,000 last month. That's where I would put your $13k as well as your DP savings.
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Fri Aug 17, 2012 4:09 pm |
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Wino
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quote:
Originally posted by protectingtheus
I've heard from people in the past that it is smarter to get a low interest rate on a car (4-5%) and invest your money. If you go and pay 23K cash on a car, yea you'll own it outright, but you'll lose all the money you could have invested elsewhere.
I already answered this. If you have the discipline and actually invest the money elsewhere this debt is not bad; however, if you take the same cash and invest it in real estate, then you're going to make even more. The question becomes how you invest rather than what you do with the money. You have to spend money somewhere. Car debt is dumb debt.
I posted a spreadsheet earlier showing that saving and buying with cash is more financially sound than buying on credit. Therefore, I don't suggest you "borrow and invest" with a new or new-to-you car. I suggest you invest until you can buy the car, and live with a beater in the meantime. Invest the money that "would have been" the car payments, and you'll be thousands ahead at the end of the loan, AND have your car even several years newer.
Wino
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Fri Aug 17, 2012 4:43 pm |
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protectingtheus
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Sorry Wino, didn't see that you fully answered my question in the first post. All very good points. I think I'll go ahead and pay off the car early. Since I already have the car loan, might as well try and get out from under it more quickly.
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Fri Aug 17, 2012 4:51 pm |
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Wino
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You already have the car debt. Now you have to look at what you can do with the money you "would use" to pay off the car early. Financially, depending on your interest rate, you can probably make more than the interest on the car, so you may be better off mathematically investing the money.
If you want my generalized advice, though, I'd say you're correct to pay it off and use YOUR money to invest afterwards. There is much less risk in this method, and I see a "cost" to risk that is often overlooked or minimized. I prefer the peace of mind that even if I lose everything I invest, all I need to do is keep working longer, rather than sell my house, car, and toys.
Wino
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Fri Aug 17, 2012 5:02 pm |
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oldguy
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quote:
I've heard from people in the past that it is smarter to get a low interest rate on a car (4-5%) and invest your money. If you go and pay 23K cash on a car, yea you'll own it outright, but you'll lose all the money you could have invested elsewhere. Any thoughts on that?
Say that my SP500 Index has $26,000 in it - and it's been growing tax deferred for a few years. I could sell it for $26k, pay my $3000 capital gains tax on my profit, and pay $23,000 for a car.
Instead, I finance the car 100% for 60 months - pay $25,400 in payments. I leave my own $26,000 invested, plus I sell my 10 yr old car privately for $4000 and add that to the $26k. SO now I have $30k that I expect to double in 6 years, ie $60,000. Yes, I pay $25,400 for a $23,000 car - but I also get to keep the $60,000.
As for borrowing on a depreciating asset - In my mind I separate the loan from the car the day I buy it. The loan is a tool for managing money & the car depreciates the same if it's paid-for or on a loan - that's already 'baked into the cake', either way.
But a car loan is bad if it's for the wrong reason - ie, because you can't afford the car. If you can afford a $4000 car, that is what you should buy, don't allow yourself to be talked into "only $4000 down and $400/m in easy payments".
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Fri Aug 17, 2012 5:55 pm |
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Wino
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quote:
Originally posted by oldguy
In my mind I separate the loan from the car the day I buy it. The loan is a tool for managing money & the car depreciates the same if it's paid-for or on a loan - that's already 'baked into the cake', either way.
Exactly the point. You can make money even on a car loan, but why not instead invest the money in real estate (well-researched and not "because it's a great investment if I flip it!"), save for the car, and use your profits to buy the car?
The math is sound. The investments are there. Car loans are still dumb debts compared to real estate. Both are not bad, but a depreciating investment does not compare to an appreciating investment. Can you make money on both? Sure. Can you make more money on one, and spend the "made money" on the other? Why not?
Wino
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Fri Aug 17, 2012 6:10 pm |
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littleroc02us
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If I was looking at your financial situation, the only difference I would see is that your behavior has been to make payments and hopefully on time, but not to pay off the debts faster then scheduled. So as a lender I would see your situation as properous because I'm going to make a ton of interest off of you as a borrower.
Risk comes from not knowing what you're doing. (Warren Buffet)
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Fri Aug 17, 2012 6:46 pm |
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Wino
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Were you alluding to me? I pay off debts very quickly when I take them on. I have an income that allows me to balance bad decisions with overwhelming income very propitiously.
My point is that saving for "dumb debts" without incurring them, and using "smart debt" to finance investments is a good way to go. The problem most folks have is that smart and dumb debt are the same to them, and as long as they make the monthly stipend, they're doing well. Everything works out fine until things "go wrong."
"Go wrong" is a very nebulous phrase. Basically, it means that optimistic assumptions were not met. So... don't be optimistic. Plan that everything goes bad. When things don't go bad, you make money. When they go good, you make good money.
Oldguy has been mentioning Carter's stewardship lately. I got my first job while he was in office. If I could do that, I can do anything. So can you. Just think before you act, and be willing to accept the outcome, either way.
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Fri Aug 17, 2012 7:46 pm |
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oldguy
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quote:
Both are not bad, but a depreciating investment does not compare to an appreciating investment. Can you make money on both? Sure.
Well, that was the point - one depreciates (bad) & one appreciates (good). So you convert the value of the car into an appreciating asset (stocks) by using it as collateral to buy the stocks.
The two appreciating assets are stocks and real estate. And the biggest depreciating assets for most families is cars. So if you can pull the value out of the cars and assign it to appreciating assets, you can offset your car depreciation (your cars are going to depreciate in any case, whether you utilize that money or not).
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Fri Aug 17, 2012 8:21 pm |
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Wino
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Again, I don't disagree, oldguy, but allowing debt to both depreciate as well as paying interest on it is not smart. Buy it outright, and call it a stereo for all I care, but don't take out the debt thinking you're going to make money on it.
Instead, save and buy for cash, unless you're taking the debt to make money on it above the investment costs. Otherwise, you're spending unnecessary money.
Wino
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Fri Aug 17, 2012 8:35 pm |
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