Recommended: Shared secure loan.

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I wanted to share something of a product I ran into that served my needs well.

First of all, I know the savingadvice philosophy is cash is always better than borrowing, when paying for a car. Not trying to argue against mathematics. . .yes, you have interest with car laons and don't with cash.

But I have an ETF of about 35K and didn't want to just dump 6K of it on a car. I feel weird losing 20% of my cash position all at once. (banks/credit unions are a pain in the butt and have caused this country a lot of heartache - in the waiting room of the credit union, there was an article there saying they need to lend more)

So, I went to apply for an auto loan. Long story short - even though my credit is excellent, and I had last years tax returns, b/c I am self-employed, they aren't lending until I have this years tax returns done.

So. . .what I did was a "shared secure loan" - I basically took the money out of my EF and put it at that bank, in savings, where every month, as the loan balance goes down, more and more my savings becomes liquid again.

THe rate on this loan is 2%. (vs. 4.5% for a standard auto loan)

I guess it's a small price for me to know that my cash wasn't spent (even though it's illiquid right now - held against the loan) and I can pretty much gamble that interest rates have no where to go but up. Soon enough, the savings account may be getting 2%, thereby nullifying the 3 year shared secure loan.

I may do more and more of my lending in this fashion. Never knew about this product.

[bjl584]

That's interesting. Definitely something that I will have to remember.

[Ima saver]

This type of loan has been around a long time especially at credit unions and small savings and loans. In the 70's I worked for a savings and loan association. You could borrow your own money for just a small percentage over the interest rate you were getting paid. I think it is a pretty smart idea.

[KaleighMaeA]

I love this idea, I think that was a great move on your part. Not only are you not completely depleting your cash savings, but you're also creating an account at a very low interest rate that over time will improve your credit score.I will remember this for the future, thank you for sharing!

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Yeah, the credit score thing they mentioned also, which mine could use a little boost.

Well, they used their own "private criteria" and said it was 755 (upper end of good). But they said that was not the average of the 3, which back a couple months ago was 770 (excellent). Again, they called it "DEXSTA Credit Union Score", their own internal house metrics, not an average of the Major 3.

But I have taken out a mortgage, tapped my busienss LOC a bit, a 0% furniture loan, I have consumed credit a bit the last 2-3 months. . .may need another personal loan here shortly for a new furnace.

Well, money is cheap, so I'm buying and doing my part to stimulate the economy.

Also - major milestone in my life - my ROTH + SEP IRA topped 100K today thanx to the continued silver rally. I now have officially 6 figures for my retirement. Had to scrimp to do it with kids and a divorce but I have done it (on Monday, it could be back below, who knows, lol).

As they say - Easy Come Easy Go.

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You know I was thinking about this today and talking to my father about it yesterday.

I told him about it and he didn't quite understand at first and then he said, "Oh yeah, ur grandmother used to do this with her money. She didn't want to drop all that cash on the car so she would go to the bank and get a loan about 2% over what it was paying on a savings account in the credit union. I don't know why she did it but she bought autos that way." (I can remember her cigar brown Chevelle, lol)

I was thinking anotehr way this is so advantageous. In effect, it doubles your emergency fund (or nearly doubles it).

Let's say you have 10K sitting in your EF. You are trying to build it up to 20K. ALl of the sudden, you have the furnace go on your house. Cost to replace: 5K.

But in essence, with "shared secure loans", you sort of have $20,000 in an EF. You take out a 5K loan at 2% and you keep your leverage.

Something to think about for your personal finance.

[Slug]

Interesting. I had not heard of this.

[disneysteve]

So they are charging you 2% to essentially borrow your own money risk-free to them. If you don't repay it, they just keep your deposit. What a deal that is... for them. No thanks. If you have the cash, I would use it.

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My total interest paid over 3 years will be $207.00. . .I don't know. . .to me that's a small price to pay to not have to drop substantially in cash.

If you are awash in cash, then yes, by all means. .. just drop the cash.

[disneysteve]

I have an ETF of about 35K and didn't want to just dump 6K of it on a car. I feel weird losing 20% of my cash position all at once.

I guess it's a small price for me to know that my cash wasn't spent (even though it's illiquid right now

My total interest paid over 3 years will be $207.00. . .I don't know. . .to me that's a small price to pay to not have to drop substantially in cash.

If you are awash in cash, then yes, by all means. .. just drop the cash.[/QUOTE]

As you said in your original post, we aren't arguing mathematics. From a math standpoint, it doesn't make sense. From a personal comfort/peace of mind standpoint, it might make sense for you, and that's perfectly fine.

For me, I wouldn't spend $207 on something that I didn't have to spend it on. You are "awash" in cash. You have enough to tie up $6,000 in an illiquid account without any problem. You just don't like the "feel" of seeing your balance sheet drop by 6K, even though ultimately that's happening no matter what.

By the way, I'm guessing your post was supposed to say EF of 35K, not ETF. That threw me off. I thought perhaps you were selling shares in an ETF to get the money to buy the car. Of course, many would argue that you shouldn't be using your EF to buy a car either.

[thekid]

How is this different than paying the 6k$ cash and then depositing what would be the loan capital payments into his savings account (other than paying interest)?

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DS,

YEs, by the time I noticed my error, I couldn't edit ETF to be EF.

I also wanted to add, the money they loan me isn't "risk free" to them. . .they are enduring market risk, banking on the fact the money they lend me will stay 2% above the savings rate. IF it doesn't, I owuld think it would be a loss to them.

Let's say in a year savings accounts are even paying 3%. I know it seems unlikely at this point, with Greenspan Bernacke keeping interest rates down. . .but he may not have control after awhile and interest rates may have to climb.

Now, I am getting 3% on my 4K balance left on a loan that cost me 2%.

I don't know. . .it's the businessman in me I guess - I am taught to use other people's money when at all possible and it's low risk.