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Is this why some people recommend to take loan for something that you have money? Like - you wanna spend 30K on a car and you have it in cash? take loan you'l

Is this why some people recommend to take loan for something that you have money? Like - you wanna spend 30K on a car and you have it in cash? take loan you'll lose a some $$, but you'll be building your history.

JohnFen 4y ago
I think that the usual rationale for taking a loan out to pay for something you can afford without a loan is that you can take the money you have and invest it in something that pays more than what the interest on the loan is. It's a kind of arbitrage. If you're losing money overall, you're doing it wrong.
- drivebyhooting 4y ago
  There’s no free lunch. You will be taking additional risk by doing this even if the downside seems unlikely or remote.
  - ericpauley 4y ago
    If the loan % is lower than a savings account then there is no/0/zero risk, so long as you stay under FDIC limits. Your deposit earns money and is backed by the full faith and credit of the United States government.
    - deleted 4y ago
      [deleted]
    - stanleydrew 4y ago
      The loan will usually be at a fixed-rate, while the interest paid on your deposits will fluctuate. So there is still risk that your net interest margin will go negative at some point.
      - ericpauley 4y ago
        Get a CD or buy treasuries with a matched maturity date. Or if you don’t want that and the savings rate goes below you can pay off any time (check your terms).
  - imtringued 4y ago
    Yes, this is just a roundabout way to invest into stocks with borrowed money. There is probably an optimal portfolio for this strategy to minimize the risk but then it is no longer the obvious win that so many people think it is. If we assume 8% returns and you only put 50% in the stock market and your loan costs 2% interest then your total benefit is only 4%. Putting all of it might get you 6% but you are now taking a significant amount of risk.
  - HWR_14 4y ago
    The last few times I remember, the interest charged on the loan was less than that generated by T-bonds of the same length.
toast0 4y ago
I don't know what factory car loans look like now, but for my last new car, they offered me a 5-year 0% loan vs a $500 incentive if I paid in cash. Safe interest rate paid for the missed incentive. It's a smidge less convenient to have a loan, but no big deal.
- voakbasda 4y ago
  In the face of persistent annual inflation, a 0% loan ends up yielding a net discount when compared to saving your money over the same time span and paying cash. Of course, that's only true if you're diligent about paying on time, but automatic recurring payments can take care of that problem.
now__what 4y ago
You also want to consider whether it's more valuable to you personally to have that cash in hand. Are you going to roll it into another investment? Then maybe a low enough interest rate on the loan will put you out ahead despite paying interest.
tiedieconderoga 4y ago
Nah, you can easily get a residential mortgage from smaller lenders with just proof of income/savings, and the sort of light credit usage you get from monthly CC payments, rent, utilities. That will net you a solid credit score, too. The issue is with very large banks. They have rigid underwriting deparments and poor CS, so if you approach them as a first-time buyer who isn't already leveraged to the hilt, they will make it a long and painful process. Mortgage agents are a prime target for AI replacements, because all they do is relay information between you and the underwriting departments that make the real decisions. Other people have pointed out that when you take a loan for something you can afford, you can use the money you would have spent on other things in the meantime. (As long as you're confident that you'll keep making enough money to make your payments for the life of the loan.)
- HWR_14 4y ago
  Rent and utilities rarely report to credit scores.
  - no_wizard 4y ago
    There's been normalization around using rent as additional inputs into a credit score: https://www.cnbc.com/select/your-rent-payments-can-raise-your-credit-score-with-experian-boost/ https://www.cnbc.com/select/your-rent-payments-can-raise-you... I'm not sure they're all that available or popular (they're highly dependent on your landlord having the correct paperwork and such) but the place I rented an apartment last year had this available and it did get reported
    - HWR_14 4y ago
      Yes, that's been a push for a while. I'm glad to see it's becoming more popular. But it doesn't work if unless the landlord opted into their payment system.
  - nickjj 4y ago
    That's such a strange system if common routine things aren't counted towards your score. Is this a ploy to get you to buy things you don't need just to prove you can pay it back? Personally I've never owned a credit card, I always pay with a debit card or cash. 20 years ago I refused to participate in the credit scoring system and still stand by it.
nicholasjarnold 4y ago
Reasons other than "it helps me build a credit history": * you think you can make more money by investing your 30k and letting it grow and compound * you are very prudent with your cash on hand and would rather have immediate access to liquid cash than save a little bit on interest which you pay down over the course of <term> Some of the dynamics here are a bit different when market returns are not looking great/steady and money isn't cheap anymore.
- chickenpotpie 4y ago
  > you think you can make more money by investing your 30k and letting it grow and compound Mortgages especially. Mortgage interest is tax deductible and makes it easier for high tax bracket individuals to outperform their loan by investing.
  - supportengineer 4y ago
    > Mortgage interest is tax deductible Since 2017, not really, due to tax law changes. Cap of $10k but that includes state taxes paid also.
    - toast0 4y ago
      I was under the impression that the $10k cap is for SALT and mortgage interest is separate? The mortgage interest deduction was reduced, interest on new loans is only deductable for the first $750k of debt, instead of $1M, and mortgage rates were really low in 2017; capped SALT + a relatively low interest rate on $750k might not combine to more than the standard deduction if you're married filing jointly. Certainly on my ~ $350k mortgage @ 3.15%, I stopped itemizing after the tax changes.
    - chickenpotpie 4y ago
      Absolutely not. That's property tax, not mortgage interest.
    - jdmichal 4y ago
      The bigger change for mortgage interest was the massive increase in the standard deduction in 2018 to $24,000 from $12,700. We were barely doing better than the standard deduction prior to that, and the increase put us pretty far into "just take standard" territory.
andirk 4y ago
No. You need 2+ credit cards and ~2 bank accounts all that have existed for several years. "Carry a balance" of ~15% of your total credit limit BUT you need only _for the owed money to show up on the paper statement_. It's weird but if you pay off the thing you bought immediately that day, it's as if it never happened. It needs to be recorded on a statement, then pay 100% off before due date and don't owe anybody shit! Curious how the parent commenter had great credit with no seasoned lines of credit. It's one of the biggest factors in the score. Months before seeking a mortgage loan, learn the score's equation and appease it.

