Pay It Off Or Stretch It Out?

[CKw4itlb]

Hello everyone. Every so often i like to gather your viewpoints on matters that I tend to overthink.

In this instance, it's a loan I took out two months ago from my credit union for $7,000, and for house repairs. I took it for a lengthier period in order to have better flexibility with how often I pay, and to have a lower required amount. I might have handled that part long, but it's done. I can pay off the loan at any point, and right now, two months later, I'm down to owing $6,500.

The reason I took out a loan rather than dip into my Vanguard account is because my friend suggested that taking out that $7,000 could result in up to $20,000 worth of lost potential income. I am on Social Security which pays for my monthly expenses and a little extra.

My problem is that this loan is hanging over my head, weighing me down! I want it gone, and I'm tempted in a few months to just call Vanguard and pay it off, thinking that half a year will help with my FICO score AND give me peace of mind of having no debts.

What say you folks? (Thank you for your input.)

 

[Montecfo]

Pay it off.

Every dollar is better saved than spent theoretically. But spending with nondeductible interest just makes it more expensive.

 

[MichaelB]

Will you pay it off with funds from a taxable account or will thry come from a tax-deferred account? In other words, will you need to pay taxes on this withdrawal before paying off the loan?

 

[pb4uski]

... The reason I took out a loan rather than dip into my Vanguard account is because my friend suggested that taking out that $7,000 could result in up to $20,000 worth of lost potential income. I am on Social Security which pays for my monthly expenses and a little extra. ...

I think you probably received bad advice from your friend. Can you elaborate on how selling $7,000 could result in $20,000 worth of lost income? It doesn't pass the smell test for me.

If having the loan bothers you and you have the money to pay it off, then by all means pay it off.

 

[mystang52]

I think you probably received bad advice from your friend. Can you elaborate on how selling $7,000 could result in $20,000 worth of lost income? It doesn't pass the smell test for me.

If having the loan bothers you and you have the money to pay it off, then by all means pay it off.

Exactly what I would have said, not to mention OP's own comment:"My problem is that this loan is hanging over my head, weighing me down! I want it gone, and I'm tempted in a few months to just call Vanguard and pay it off, thinking that half a year will help with my FICO score AND give me peace of mind of having no debts."

 

[latexman]

What’s the interest rate and terms?

 

[Koolau]

Yep. Waiting for more info before we can evaluate your situation and make suggestions.

 

[pb4uski]

No disrespect, but how much analysis does paying off a $6,500 loan warrant?

 

[Koolau]

No disrespect, but how much analysis does paying off a $6,500 loan warrant?

I notice OP is relatively new. This may be his/her first major financial challenge. We "old timers" here have seen it all. Perhaps, starting with this situation will help OP find out what resources are available and what questions to consider.

Such analysis may sound small to "us" but not so to OP. Walk a mile..., etc.

 

[Andre1969]

Well, one way of looking at it, is that if you've gotten it down from $7K to just $6500 in two months, at that rate you should have it paid in full in just 26 more months.

Also, depending on your financial situation and the terms of the loan (interest rate, length, etc), it might irrelevant, no matter what you do. It's most likely not a scenario where there is only one right answer, and if you choose wrong you're doomed to failure. But more along the lines of you've already won, but do you want to win by more?

I agree with the others that this $20K of lost income is probably some kind of common-core "New Math" type of nonsense. Unless you're really lucky/skilled, or inflation runs rampant, it would most likely take decades for $7K to throw off an additional $20K in income/gains.

The big thing seems to be your peace of mind. It's hard to place a dollar value on that. Personally, I'm not a big fan of having debt, but if the interest rate is low enough, I might be tempted to carry it. For instance, the mortgage balance on my house is around $440K. But the interest rate is only 2.875%. While I like the idea of being debt free, I like having the extra $440K around even more.

One thing you might want to do, if you're able, is instead of paying it off all at once, just pay it down aggressively. If you have a good month, make a bigger payment. If you have a tight month, just make the minimum. It would help though, to know what the interest rate is on this loan. And whether that Vanguard account is taxable, tax deferred (IRA/401k) or a Roth.

 

[CKw4itlb]

OP here.

Thank you for your responses. I wanted a handful to accumulate before I replied.

1) Yes, I can call up Vanguard and transfer money over and be done with this loan, albeit with a minor penalty from the credit union.

2) The credit union pre-approved me for up to $20K non-secured loan which appealed to me because there was no inquiry "ding" on my FICO score which hovers around 820. I went with a 5-year loan, interest at about 9 percent. I went with that rate because the longer period allowed for lower monthly mandatory payments.

3) Regarding the $7K is the equivalent of about $20K in actuality comment, my friend was exaggerating, but his primary point was that if I can take out a loan with liberal repay policies, that, even with the interest paid, it would still be much less than what that $7K could earn at Vanguard over time. It was this philosophy that stuck with me. $20K, $15K, $10K, even $5K seemed like that could be reason enough to get the loan.

