# Pay off no interest loan with a personal loan?

As part of an employment switch, my new employer fronted \$325k to buy out my old employer's non-compete clause.

The \$325k was to be repayed without interest, through certain paycheck deferrals. Once a quarter, an escalating amount of money will be repayed. Now, 2 years in, the bulk of the repayment is to take place. At my ~32% tax bracket, this would amount to ~32% taxes on ~215k remaining, without realizing any of that income.

Soooo, I was thinking what if I payed off the amount owed via a personal loan. I am able to get a bank loan for the amount of the outstanding debt at 3.8%. My idea is that I can then use the income that would have been deferred to invest in an index fund, which would probably yield me ~7-8% of the next three years. That would seem to be better than just deferring income?

To summarize:
Current: 215k outstanding debt, no interest, income not realized (goes back to employer)
or
Proposed: 215k debt payed off with personal loan at 3.8%, realized income invested in index hopefully returning 7-8%.

Provided my estimation of the return on investing is true, I think the math works out? Any holes people see in this strategy would be appreciated.

• Perhaps I am missing something. You propose to borrow at 3.8% to pay off a 0% loan, but somehow see a 7-8% extra return this way? How does one relate to the other? Commented Feb 24, 2015 at 0:47
• In this way: currently, I don't see the money that is paying back the loan. I don't have a chance to invest in a good market for index investing. If I pay it off, I would sew that money and offset the loan interest by a return on my investment. There is an element to risk for sure. Commented Feb 24, 2015 at 2:29
• Could you not deduct the amount repaid as an employee business expense? Commented Feb 24, 2015 at 3:53
• I'm still not seeing how this works. You're "not seeing the income" because it's going in loan repayments. If you pay off that loan with another loan you'll "see the income" in a literal sense but then you'll see it go stright away in loan repayments to the new loan, which will be higher because it's not interest free. Where is the money to invest coming from? Unless what you're actually proposing is to take the personal loan over a longer period so you pay less/month than you currently are? Commented Feb 24, 2015 at 11:20
• @NigelHarper "take the personal loan over a longer period" - I think you got it. Commented Feb 24, 2015 at 12:11

You are effectively 'making' 3.8% right now. By maintaining a loan at 0% vs the 3.8% you'd otherwise pay, you are ahead by that percent.

Now, if you borrowed at 3.8%, and made 7.6% on your investments, taxes aside, you'd break even. you are exactly ahead by the same 3.8%.

It seems to me that with a break-even of 7.6%, you'd be taking a risk based on the market return over the next few years. In a sense, that's true for any of us, but in your case, you are not deciding where to put idle cash, you already have the 3.8% option of "leave well enough alone." This is where I'd quote Harry Callahan - 'you've gotta ask yourself one question: "Do I feel lucky?" Well, do ya, punk?'

• That's a good way to look at it, in the sense of an implicit 3.8% advantage to staying put. I hadn't really considered it in that way, thanks for your comment. Commented Feb 24, 2015 at 14:20

Well, if you can get a loan for 3.8% and reliably invest for 7% returns, then you should borrow as much as you possibly can - the whole employment/existing loan situation doesn't even enter into it!

But as they say, if something is too good to be true, it probably isn't (true). The 7-8% return are not guaranteed at all, but the 3.8% interest is. And while we're at it, 3.8% for an unsecured loan sounds pretty damn low, I would be really doubtful about that. I mean, why would the bank do that if they could instead invest the money for 7-8%?

• I should have clarified that this is not an unsecured loan. Rather it is a home equity loan at indeed a 3.8% rate. That rate is why I am considering this strategy. The funds that I take home can partly be used to pay back the loan and partly to invest. Or it can be used in whatever manner I want. That is currently not an option as the payback takes place in quarterly bulk installments. Commented Feb 24, 2015 at 2:33
• @user1837608: ah, I see, that's more realistic. Well, overall it's simply a gamble. You're gambling that the returns on the investment will be higher than 3.8% over the timeframe of that loan. They may be, or then again they may not be. Personally, I wouldn't bet on it; stock markets have gone up for some years now, a downwards phase sometimes in the next few years is quite likely. Now I noticed that you mention taxes, which could change the picture, I guess. But I'd rather ask a tax advisor about that. Commented Feb 24, 2015 at 11:38