JohnFen 4y ago

I think that the usual rationale for taking a loan out to pay for something you can afford without a loan is that you can take the money you have and invest it in something that pays more than what the interest on the loan is. It's a kind of arbitrage. If you're losing money overall, you're doing it wrong.

drivebyhooting 4y ago
There’s no free lunch. You will be taking additional risk by doing this even if the downside seems unlikely or remote.
- ericpauley 4y ago
  If the loan % is lower than a savings account then there is no/0/zero risk, so long as you stay under FDIC limits. Your deposit earns money and is backed by the full faith and credit of the United States government.
  - deleted 4y ago
    [deleted]
  - stanleydrew 4y ago
    The loan will usually be at a fixed-rate, while the interest paid on your deposits will fluctuate. So there is still risk that your net interest margin will go negative at some point.
    - ericpauley 4y ago
      Get a CD or buy treasuries with a matched maturity date. Or if you don’t want that and the savings rate goes below you can pay off any time (check your terms).
- imtringued 4y ago
  Yes, this is just a roundabout way to invest into stocks with borrowed money. There is probably an optimal portfolio for this strategy to minimize the risk but then it is no longer the obvious win that so many people think it is. If we assume 8% returns and you only put 50% in the stock market and your loan costs 2% interest then your total benefit is only 4%. Putting all of it might get you 6% but you are now taking a significant amount of risk.
- HWR_14 4y ago
  The last few times I remember, the interest charged on the loan was less than that generated by T-bonds of the same length.

toast0 4y ago

I don't know what factory car loans look like now, but for my last new car, they offered me a 5-year 0% loan vs a $500 incentive if I paid in cash. Safe interest rate paid for the missed incentive. It's a smidge less convenient to have a loan, but no big deal.

