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Account to pay loan while in the stock market

2,813 Views | 31 Replies | Last: 5 yr ago by OverSeas AG
handle234
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I'm gonna be buying a car soon for $20k. I have the cash, but if the financing terms are less than 6% I'd prefer to take the loan and invest the cash in the stock market.

Is there an account option out there where I could park $20k, then have it auto draft to do the monthly loan payments? I'd prefer to not have it go through checking bc I track all my billls through checking, and this feels different since I could pay it down, but I'm choosing to invest the $20k instead.

Not looking to debate future market returns
Baby Billy
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AG
Why take out a loan when you can pay cash?
Ragoo
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AG
How would you be making the monthly loan payments if the money is invested?
oldarmy1
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AG
Ragoo said:

How would you be making the monthly loan payments if the money is invested?
Right? Pay off the car and whatever the monthly loan would be place it in the stock markets. You get your own dollar cost averaging plan and save 6%.
gvine07
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AG
First, good for you for saving money!

Just pay for the car, even if financing is sub 2%. You can't make monthly payments in stock shares, and you don't want to mess with having to sell monthly. I'd be surprised if anywhere could do it automatically.

In 2008 the S&P dropped ~37%, and in 2002 it dropped ~22% even after dropping in 2000 and 2001. It took years to recover. If you held on you would be ok now, but if you had to sell monthly you would have been hosed.

Just pay for the car in cash, and invest monthly like the others recommend.
Harkrider 93
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AG
I borrow for a car and invest the cash. I do not leave it in cash. I invest it so that it can earn more than the cost. A one year CD is currently paying more than the cost if a car loan from most credit unions.

Do not do this strategy if you aren't disciplined. It helps if your cash flow could afford the payments in case the market is down.
BombayAg
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I recommend you pay off a lot or all of the car cost. A loan makes sense only if you don't have the money or if the APR is 0 or if you foresee some risk like medical costs or a layoff.
Zemira
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AG
Just pay for the car, unless you can afford the payments without touching the 20k.

If you can afford the payments, I'd invest the cash in EFTs or if you want low risk CDs.

What you are looking for isn't available. I can see your reasoning, but those kind of financial instruments don't exist.

I was going to pay cash for my car (purchased about five years ago), but they offered me zero percent financing for 3 years. I took it and had to avoid all the "extra" warranty and crap they wanted to sell me. Be careful with dealer financing. I had to almost leave to get them not not hassle me on adding extras. Buying a car is painful and buying with financing is extra painful.
handle234
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Thanks everyone - really appreciate the responses.

To answer a few of the questions

1) I have the money to handle the payment without the $20k
2) I totally get that if there is a down year in the stock market, this strategy fails, but given that the average stock market return has been around 7% for the last 70 years, its feels like a decent strategy (certainly with risk involved)
3) I wouldn't leave it in cash (sorry if that part of my question was confusing), I would put it into an investment then withdraw (which would require selling shares) the car payment amount each month.

I think the other thing I'm not thinking of are the tax implications. If I'm paying uncle sam the marginal tax rate, then my loan rate would probably need to be under 5% if I think the stock market returns will be 7% on average.

I feel like this is something Betterment or WealthFront should offer.

Thanks again for the feedback everyone!
Stive
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AG
The other aspect you're missing about the 7% average though is timing. When the down turns happen matters with your strategy. In a straight line 7% ROR you're fine. With the way the historical markets have actually gone it doesn't work as well.
Zemira
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AG
Yeah nothing you invest in is going to guarantee 7% return. If you are cashing in $500 a month, your ability to earn an average 7% is going down over time.

I would decide what you are going to invest in. Look at the monthly returns for the last five years. If any gain/loss on a monthly basis is too risky you are going to need to find something with more security like a CD, except you want to cash parts of it in monthly and at best you get a few percent.

If you don't want to pay cash, just invest the 20 grand and make the payments out of your income. Then in 3-5 years when your done with your loan you still have a nice investment and a car.
Harkrider 93
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AG
You mentioned 7%, which has everyone else mentioning 7%. I would look at it differently.

