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I'm trying to get some different opinions on what I should do. I'm selling my home and buying another. The difference is $25,000. I have $50,000 in my bank account, no debt, $10,000 in a Roth IRA and around $5,000 in my personal trading account. (I'm mid twenties, and I started investing three years ago.)

I am thinking about taking a secured loan from my credit union for $25,000 with a 2.74% interest rate and putting my $19,000 car on it. I don't want to take out a mortgage for several reasons.

My reasoning for this is my monthly payment will be close to $1,100 (which I can afford) and the interest from the loan is roughly $720 over the life of the loan. If I invest $10,000 into my stock account and invest in a safe mutual fund (3-5% per year), I will be able to recoup the $720 loss (and maybe make some) and not use my own money.

Is this the smart thing to do? Worst case scenario is I pay off the loan early (no penalty) and my bank account takes the hit. Thoughts? Opinions?

Thank you!

D E
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    Possible duplicate of mortgage vs car loan vs invest extra cash? – Grade 'Eh' Bacon Oct 23 '17 at 17:14
  • There are a lot of questions talking about using a mortgage to invest - this may not be the best one, but you should search around for other questions which may be better suited. – Grade 'Eh' Bacon Oct 23 '17 at 17:15
  • What do you mean by "(put) (your) $19,000 car on a secured loan? Use the car as collateral? – RonJohn Oct 23 '17 at 17:22
  • Correct @RonJohn, I would put my car as collateral. – D E Oct 23 '17 at 17:23
  • @Devyn but the car's worth substantially less than the prospective loan amount, and will get less valuable faster than the loan would get paid off. – RonJohn Oct 23 '17 at 17:25
  • I bought it for $23,000 4 years ago and paid it off 2 years ago. I would now be putting a loan on it again, basically, and paying it off in 2 years just to reduce the interest rate from 7% to 2.4% making the overall interest amount ~$720. If something happens, I just pay everything off with the money I've saved. Also, the $19,000 value is what the credit union valued it as. – D E Oct 23 '17 at 17:30
  • Do you itemize your deductions without a mortgage? If you can get a low enough rate on a mortgage and can deduct the interest you may come out ahead of a 2.74% interest rate on a bank loan. – Hart CO Oct 23 '17 at 17:35
  • A mortgage is not an option, so I'm stuck with the 2.74% loan. @HartCO – D E Oct 23 '17 at 17:53
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    Why is a mortgage not an option? The reason for that may be significant when deciding on a car loan. – D Stanley Oct 23 '17 at 18:27
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    I close in 3 days @DStanley – D E Oct 23 '17 at 18:41
  • @Devyn Fair enough, but you could pay cash to close and get a mortgage later. Still not a wise move but it is possible. – D Stanley Oct 23 '17 at 18:43
  • @Grade'Eh'Bacon This is not a duplicate. In the other question, OP already has both a mortgage and a car loan, and is trying to decide which to pay off first (or invest instead). – Ben Miller Oct 24 '17 at 15:15

1 Answers1

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Is this the smart thing to do?

You're essentially borrowing money at 2.7% to keep it in your bank account. No, that is not a smart financial decision. Pay the difference in cash and replenish your savings with the $1,100 a month.

Some other notes:

  • You may not be able to get a $25K loan on a car that's worth $19K. You will immediately be upside-down on the loan and will be for a while
  • When you have a lien on a car, most, if not all, banks will require you to have full insurance coverage (to protect them, not you). If you do not borrow on the car, you can reduce or eliminate the full coverage, reducing your auto insurance premiums significantly. You could also use that savings to replenish your savings and self-insure (which you can obviously do with $50k in the bank).
D Stanley
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    While what you say is true, it's insane not to have Comp/Collision on a $19K car whether or not it's paid off. – RonJohn Oct 23 '17 at 18:38
  • @RonJohn On a $19k car, maybe, but you can also increase the deductible and save a lot. – D Stanley Oct 23 '17 at 18:42
  • My insurance is pretty fair and I have high deductibles. I don't plan on dropping full coverage for a few years at least. I can agree with your statement about borrowing money to keep it in my bank. I am young and I am unsure about the future, so I would rather have the peace of mind of having the money in the bank than not, but at the end of the day you are correct. Thank you – D E Oct 23 '17 at 18:56
  • @DStanley "you can also increase the deductible and save a lot" of course, but that has nothing to do with the question. – RonJohn Oct 23 '17 at 19:08
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    @RonJohn No, but it was part of my point that there are other costs associated with borrowing against a car. If that's the biggest point of contention I can take it out. – D Stanley Oct 23 '17 at 19:13
  • "You're essentially borrowing money at 2.7% to keep it in your bank account." But that's not what he proposes. He says, "If I invest $10,000 into my stock account and invest in a safe mutual fund (3-5% per year), I will be able to recoup the $720 loss (and maybe make some) and not use my own money." He asked if it's smart to borrow at 2.7% in order to recoup 3-5%. – chili555 Oct 23 '17 at 19:22
  • OP is borrowing $25k to keep from paying it in cash. Then wanting to invest $10k to try and recoup the interest. In any case, no it's not smart to borrow 2.7% to maybe earn 3-5%. – D Stanley Oct 23 '17 at 20:03
  • @DStanley But the 3-5% would be per year, and for two years (obviously I'd invest for longer and not pull out immediately) so my 3-5% would actually be a net gain of ~300-400 if I gained a total of 5% each year. After inflation, I'm basically even. My current investments are about 17% for the past three years, but I would invest in a much safer diversified option. – D E Oct 23 '17 at 21:19
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    @Devyn Again, you're ignoring risk. You could just as easily lose 5% as gain 10%, depending on the risk of your investments. You might come out ahead, but it's not guaranteed. You are guaranteed to pay 2.7% on your loan. That's the difference. You may not go broke, but you're not for certain going to come out ahead. If you can tolerate that risk then go for it, but I would not call it "wise". – D Stanley Oct 23 '17 at 21:57