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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!

D E
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1 Answers1

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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).
D Stanley
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