voakbasda 4y ago
In the face of persistent annual inflation, a 0% loan ends up yielding a net discount when compared to saving your money over the same time span and paying cash. Of course, that's only true if you're diligent about paying on time, but automatic recurring payments can take care of that problem.

now__what 4y ago

You also want to consider whether it's more valuable to you personally to have that cash in hand. Are you going to roll it into another investment? Then maybe a low enough interest rate on the loan will put you out ahead despite paying interest.

tiedieconderoga 4y ago

Nah, you can easily get a residential mortgage from smaller lenders with just proof of income/savings, and the sort of light credit usage you get from monthly CC payments, rent, utilities. That will net you a solid credit score, too. The issue is with very large banks. They have rigid underwriting deparments and poor CS, so if you approach them as a first-time buyer who isn't already leveraged to the hilt, they will make it a long and painful process. Mortgage agents are a prime target for AI replacements, because all they do is relay information between you and the underwriting departments that make the real decisions. Other people have pointed out that when you take a loan for something you can afford, you can use the money you would have spent on other things in the meantime. (As long as you're confident that you'll keep making enough money to make your payments for the life of the loan.)

HWR_14 4y ago
Rent and utilities rarely report to credit scores.
- no_wizard 4y ago
  There's been normalization around using rent as additional inputs into a credit score: https://www.cnbc.com/select/your-rent-payments-can-raise-your-credit-score-with-experian-boost/ https://www.cnbc.com/select/your-rent-payments-can-raise-you... I'm not sure they're all that available or popular (they're highly dependent on your landlord having the correct paperwork and such) but the place I rented an apartment last year had this available and it did get reported
  - HWR_14 4y ago
    Yes, that's been a push for a while. I'm glad to see it's becoming more popular. But it doesn't work if unless the landlord opted into their payment system.
- nickjj 4y ago
  That's such a strange system if common routine things aren't counted towards your score. Is this a ploy to get you to buy things you don't need just to prove you can pay it back? Personally I've never owned a credit card, I always pay with a debit card or cash. 20 years ago I refused to participate in the credit scoring system and still stand by it.

nicholasjarnold 4y ago

Reasons other than "it helps me build a credit history": * you think you can make more money by investing your 30k and letting it grow and compound * you are very prudent with your cash on hand and would rather have immediate access to liquid cash than save a little bit on interest which you pay down over the course of <term> Some of the dynamics here are a bit different when market returns are not looking great/steady and money isn't cheap anymore.

chickenpotpie 4y ago
> you think you can make more money by investing your 30k and letting it grow and compound Mortgages especially. Mortgage interest is tax deductible and makes it easier for high tax bracket individuals to outperform their loan by investing.
- supportengineer 4y ago
  > Mortgage interest is tax deductible Since 2017, not really, due to tax law changes. Cap of $10k but that includes state taxes paid also.
  - toast0 4y ago
    I was under the impression that the $10k cap is for SALT and mortgage interest is separate? The mortgage interest deduction was reduced, interest on new loans is only deductable for the first $750k of debt, instead of $1M, and mortgage rates were really low in 2017; capped SALT + a relatively low interest rate on $750k might not combine to more than the standard deduction if you're married filing jointly. Certainly on my ~ $350k mortgage @ 3.15%, I stopped itemizing after the tax changes.
  - chickenpotpie 4y ago
    Absolutely not. That's property tax, not mortgage interest.
  - jdmichal 4y ago
    The bigger change for mortgage interest was the massive increase in the standard deduction in 2018 to $24,000 from $12,700. We were barely doing better than the standard deduction prior to that, and the increase put us pretty far into "just take standard" territory.

andirk 4y ago

No. You need 2+ credit cards and ~2 bank accounts all that have existed for several years. "Carry a balance" of ~15% of your total credit limit BUT you need only _for the owed money to show up on the paper statement_. It's weird but if you pay off the thing you bought immediately that day, it's as if it never happened. It needs to be recorded on a statement, then pay 100% off before due date and don't owe anybody shit! Curious how the parent commenter had great credit with no seasoned lines of credit. It's one of the biggest factors in the score. Months before seeking a mortgage loan, learn the score's equation and appease it.