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Everything is relative to inflation and other investment opportunities. The rate on our loan is something like 1.6% (shortly after it was literally 0%). If I c
by SkyPuncher 5y ago
Everything is relative to inflation and other investment opportunities.
The rate on our loan is something like 1.6% (shortly after it was literally 0%). If I can find an investment for more than 1.6%, I'm technically coming out better. Loan fees make the math fuzzier, but I'm simply demonstrating for this conversation.
For example, if I can make 4% on an investment and a loan is 1.6%, that means I can still make 2.4% net interest if take the loan and use the cash to invest.
The math gets even more favorable when you consider inflation. $1 in 5 years is actually cheaper to me than $1 right now.
- ryathal 5y agoThis only works if ALL things happen. -You have the cash to buy outright. -You have an investment that you can reliably withdraw the funds from. -There isn't risk to losing principal with the investment. -The investment outpaces inflation + interest. If inflation is 3% in your example you just lost .6%. 99% of the time these things aren't true for the 5-7 years of a loan.
- mwint 5y agoDoes inflation really matter here? The value of the loan isn’t inflated, so I don’t think inflation should “count” here? Willing to be wrong on that, just having a hard time understanding.
- SkyPuncher 5y agoI'd argue that inflation is further reducing the cost. Inflation means that $1 is fundamentally less valuable in the future than it is right now. If we're making a deal for me to pay $1 in the future, I'd prefer to make that $1 payment as far out as possible.