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I'm trying to get some different opinions on what I should do. I'm selling my home and buying another. The difference is $25,000. I have $50,000 in my bank account, no debt, $10,000 in a Roth IRA and around $5,000 in my personal trading account. (I'm mid twenties, and I started investing three years ago.)

I am thinking about taking a secured loan from my credit union for $25,000 with a 2.74% interest rate and putting my $19,000 car on it. I don't want to take out a mortgage for several reasons.

My reasoning for this is my monthly payment will be close to $1,100 (which I can afford) and the interest from the loan is roughly $720 over the life of the loan. If I invest $10,000 into my stock account and invest in a safe mutual fund (3-5% per year), I will be able to recoup the $720 loss (and maybe make some) and not use my own money.

Is this the smart thing to do? Worst case scenario is I pay off the loan early (no penalty) and my bank account takes the hit. Thoughts? Opinions?

Thank you!

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    Possible duplicate of mortgage vs car loan vs invest extra cash? – Grade 'Eh' Bacon Oct 23 '17 at 17:14
  • There are a lot of questions talking about using a mortgage to invest - this may not be the best one, but you should search around for other questions which may be better suited. – Grade 'Eh' Bacon Oct 23 '17 at 17:15
  • What do you mean by "(put) (your) $19,000 car on a secured loan? Use the car as collateral? – RonJohn Oct 23 '17 at 17:22
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    Why is a mortgage not an option? The reason for that may be significant when deciding on a car loan. – D Stanley Oct 23 '17 at 18:27
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    I close in 3 days @DStanley – D E Oct 23 '17 at 18:41
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Is this the smart thing to do?

You're essentially borrowing money at 2.7% to keep it in your bank account. No, that is not a smart financial decision. Pay the difference in cash and replenish your savings with the $1,100 a month.

Some other notes:

  • You may not be able to get a $25K loan on a car that's worth $19K. You will immediately be upside-down on the loan and will be for a while
  • When you have a lien on a car, most, if not all, banks will require you to have full insurance coverage (to protect them, not you). If you do not borrow on the car, you can reduce or eliminate the full coverage, reducing your auto insurance premiums significantly. You could also use that savings to replenish your savings and self-insure (which you can obviously do with $50k in the bank).
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    While what you say is true, it's insane not to have Comp/Collision on a $19K car whether or not it's paid off. – RonJohn Oct 23 '17 at 18:38
  • @RonJohn On a $19k car, maybe, but you can also increase the deductible and save a lot. – D Stanley Oct 23 '17 at 18:42
  • My insurance is pretty fair and I have high deductibles. I don't plan on dropping full coverage for a few years at least. I can agree with your statement about borrowing money to keep it in my bank. I am young and I am unsure about the future, so I would rather have the peace of mind of having the money in the bank than not, but at the end of the day you are correct. Thank you – D E Oct 23 '17 at 18:56
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    @RonJohn No, but it was part of my point that there are other costs associated with borrowing against a car. If that's the biggest point of contention I can take it out. – D Stanley Oct 23 '17 at 19:13
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    @Devyn Again, you're ignoring risk. You could just as easily lose 5% as gain 10%, depending on the risk of your investments. You might come out ahead, but it's not guaranteed. You are guaranteed to pay 2.7% on your loan. That's the difference. You may not go broke, but you're not for certain going to come out ahead. If you can tolerate that risk then go for it, but I would not call it "wise". – D Stanley Oct 23 '17 at 21:57

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