Home     Forum     401k     401k Rollovers
    Register   Login   Members   Search   FAQs     Recent Posts    




Loan

Reply to topic
Money Talk > Credit & Loans

Author Thread
Brownsfan2k5
Full Member


Cash: $ 20.90

Posts: 93
Joined: 27 Feb 2013
Location: Military
Loan  Reply with quote  

I currently have a loan out for $20,000 with a 3.9% rate. I invested the full amount in the S&P 500. I have the option to not pay the loan for 48 months but it will be accumulating interest the whole time. My question is, should i starting paying the loan now? Or should i wait the 48 months while allowing the interest to accumulate and then start paying off the loan?

I am just trying to get the most out of my money and compound interest.

Thanks
Post Mon Sep 16, 2013 9:59 am
 View user's profile Send private message
Publius
Preferred Member


Cash: $ 31.00

Posts: 151
Joined: 12 Oct 2012
Location: Georgia
 Reply with quote  

You borrowed 20K at 3.9% for the sole purpose of investing? I know that there are others on here that will disagree with me, but I see this as exceedingly risky unless that 20k is a small part of your overall financial picture. If the market went down 40% over the next 10 months, would you be able to weather that and still pay the loan without defaulting?

That being said, if you pay it based on a monthly amortization, you will pay 1632.96 in interest over 4 years, or about 8.2% of the principal. If you let it go without paying and the interest capitalizes annually (it will likely happen monthly, but this calculation was faster) you will pay 3,307 in interest over 4 years, or about 16.5% of the 20k. In four years, there is a good statistical chance that your 20k will have made more than 16.5% if invested in the S&P500 with reinvestment. There is a greater chance that your investment will have made more than 8.2% over that 4 year period. But neither of these are guarantees, it could be down at the end of 4 years as well. The amount you "make" on this borrow-to-invest strategy is the differential between the interest you pay and the return you receive from the market, so you maximize your "profit" by paying the loan as you go.
Post Mon Sep 16, 2013 2:29 pm
 View user's profile Send private message
Brownsfan2k5
Full Member


Cash: $ 20.90

Posts: 93
Joined: 27 Feb 2013
Location: Military
 Reply with quote  

I forgot to mention a key part of information. The loan repayment is over a 25 year period. If I wait for the 48 month period then it will be 25 years after that.
Post Mon Sep 16, 2013 2:38 pm
 View user's profile Send private message
Publius
Preferred Member


Cash: $ 31.00

Posts: 151
Joined: 12 Oct 2012
Location: Georgia
 Reply with quote  

By the way, just to put the numbers out there. The payment on that loan will be about 450/month. If you were to invest 450 monthly for four years and got the average rate of return of 11% that is talked about so much, you would have $27,256.

If you invest 20,000 in the market and get the same return for four years, you will have $31,052. But you would have paid with 1632 or 3307 in interest depending on which repayment method you use. So your difference between investing gradually with no loan or investing with borrowed money is either $2,164 or $489 depending on whether you pay as you go or you pay it off in a lump sum at the end. Is this worth the risk of the market possibly taking a nose dive during those four years a derailing this?
Post Mon Sep 16, 2013 2:39 pm
 View user's profile Send private message
Publius
Preferred Member


Cash: $ 31.00

Posts: 151
Joined: 12 Oct 2012
Location: Georgia
 Reply with quote  

Sorry, Brownsfan, I didn't see your previous reply until after I had posted my second. So this would change things drastically. Your monthly payment is only a little over $100 and your horizon is a lot longer. As the investment period goes up, so will the differential between the interest paid and the *historical* return that the market provides.

I would still be in favor of paying on the loan as you go, unless you have some other plan for the money. If you are trying to get the most out of your money, the only way that 102 monthly payment does anything for you is either by paying on the loan, or by investing in a vehicle that is paying greater than 3.9%.
Post Mon Sep 16, 2013 2:57 pm
 View user's profile Send private message
coaster
Senior Advisor


Cash: $ 1626.30

Posts: 7990
Joined: 11 Oct 2005
Location: Wisconsin
 Reply with quote  

In forum lingo that's known as "simulposting" Laughing

~Tim~
Post Mon Sep 16, 2013 3:42 pm
 View user's profile Send private message
oldguy
Senior Member


Cash: $ 720.20

Posts: 3503
Joined: 21 May 2006
Location: arizona
 Reply with quote  

If I understand, that makes it a 29 year 3.9% loan. For me that's a keeper, I would keep it full term, pay minimums, leave the $20k in the SP500 plus add any "would be" payments to the SP500 also.

