1

I have a loan with a fixed 6.5% interest rate, with an absurdly low minimum payment, so I have been paying extra each month (about enough so that the loan will have a 10-year repayment lifetime instead of god-knows how long). Due to this, I am months ahead on the payment.

Considering that the long-term growth of the stock market is in the 6.5% range also, what would be the better use of my money? Should I continue paying extra on my loan in order to pay it off quicker, or would I be better off paying the minimum and investing the money in my 401(k)?

4

The long term growth is not 6.5%, it's 10% give or take. But, that return comes with risk. A standard deviation of 14%. Does the 401(k) have a match? And are you getting the full match? If no match, or you already top it off, the 6.5% is a rate that I'd be happy to get on my money. So, I would pay it off faster. My highest rate debt is my 3.5% mortgage, which is 2.5% after tax. At 2.5%, I prefer to be a borrower, as that gap 2.5%-10% is pretty appealing, long term.

  • I haven't reached my corporate match limit... yet. Since I'm ahead on this loan, I think that's the goal I'll aim for. – Bigbio2002 Oct 16 '13 at 22:17
  • 1
    @Bigbio2002 - getting the match takes absolute priority, even a 25 or 50% match is free money and should come before a 6.5% loan. – JoeTaxpayer Oct 17 '13 at 1:25
  • Let's assume I am now contributing up to my match. If the long-term market growth is 10%, why should I pay off the debt, versus putting more into my 401(k)? – Bigbio2002 Feb 25 '14 at 22:04
  • If you are comfortable with the concept of the long term gain potential with the +/- risk layered over it, i.e. the down years along the way, I wont debate the choice. I'll share that some people are still advocating paying off their sub 4% mortgages, and doing so with a zeal that boarders on religiosity. My purpose is to educate. If you understand, the decision you make will be well informed. And it will be right for you. – JoeTaxpayer Feb 25 '14 at 23:45
2

Having a loan also represents risk. IMHO you should retire the loan as soon as feasible in most cases.

JoeTaxpayer, as usual, raises a good point. With numbers as he is quoting, it is tolerable to have a loan around on a asset such as a home. While he did not mention it, I am sure that his rate is fixed.

If the interest rate is variable: pay it off. If it is a student loan: pay it off. If you can have it retired quickly: pay it off and get the bank off your payroll. If it is consumer debt: pay it off.

  • +1 yes my rate is fixed. Thank you for your kind words. – JoeTaxpayer Oct 16 '13 at 19:28

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.