What are the odds that you beat 2.25% (cost of loan)? Also, that is simple interest, so it is closer to 2%.

You may get 3%-10% over the next 5-7 yrs. Maybe you get less, but your chances of beating it are really high.

You could also buy a 5 yr CD (pays over 3%) with half your money and invest the other half to increase your odds. It limits the upside, but limits the down.

JSKolache
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AG
Money is cheap right now, so borrow. Invest your cash.
Baby Billy
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JSKolache said:

Money is cheap right now, so borrow. Invest your cash.

No. Never volunteer to pay interest when you have enough cash.
Stive
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Why not? This is about leveraging money. If I can make money work for me that will make more money than something costs me, then you better believe I'm borrowing with a smile on my face. It's just math.
Baby Billy
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Stive said:

Why not? This is about leveraging money. If I can make money work for me that will make more money than something costs me, then you better believe I'm borrowing with a smile on my face. It's just math.

On something like a used car? Why take out a loan, pay 6% interest (from OP), try to invest the money in the market and make more than what he's paying plus inflation, deal with the taxes and upkeep, etc.
A lot of work and not much return.

All for a used car that he can pay for out right with no problems.
Stive
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AG
And NOW you've conveniently changed the situation.

You said NEVER volunteer to pay interest when you have enough cash. That's quite different than using the "less than 6%" and used car lines from the OP.
Baby Billy
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AG
Stive said:

And NOW you've conveniently changed the situation.

You said NEVER volunteer to pay interest when you have enough cash. That's quite different than using the "less than 6%" and used car lines from the OP.

Was just personalizing the situation. My logic still applies in any situation, though. But perhaps that's just MY logic.

If it's me, I'm not taking out a loan and paying interest when I can pay cash.
Stive
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AG
No matter what the interest rates and no matter what the ROR would be on the investment?
Baby Billy
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Stive said:

No matter what the interest rates and no matter what the ROR would be on the investment?

If the rate is 0, sure.
Stive
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Huell Babineaux said:

Stive said:

No matter what the interest rates and no matter what the ROR would be on the investment?

If the rate is 0, sure.

So emotion always wins out over math.

Got it.
Baby Billy
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Stive said:

Huell Babineaux said:

Stive said:

No matter what the interest rates and no matter what the ROR would be on the investment?

If the rate is 0, sure.

So emotion always wins out over math.

Got it.

Are you trying to advocate for the OP's situation?
62strat
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Huell Babineaux said:

Stive said:

No matter what the interest rates and no matter what the ROR would be on the investment?

If the rate is 0, sure.
what about 0.1%?

Stive
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AG
The OP already had his mind made up about his math. He assumes he can get more than 6% in the market during the term of the loan, is willing to shoulder the risk, and if he's correct about his measure of the risk vs reward he will come out ahead of someone like you that chose to pay cash. If he's wrong and mistimes his entrance into the market, your situation might win.

I'm not necessarily advocating for his decision because I have no idea what his investments would be or how they would perform, I'm simply pointing out that your math doesn't work. Emotionally you would prefer to have zero debt, and you're willing to sacrifice income or future net worth to have a clear liabilities piece on your balance sheet.
ryanhnc10
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There are scenarios where it makes sense to borrow to increase leverage. The real question, and only the OP can answer this, is what is your risk tolerance? If you're willing to take the risk in the market, it's certainly possible to come out ahead. Just depends on what you're comfortable with doing
12thAngryMan
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AG
For a real world example, the loan on my wife's car is 0.90% APR. The yield on our Barclays online savings account is currently 1.75% and rising. By paying off the car loan early rather than leaving extra cash in the savings account, I am losing a guaranteed 0.85%. Nothing to write home about, but it's an easier and more foolproof decision than what OP suggests.

