Pay off debt during down market?

[Nutria]

When stock investments are making 8% annually, it makes no sense to pay off a 4% car loan. But what about when the market is flat or down? At that point, the 4% car loan is costing you.

If your long-term investments are relatively old, then ashing out some of then wouldn't incur a loss since they were probably purchased at a lower point than the current market.

Thoughts?

[Fishindude77]

I would argue that it ALWAYS makes sense to pay off and get out of debt.

[Fishindude77]

double post oops

[Fishindude77]

double post

[autoxer]

I would argue the opposite, if the market is down, then you should be buying equities. If you wait for the market to go up, then you are buying less shares.

Although 4% is too high for a car loan.

[feh]

When stock investments are making 8% annually, it makes no sense to pay off a 4% car loan. But what about when the market is flat or down? At that point, the 4% car loan is costing you.

If your long-term investments are relatively old, then ashing out some of then wouldn't incur a loss since they were probably purchased at a lower point than the current market.

Thoughts?

I would say - don't try to time the market.

If that advice is going to be ignored, then you should buy more when the market is down, not less.

[autoxer]

I would argue the opposite, if the market is down, then you should be buying equities. If you wait for the market to go up, then you are buying less shares.

Although 4% is too high for a car loan.

Scratch that, I would argue that it's best to come up with a strategy that doesn't have you guessing whether that over the next year, the market will return 20% or drop 20%. My strategy for investing over the next year is no different than it was for the past few years. It is the same weekly contributions into the same asset allocation. I compare my debt interest rate to what I expect to return in the market over the long term, not what I think it will return in the next year.

[amastewa93]

I would probably argue that paying off your debt would be more important than returns on your stock. Of course, putting money in the stock market is a great way to make your money work for you, but if you are in debt, it might not do you much good.

[Fishindude77]

I frequently hear the old line ...... "Rather than paying extra or paying off my low interest mortgage, I should put my excess funds in the market where I can get a return greater than what my mortgage is costing me"

I get this, and it makes sense, but would bet that many that preach this line don't take that extra (if they have it) and put it into investments.

Many tend to "over analyze" finances, talking about putting money here vs there to gain that additional couple percent. While that makes sense for professional investors, most would be better served by focusing on getting out of and eliminating their debt. When you have no debt, a whole lot more money and opportunities to grow personal wealth are available to you.

[snafu]

While most SA participants manage money well, if you have any influence over others who have taken on massive debt, explain that in every other country, there is huge upheaval. Jobs are contracting/gone at a scary pace. You need an Emergency Fund of at least 3 months that covers basic expenses. In our area foreclosures are up 30%. The only buyers are sharks, looking for the most desperate sellers, those carrying the most unmanageable debt. Job losses, shut downs, layoffs are running a thousand a day! Trickle down hasn't started yet, protected by Christmas buyers but the bills are in the mail

[dczech09]

Looking at a 4% car loan and saying "well, hey I can make 8% in this market, so I should invest instead of paying off the loan" is faulty. You cannot look at interest rates on debts nominally.

If you were to invest $100 into the stock market, you could get a high return, a moderate return, a low return, or even a loss. You simply do not know what you will get until it is too late.

If you were to use that $100 to instead pay down a 4% car loan, you save 4% in interest. You know exactly what your return is.

Sure, there is an opportunity cost when you pay down the car loan, but there is also an opportunity cost when you invest. The whole point is that your return is much more stable and predictable when you pay down the car loan, as opposed to investing.

If you invested, you not only have a risk that you could lose your money, but you also have the risk that you do not make enough to cover the 4%. So comparing the 4% car loan nominally with an 8% market return is foolish because you are leaving risk out of the equation. Its the same as how you cannot compare a crap shoot with investing in the stock market.

No matter the market conditions, you are best suited by paying off the loan because you eliminate all of the (more dangerous) "what ifs." At least you know your return, and you're not wringing your hands hoping for a glamorous outcome that is out of your control.

Another way to look at this...
If you were debt-free, would you take out a 4% loan to invest in the stock market? After adjusting for taxes, inflation, interest, and risk, you would be crazy to do this.

[LivingAlmostLarge]

It depends. One thing about paying off debt. I always think you should not pay it off with savings and lump sum but suffer paying it because otherwise the habit will reoccur. Gotta change behavior. Sometimes that means paying of debt longer.

[ua_guy]

I think it's a good question to ask - invest now, or pay off debt, especially given the recent market conditions.

Specifically, I'm curious about my own mortgage, 495k outstanding balance due in 2043, 3.5% interest rate. We have plans to pay it off well before 2043, but could accelerate even that if we channeled some of our income away from retirement contributions. The worry is that paying interest on a mortgage balance that big is actually hurting us in the long run, especially in an "age" of market conditions where returns seem low.

[Fishindude77]

That $495,000 mortgage is kind of a no brainer for me. if you just stick to the standard mortgage payments and duration, you will have paid nearly $750,000 for that home, plus whatever down payment you put on it.

Cut that payoff time by 1/4, 1/3 or half and you will realize huge savings in interest paid. Further .... do you really still want to be paying for that home (27) years from now?

[rennigade]

Whats debt? Im 32 and thats not a word in my vocabulary.