20K Loan @ 2%

[gpoitras]

Within the year I'm going to be eligible for a 20k loan @ 2% interest from my bank for completing a certain military school.

We grossed about 110k this year, no debt but the house. 2 infant children.

Can anyone think of a way to invest this 20k so it would be worth taking the loan? Maybe something short term, 1 year to 18 months.

Otherwise, what would you do in my situation, take it or not? I'm interested in your opinions. Thanks

[disneysteve]

That's an interesting question. You'd have to find something with a guaranteed rate of return high enough to cover the interest on the loan and the taxes on the earnings and still leave enough to make it all worth the trouble. If you earned 4% and 1/4 of that went to taxes, you'd end up with a 1% net return, just $200 on 20K, which might not be worth the effort.

[wonderfulpittance]

If you are able to find something with a return on investment higher than the interest (as disneysteve has mentioned) you should try it out. But before doing that, you still have a lot of things to consider.

You haven't mentioned if you have sufficient emergency fund. Or savings for your infant children. I suggest you look around and see where you can use that 20k instead of thinking of short term investment. IMO, there are not a lot of short term investments with good returns. As mentioned by disneysteve, $200 return on a 20k loan is not much, but that's if you're looking at it as an investment. But if you're saving that 20k for something else, say savings for your infant children, $200 would be welcome. I suggest looking for institutions that offer compound interests. You'll be amazed at how much money you'll get with compounding interests especially if these interests are compounded monthly.

Good luck.

[kork13]

"certain military school", huh? Sounds familiar...

In any case, I was in an identical situation about 3 years ago, right before I graduated college. I was offered a $30k loan at 1% interest, which I took and am about halfway finished paying off. Personally, I set it up for the long term. I set aside $10k of it to buy a car, then invested the remaining $20k. I started my Roth IRA by loading it with 2 years' worth of $5k contributions, and put the last $10k into a standard investment account. I prefer simplicity in my investments, so the Roth is in a 2050 Target-date fund, and the taxable account is made up of a S&P 500 index fund, mid-/small-cap index fund, and a GNMA fund. I've been building on all of those accounts since then, and have been able to grow everything to more than $75k. Obviously, alot of that is from additional contributions, but by using the loan as a starting point for myself, I've been able to do quite well. The payments are easily carved out of my paycheck, and the minimal interest has been far worth it. I'm drawing out the loan for as long as I can (5 years).

Understandably, you and I seem to be in a very different personal situation, but that's what I did with it when I had that option. I'd recommend a similar course for almost anyone else who has it as an option...

[cschin4]

You might want to take that and open 2 college accounts for your kids at $10K each. Then pay back the loan and know that you have a great start on funding your kids college.

[bjl584]

I would pass on the loan. It sounds more trouble than it's worth. After taxes you aren't going to net enough to make it worth it to you.

[gpoitras]

15k EF at ING earning 1.1%

Aside from my military retirement (7 years left) my wife and I have around 30k in retirement savings, spread out over 457b, TSP, and 2x Roth IRA's. I'm 31 and my wife, 27. We've got about $900/month going to investments and the remaining $2000 going to the EF.

As I said before, aside from our mortgage, we're debt free. Cars both have under 70k on them and they are Honda's so the upkeep is relatively minimal.

6 months of expenses for us is 26k, so that's our first EF goal.

I don't want to start educational funds for the kids until our retirement situation is on track.

If I do end up taking the loan, my plan was to fund both Roth IRA's for the year, leaving just about 16000 which I could put into a long term growth mutual fund so it can start working for me today. I "feel" confident that a mutual fund that's got a good 10 year track record will return more than 2%.

My asking for short term was wishful thinking as anything thats cheap and fast, cant be good.

[bjl584]

Borrowing money to try to make a profit by investing it is a risky proposition. It reminds me of people that take out a HELOC against their home and try to take the money and make gains on it in the markets. You may come out ahead, but you also may end up in foreclosure. Unless you are thinking about parking the money into a 0 risk investment like a savings account or a CD, then I would advise against it. Being that interest rates are near zero, this strategy doesn't really make sense. I still vote that you pass on this.

[jpg7n16]

Originally Posted by gpoitras

Can anyone think of a way to invest this 20k so it would be worth taking the loan? Maybe something short term, 1 year to 18 months.

Short term, no.

Long term, yes.

If you take a short term loan, you'd need a short term investment. And as detailed above, it may not be worth the hassle, and may cost you money anyways.

But if your risk tolerance is high enough, and you can borrow the money for 5-10+ years, I would borrow it in a heartbeat and invest it all in stocks and bonds - like Kork did.

I have a high risk tolerance though. You may not. So it may not be a good idea for you.