4 ms·

Its a lesson about risk. Your investments can sour. Put it another way. If you had a paid off car, would you take a loan out on it to invest?

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iamricks 5y ago
There is risk in cash, it is called inflation, if you bought a car last year you lost 7% + depreciation of the car since you bought it. The SP500 is up 11% since last year. This means you would have lost 7% to inflation, 11% to potential upside plus depreciation of your car. Assuming your car did not depreciate because of current car production shortages you lost 18% of your money buying cash vs 3%-4% interest on the loan. Cash is not risk free
- b112 5y ago
  Cash inflation has nothing to with a new product decreasing in value, due to wear, tear, and being used, after purchase.
- ryathal 5y ago
  your investment lost 7% to inflation too. 7% of that 11% isn't gain. That puts you up 4% - interest rate * risk factor.
  - frumper 5y ago
    To add on to your comment, you're also going to be paying taxes on that 11%. That 4% is looking more like 1-2% for most people.
brianwawok 5y ago
Yes. If I had 1M in the bank and went to buy a 500k house, and was offered like a 3% APR loan, would I take it? Yes. Reasons being: 1) I can make 5-6% return with my money. So I can pay the interest and still come out ahead. 2) That mortgage interest is tax deductible, so it costs a little bit less than 3%, maybe only 2.5% to me 3) Real estate market crashes and house is worth 200k? Especially in a no-recourse state, you can leave the keys and walk. The bank takes on the downside risk of your house, not you.
- SketchySeaBeast 5y ago
  Argument #1 is a "should", not a "will", so there's definitely risk there. Considering the average stock market gain is something like 10% and we're sitting at way over that, it would stand to reason that if that average holds at some point we're going to get below average performance. It's a gamble. Regarding #3 - doesn't that do a number on your credit? And how many states are non Recourse? As I understand it here in Canada those agencies that backed your loan (the bank or the CMHC) will attempt to recoup their losses by taking you to court if they have to.
  - brianwawok 5y ago
    1) Sure, always a risk. 3) > Home mortgages—though generally recourse—are non-recourse in 12 states: Alaska, Arizona, California, Connecticut, Idaho, Minnesota, North Carolina, North Dakota, Oregon, Texas, Utah and Washington. If a homeowner defaults in one of these states, the lender can foreclose on the collateralized home but cannot go after the borrower’s other assets. Generally taking a credit hit for a few 100k is a fine trade off. You can even buy a new house right before you walk away from your old house..
fennecfoxen 5y ago
At a 2.49%-3.84% interest rate? [1] YES. Hell yes. That's better-than-free money, adjusting for inflation. If you haven't maxed out your I-bond purchases yet, you can get 7.12% basically risk-free. [1] https://www.bankrate.com/loans/auto-loans/rates/ https://www.bankrate.com/loans/auto-loans/rates/
- alistairSH 5y ago
  2.49% is high for a loan through the dealer. My BMW loan is 0.9% and my Honda loan is 1.9%.
  - fennecfoxen 5y ago
    Even better!
  - Kirby64 5y ago
    It's only high if the dealership isn't offering incentives in some way. That 0.9% APR is because BMW (or the dealership) is subsidizing it in kickbacks. Not every dealership/brand does that.
- JumpCrisscross 5y ago
  > If you haven't maxed out your I-bond purchases yet, you can get 7.12% basically risk-free Those are being issued at 0% real. The initial rate is 7.12%, but that figure fluctuates with CPI-U. Betting that American inflation will keep raging at 2.5%+ isn’t a terrific bet. That said, your broader point is valid. Money at 2.5% should not be paid back. There are good bonds yielding more, to saying nothing of dividend-paying stocks.

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iamricks 5y ago

There is risk in cash, it is called inflation, if you bought a car last year you lost 7% + depreciation of the car since you bought it. The SP500 is up 11% since last year. This means you would have lost 7% to inflation, 11% to potential upside plus depreciation of your car. Assuming your car did not depreciate because of current car production shortages you lost 18% of your money buying cash vs 3%-4% interest on the loan. Cash is not risk free

b112 5y ago
Cash inflation has nothing to with a new product decreasing in value, due to wear, tear, and being used, after purchase.
ryathal 5y ago
your investment lost 7% to inflation too. 7% of that 11% isn't gain. That puts you up 4% - interest rate * risk factor.
- frumper 5y ago
  To add on to your comment, you're also going to be paying taxes on that 11%. That 4% is looking more like 1-2% for most people.

brianwawok 5y ago

Yes. If I had 1M in the bank and went to buy a 500k house, and was offered like a 3% APR loan, would I take it? Yes. Reasons being: 1) I can make 5-6% return with my money. So I can pay the interest and still come out ahead. 2) That mortgage interest is tax deductible, so it costs a little bit less than 3%, maybe only 2.5% to me 3) Real estate market crashes and house is worth 200k? Especially in a no-recourse state, you can leave the keys and walk. The bank takes on the downside risk of your house, not you.

SketchySeaBeast 5y ago
Argument #1 is a "should", not a "will", so there's definitely risk there. Considering the average stock market gain is something like 10% and we're sitting at way over that, it would stand to reason that if that average holds at some point we're going to get below average performance. It's a gamble. Regarding #3 - doesn't that do a number on your credit? And how many states are non Recourse? As I understand it here in Canada those agencies that backed your loan (the bank or the CMHC) will attempt to recoup their losses by taking you to court if they have to.
- brianwawok 5y ago
  1) Sure, always a risk. 3) > Home mortgages—though generally recourse—are non-recourse in 12 states: Alaska, Arizona, California, Connecticut, Idaho, Minnesota, North Carolina, North Dakota, Oregon, Texas, Utah and Washington. If a homeowner defaults in one of these states, the lender can foreclose on the collateralized home but cannot go after the borrower’s other assets. Generally taking a credit hit for a few 100k is a fine trade off. You can even buy a new house right before you walk away from your old house..

fennecfoxen 5y ago

At a 2.49%-3.84% interest rate? [1] YES. Hell yes. That's better-than-free money, adjusting for inflation. If you haven't maxed out your I-bond purchases yet, you can get 7.12% basically risk-free. [1] https://www.bankrate.com/loans/auto-loans/rates/ https://www.bankrate.com/loans/auto-loans/rates/

alistairSH 5y ago
2.49% is high for a loan through the dealer. My BMW loan is 0.9% and my Honda loan is 1.9%.
- fennecfoxen 5y ago
  Even better!
- Kirby64 5y ago
  It's only high if the dealership isn't offering incentives in some way. That 0.9% APR is because BMW (or the dealership) is subsidizing it in kickbacks. Not every dealership/brand does that.
JumpCrisscross 5y ago
> If you haven't maxed out your I-bond purchases yet, you can get 7.12% basically risk-free Those are being issued at 0% real. The initial rate is 7.12%, but that figure fluctuates with CPI-U. Betting that American inflation will keep raging at 2.5%+ isn’t a terrific bet. That said, your broader point is valid. Money at 2.5% should not be paid back. There are good bonds yielding more, to saying nothing of dividend-paying stocks.