4) Now that I have had this loan, having debt bugs me a helluva lot more than I thought it would. I mean--I knew it would bother me some, but it bugs me so much more than I anticipated. My thinking now is that I must keep this loan at least for six months so that I can at least maintain my FICO score. If this logic of mine is off, then by all means, alert me.

5) As for the comment about all the analysis for just $6,500, well, I guess that could be a fair point, but it seems many threads and discussions are had on here, in greater detail, for amounts that are much less. (Sorry, not sorry?)

I, too, mean no disrespect to anyone who has taken the time to respond. I don't use this forum as often as I should. There are some very enlightening viewpoints on many threads. For those who are tossing in their two cents, or three cents...thank you again.

 

[Andre1969]

Thanks for the additional information. At 9%, I think I might be tempted to pay it off. Or, at least pay it down more aggressively.

I don't know too much about how FICO scores work, but with my own, I've noticed that credit cards seem to have a lot more sway on them than fixed-type loans, such as a mortgage or car payment. However, those are both secured loans. I have no idea what kind of impact a non-secured loan would have.

But, if taking this loan out in the first place didn't impact your FICO score, then I would guess paying it off early (even before 6 months) might not have an effect either. If you're worried about that 6 month figure, what you could do is pay off the vast majority of it now, then make smaller payments up to the 6 month point, and then pay it off.

 

[latexman]

@ 9%, I'd pay it off. When? I'd talk to the CU loan officer about that. About FICO score and early payment penalty implications. But @ FICO = 820, this should not have a significant effect.

 

[captain3d]

9%. Goodbye loan

 

[COcheesehead]

You learned a lesson about yourself. Pay it off.
As to the comment about out earning a 9% loan in an investment account, good luck.
Regarding your FICO. It’s a wash.

 

[RunningBum]

3) Regarding the $7K is the equivalent of about $20K in actuality comment, my friend was exaggerating, but his primary point was that if I can take out a loan with liberal repay policies, that, even with the interest paid, it would still be much less than what that $7K could earn at Vanguard over time. It was this philosophy that stuck with me. $20K, $15K, $10K, even $5K seemed like that could be reason enough to get the loan.

Maybe, maybe not. Not without risk. Is your friend confident enough to tell you to take out a loan simply to invest more money, since they say you could earn more at VG? Doubtful. So why take out a loan for something you could pay cash on? That doesn't seem like good advice.

 

[Humbooster]

Pay it off, peace of mind is everything, there is no need to have anything weigh you down if you can get rid of it fairly easily.

 

[Exchme]

A debate often had on this forum is whether to pay off a home mortgage early or invest. That is a rational discussion to have. Mortgages interest is much lower than this and is partially tax deductible.

The 9% here is very high, and while that 9% is slightly below the S&P500 average return, your loan is not tax deductible, so on average it probably comes out as a loser. Of course that average return includes some sickening drops that you'll never see coming, long grinds down, extended periods where it goes up and down over the same range for a decade or more and of course a few great boom times mixed in. And there's your problem, borrowing to invest means you can't afford to take the kind of punishment the market can dish out.

The market is just everyone trying to outguess each other about the future, so it doesn't work to try to time it and only borrow when stocks are going up. John Bogle, the former CEO of Vanguard, said something to the effect that he didn't know anyone that could time the market and in fact, he didn't know anyone that knew anyone that could time the market. So just pay off the loan as quickly as possible and put this down to a life lesson.

With consistent savings and living below your means, you can get rich - or at least very comfortable - slowly. The more schemes you employ to try to speed that up, the more you ruin the chance you get there at all.

 

[Sunset]

OP - I would be happy to get 9% at Vanguard into your pocket (after taxes), your friend is wrong, the loan is costing you more than you will make over time in the market.

I would pay off the loan, assuming you don't have to use expensive money by pushing yourself into a new tax bracket.

That 9% is the cost after taxes have been paid on the money.

 

[Jerry1]

9%. Goodbye loan

Yes. 9% is too high. Something like a 3% mortgage may be worth stretching out but not a 9% loan.

 

[Dean56]

9%. Goodbye loan

+1

You'll be able to cross this off your To-Do's list.

 

[Koolau]

Let's make it unanimous - pay it off at 9%!

 

[DrRoy]

9%??!!
Much too high.
Pay it off.

 

[Marc]

If this is HELOC only penalty from CU should be to "close" the loan not pay balance to zero. I had the same thing when I took off a HELOC to pay off new house before old house was sold. I immediately paid off loan when old house sold but kept the HELOC open the required two years before closing.

 

[Badger]

Trust your gut. You seem to already know.
If it were me I would pay it off. I did this years ago with everything because I got tired of making monthly payments on multiple loans (house, car, etc.) and wasting money on the interest. I made sure I had enough saved/invested that I would never need to take out a loan again. The only exception is CC which I only use if I know there is the money to cover it and is paid off every month.

Cheers!