That being said, for any scenario other than the above (i.e., a near-zero financing rate and a very low-risk investment), I would pay off the loan.
handle234
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OP checking back in here. The question I was asking was more of an operational one, and I was using the car loan as the example.

Hopefully I'm saying it better now --> Is there a financial instrument that will allow me to go straight from investments to loan payments, doing the middle work of 1) transferring the investment to cash and 2) making the payment at the right time for me. Kind of like bill auto-payment, but from investments.

The answer seems to be a resounding no, which is fine.

To answer the other questions, I have a super high risk tolerance, I can afford for this to fail and that's the type of risk I want to take. In 2013, when the market returned +32%, this would have worked great. In 2008 when the market returned -37% it would have been a disaster. On average, the market has returned 7%, which is the price point I'm basing this whole strategy on.

Thanks again for your insights, and I really wasn't trying to get into a "should you pay cash or not" discussion.
Endo Ag
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AG
At 6%? Pay cash. The amount you come out ahead is small, and the risk of losing is high, and you have to deal with payments, which while easy, add complexity. My personal cutoff is around 4% I'm paying it off asap every time. I bought a boat this spring and when I checked the rates, I wasn't impressed, so I wrote a check.

Below inflation? Invest it every time. I'm still paying the minimum on my 1.6% student loans I consolidated in 2004. Sixteen more years and that degree is mine, baby!

Between 2.5 and 4? This is where I enter a decision point, and it kind of depends on my mood, cashflow, immediate plans, etc. I'm currently paying down some 3.5%-4% loans from my business. These are technically deductible payments (or at least decrease business profit), but I'm tired of seeing them, so I'm maximizing tax-advantaged saving then all other money for saving goes to the loans. I'd probably die wealthier if I paid them off slower, but they add stress and complexity to my life, so they are gone.
Casey TableTennis
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AG
handle234 said:

OP checking back in here. The question I was asking was more of an operational one, and I was using the car loan as the example.

Hopefully I'm saying it better now --> Is there a financial instrument that will allow me to go straight from investments to loan payments, doing the middle work of 1) transferring the investment to cash and 2) making the payment at the right time for me. Kind of like bill auto-payment, but from investments.

The answer seems to be a resounding no, which is fine.

To answer the other questions, I have a super high risk tolerance, I can afford for this to fail and that's the type of risk I want to take. In 2013, when the market returned +32%, this would have worked great. In 2008 when the market returned -37% it would have been a disaster. On average, the market has returned 7%, which is the price point I'm basing this whole strategy on.

Thanks again for your insights, and I really wasn't trying to get into a "should you pay cash or not" discussion.



Yes, it can be done. I have many clients that have a SWP ( systematic withdrawal plan) that auto liquidates from mutual funds, then Drafts funds to a bank or payee. I would assume most financial advisors could do this for you.
handle234
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Its happening!

I needed to get the car a few days before the house I'm selling closed, so I ended up getting the car financed, at 4.29%, $17k.

So now I have to decide whether to pay it off immediately, or (manually) transfer ~$350/month from my Betterment account every month and let that $17k ride the market.

I know earlier I was asking for more operational opinions, but now its time for speculation!
Deputy Travis Junior
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I know interest rates have gone up a few times, but are car loans really up to 4.3%? I got 0.8 or 0.9% like 20 months ago. Sad.

As for your OP, I'm sure you can find a bank to set up and automate the investment -> cash -> payment process, but you're gonna pay for a lot of transaction fees that will eat into your returns. On top of that, you'll face market timing issues and inevitably selling at the wrong time. If you want to stick with investment, then invest the money and earmark the few hundred of your paycheck for car payments; don't touch the money you've invested. Know that 4.3% is high enough, though, that you run a real risk of costing yourself cash.
Joe Exotic
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AG
Ya 4.29 seems high. We just did 1.75 from our credit union. Had the cash but didn't see the point burning it with a rate that low.
OverSeas AG
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Every knee shall bow and every tongue shall confess
DON'T TREAD ON ME
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