Pay off car loan or put it all on the market?

[Jansen]

Hey guys, long time lurker here.

I've got a 2M yen car loan that lasts for another 40 months. I get a 70k yen discount if I were to pay in full next month, which doesn't feel like a lot. That's basically 20k yen a year over 3.5 years and I'm wondering if it's possible to at least make that much just from funds or stocks with good dividends.

Currently the only dividends I'm getting are from Apple stock, Vanguard S&P 500 ETFs and the Mitsui-Sumitomo-Vanguard foreign funds. Those were 2/3 of last year's NiSA allotments and I've received almost 7k yen cash as dividends from. Assuming they continue paying at the same rate and if I had another 2M yen more of those, it seems like I could possibly make another 21k yen?

[ricardo]

Pay off debt first.

Always.

[N00bster]

I'm wondering if it's possible to at least make that much just from funds or stocks with good dividends.

It is certainly possible. It is also possible that the market will go down and that you will take a loss, while still having the burden of paying your debt, at full price.

Saving 7万 tomorrow while becoming debt-free sounds more appealing to me than worrying for the next 3.5 years over whether I will make even or not.

Or to put it into different words: in effect, what you are thinking of doing is to convert your car loan into a loan to invest in stocks. Would you borrow money and invest it in stocks? If the answer is no, then you probably don't want to do it with your car loan money either.

[ricardo]

“Assuming ... seems like .. could...”

Debt = stress = misery.

Believe me.

Pay it off.

Then do what you want with YOUR money.

[RetireJapan]

If the interest is more than 1% or so, I'd probably pay the loan off

But it's a matter of preference.

[Jansen]

Or to put it into different words: in effect, what you are thinking of doing is to convert your car loan into a loan to invest in stocks. Would you borrow money and invest it in stocks? If the answer is no, then you probably don't want to do it with your car loan money either.

That is a good argument and you have convinced me.

[adamu]

Would you borrow money and invest it in stocks? If the answer is no, then you probably don't want to do it with your car loan money either.

This is the key point. It's great logic, but requires discipline to adhere to it because we are biased towards our current situation.

[jcc]

What's the interest? And ideally it would be good to know what the total loan is.

The 70k pay now is a factor of course, but it would be better to calculate it as percentage.

Assuming historical returns you could get a return between 4-8%(depending on your approach towards risk). The question then becomes

a) is the 70k lost plus interest rate higher than that? If it is, then pay that right away

b) are you willing to take on the greater risk for better gains(paying off and saving is a sure thing, investing is not)

c) can you live with that debt.

a is pure maths, b and c are personal decisions you have to make. Myself if the rate was low(like 1% or something) I'd take on the extra risk, leaves me more money to invest and a loss isn't a terrible setback. But that's just me. If you're pretty strapped for cash, taking the safe savings would probably be the better option

[Jansen]

What's the interest? And ideally it would be good to know what the total loan is.

The 70k pay now is a factor of course, but it would be better to calculate it as percentage.

Assuming historical returns you could get a return between 4-8%(depending on your approach towards risk). The question then becomes

a) is the 70k lost plus interest rate higher than that? If it is, then pay that right away

b) are you willing to take on the greater risk for better gains(paying off and saving is a sure thing, investing is not)

c) can you live with that debt.

a is pure maths, b and c are personal decisions you have to make. Myself if the rate was low(like 1% or something) I'd take on the extra risk, leaves me more money to invest and a loss isn't a terrible setback. But that's just me. If you're pretty strapped for cash, taking the safe savings would probably be the better option

The total loan amount is 2.6m with interest at 1.9% over 60 payments. I believe total interest is probably around 150k?

I'm not sure what you mean by a. I could definitely live with c, I basically just realised the last weekend that I had 2m yen in cash without anywhere to put it. I still have a bit more I could put in my NISA but it's essentially maxed out for the year.

[jcc]

Ok, so the 1.9% interest plus the 70k you would be paying to have the loan amount to something like 3% per year. With a moderately aggressive portfolio you would on average beat it but you might lose(and hell, you could lose part of your principal).

3% is close enough to your expected returns that considering it's a guarranteed saving it may well be worth it just to pay it off, but again if you have a high risk tolerance you would *on average* be better off investing it. That's a viable choice so long as you are prepared to accept the possibility you may come out worse. At 3% I'd probably just straight up pay it. I've said before I would not rush to pay a home loan(because those are less than 1% here) but the gap between average gains and the interest is small enough here the risk doesn't really seem that worthwhile