Actually, I would have done it even when we thought it was only a 4-yr loan. But it depends on how it dovetails with your other investing. As others correctly stated, 4 years is too short to predict the outcome of a longterm invstment. But if you do this with everything - car loans, house loans, student loans, etc - then you are turning shortterm loans into longterm.
Take car loans - if you get 5 year loans, the outcome of your individual loans could be almost anything. But if you do it with every car for the next 30 yrs you get the 30 yr avergae return (11%/yr). Some car loans will not make money, some may triple in 5 yrs - but the average over a few cars will be the SP500 longterm average.
Post Mon Sep 16, 2013 3:42 pm
 View user's profile Send private message
coaster
Senior Advisor


Cash: $ 1626.30

Posts: 7990
Joined: 11 Oct 2005
Location: Wisconsin
 Reply with quote  

Ha ha ... oldguy and I just did it, too. Shocked

~Tim~
Post Mon Sep 16, 2013 3:43 pm
 View user's profile Send private message
Brownsfan2k5
Full Member


Cash: $ 20.90

Posts: 93
Joined: 27 Feb 2013
Location: Military
 Reply with quote  

Oldguy I'm confused. Are you saying if I use loans instead of cash for my car, school, house etc. and instead put the cash in investments I would come out ahead?
Post Mon Sep 16, 2013 5:34 pm
 View user's profile Send private message
oldguy
Senior Member


Cash: $ 720.20

Posts: 3503
Joined: 21 May 2006
Location: arizona
 Reply with quote  

quote:
Are you saying if I use loans instead of cash for my car, school, house etc. and instead put the cash in investments I would come out ahead?


Yes - but it depends on what you invest in. If you continually borrow longterm capital at an interest rate lower than what your investment return is, you will continually earn the difference in interest, compounded.
Eg - if I borrow $50k at 5% for 30 yrs it costs $97,000. If I place that $50k lump sum in an 11%/yr index fund it will be $1,145,000. (the 7% difference grows and compounds).
Conversely, if I put the $50k into a savings account for 30 yrs I won't even cover my $97k cost.

In fact, in the 1980s & 90s when index returns were 18%/yr, I made money with 8% and 9% loans on our rental houses - 9% mortgages sound high (in today's market) but it works fine to borrow at 9% and get 18%/yr.
Post Mon Sep 16, 2013 8:03 pm
 View user's profile Send private message
Brownsfan2k5
Full Member


Cash: $ 20.90

Posts: 93
Joined: 27 Feb 2013
Location: Military
 Reply with quote  

Understood. Thank you
Post Mon Sep 16, 2013 8:19 pm
 View user's profile Send private message
Paula6
Member


Cash: $ 2.20

Posts: 11
Joined: 17 Jul 2011

 Reply with quote  

Hi, I would suggest you to take small loans for the period of a month or two. these loans are easy to repay and hassle free to get. Also, there is faxing or credit check required to grab the payday loans online.
Post Wed Sep 25, 2013 7:41 am
 View user's profile Send private message
maggie_z
First Time Poster


Cash: $ 0.20

Posts: 1
Joined: 17 Sep 2014
Location: Singapore
personal loans  Reply with quote  

I think you need time space therefore to handle or manage your problem to contact with Quick credit Pte Ltd for getting legal consultation. They must revertible draw up the line.
Post Thu Sep 25, 2014 5:04 am
 View user's profile Send private message Visit poster's website
stockbrokers
Full Member


Cash: $ 10.40

Posts: 51
Joined: 05 Sep 2014

 Reply with quote  

some times link is not working any body tell me ....my browser says ....Reload this page again.....




What your stock broker doesn’t want you to see.
Post Sun Sep 28, 2014 12:20 pm
 View user's profile Send private message
losangelescpa
Member


Cash: $ 2.00

Posts: 10
Joined: 05 Jan 2015
Location: USA
 Reply with quote  

I also need a company who will help me to get loan for my house remodeling. ccan anyone give me some information?
Post Mon Jan 19, 2015 11:49 am
 View user's profile Send private message

Goto page 1, 2  Next
Reply to topic
Forum Jump:
Jump to:  
  Display posts from previous:      





Money Talk © 2003-2016