Payoff a loan or invest?

Question

So I have a car loan that is about $470 a month. I currently owe about 11k on this vehicle. I also have around 20k in available capital that I could use to pay off this loan or to invest.

My question is this. Does using all 20k as investment capital play out better in the long run, or paying off the loan and saving that $470 a month.

Thinking about this like an investment here is my math, looking for a sanity check:

If I pay off the loan, my ROI is close to 50% per year. $470 x 12 months = $5640 yearly savings. Divide that by the $11k loan amount and I end up with 51%. However there is no equity or appreciation. I just have an extra $470 a month to save towards future investing.

If I decide to invest it, I doubt I could find an investment with a 51% return, however I also know I would have an asset that could appreciate in value while also generating maybe $200 - $300 in cash flow.

Overall, I am a rookie investor and I am still in the education phase. So I am leaning towards paying off the vehicle. That would set my ability to buy now back, but I am also still learning a lot, and it would give me plenty of time to learn strategies and get comfortable with evaluating deals.

Andrew B. · Answer

You're looking at it wrong. That's not a 50% return. That's purchasing a car. Your actual "return" is the savings on the interest. Whatever your interest rate is, that's your return on investment. With a car payment that high, I suggest paying it off. Especially when you have such an insignificant amount to invest.

Andrew Neal · Answer

@Phillip Overpeck I would payoff the car. That $470 is counting against your DTI (debt to income) and will vastly change the amount you can get qualified for. Even a few hundred bucks makes a huge difference.

Account Closed · Answer

@Phillip Overpeck I suggest keeping it simple and pay off the car and then pay cash for all future cars. It's best not to have a loan on a depreciating "asset." You will offer yourself a lot of flexibility without that payment.

Bernie Huckestein · Answer

As said this will not produce the returns you are speaking of, not even close.

I guess the official stance might be - what are you paying as an interest rate on the car and can you invest the funds elsewhere for return higher than that rate

That said, unless you already have a low Debt to income ratio and if you can pull together other money or Partner with someone on RE investments, I would pay the loan off allowing you to contribute the monthly amounts you would have paid on an investment mortgage...

Thomas S. · Answer

Pay off the car or sell it and buy a less expensive one with a portion of the cash received.

Bad debt is bad debt, your primary goal as a investor is always to clear bad debt.

Craig Curelop · Answer

@Phillip Overpeck - I agree with the people above. The car is a depreciating asset. You are putting money towards it every month while you drive it and it loses value.

As for the ROI. You are technically thinking about it wrong, but I actually like the way you think about it. The only way you get your principal back is if you sell the car and DO NOT purchase a new one. I'm going to assume that this is not in the cards so you are effectively losing $470 per month on the vehicle.

Pay off the car, increase your savings rate, and continue to funnel those savings into investments that provide a high return.

Phillip Overpeck · Answer

Admittedly the terminology there was faulty, I was thinking of it as more of an analogy. I look at that $470 as if I never had it to begin with, since I know I have to pay that monthly.

So I am equating the whole amount to the return, since it is now money I have access to. Versus just looking at the interest portion.

Thanks for the advice

Payoff a loan or invest?

Payoff a loan or invest?

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