Pay Cash or Finance?

Discussion in 'Business, Investing & Finance' started by bradgator2, Jul 30, 2020.

  1. PCGatorAlum

    PCGatorAlum Well-Known Member
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    If you have a decent balance in your 401k you can borrow money for a car and pay yourself back the interest. It's a terrific way to finance and get more money into your 401k because you are paying yourself the interest.. BTW the Cares act has doubled the amount you can borrow due to the Wuhan Flu Check it out with your HR department.

    https://money.usnews.com/money/reti...g-a-401-k-loan-to-cope-with-coronavirus-costs
     
    #61 PCGatorAlum, Aug 13, 2020
    Last edited: Aug 13, 2020
  2. bradgator2

    bradgator2 Rioting
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    So... as a strategic way to maximize your money and squeeze out every last drop possible... you'd do this method?
     
  3. PCGatorAlum

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    I have, and I have another friend that financed two cars this way.
     
  4. bradgator2

    bradgator2 Rioting
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    Alright, help me break down this 401k loan concept.

    Let's start with the same starting assumptions:

    $40,000 loan, 60 month term. You have the cash, you can take out a 2% loan through the dealer, or you can take out a 401k loan.

    For the sake of keeping it simple, let's assume you can get a 7% return on any money saved.

    Option 1: Take out a 401k loan. I just checked mine and it has a 6.75% interest rate and I cannot make contributions with an outstanding loan. So that's a $787 monthly payment. Plus a bunch of nickle and dime fees that we'll ignore. So $787 "saved" per month, always earning 7% interest, and making no other contributions to my 401k, it would have a balance of $56,000 in 5 years.

    Option 2: simply pay cash. My 401k balance would go from $40,000 and with zero other contributions during the next 5 years it will have a balance of $56,100. If I saved that $787 "payment" into my 401k, then my 401k balance would be $112,000.

    Option 3: Put that $40,000 into a brokerage account. Make a monthly withdrawal each month to make the car payment. I would have $6,190 left in that account when the final payment is made. (this calculation was made previously in this tread). 401k balance is the same as above and have an ending balance of $56,100, or $112,000 if I made I saved that payment each month.

    Am I looking at that correct?

    (edit.... I guess in theory, you still have that $40,000 cash laying around in option 1 that you could invest)
     
    #64 bradgator2, Aug 13, 2020
    Last edited: Aug 13, 2020
  5. PCGatorAlum

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    I had no problem making contributions while taking a loan so if that is the case for yours it would make no sense. I have no idea why your 401k is doing that to you.

    I double checked with my buddy who currently is doing this and he is paying back his 401k the loan and is making his monthly contributions. I looked all over to find any information on not being able to make contributions while having a loan and could not find it anywhere. Are you sue whoever you talked to know what the hell they are talking about? Seems really arbitrary and penalizing and possibly illegal for them to do that. I would double check that.However that could be due to the company not wanting to match your contributions and doing whatever they can to avoid it.

    Now assuming you have at least 40k in cash in your 401k and can still make contributions while paying back the loan at 6.75% your 401k after 60 months. You will have paid $47,240 back into your account Plus whatever else you contributed. Getting a near 7% return these days is unheard of nowadays. You are borrowing your own money so you make $7,240 on that loan.
     
    #65 PCGatorAlum, Aug 13, 2020
    Last edited: Aug 13, 2020
    • bradgator2

      bradgator2 Rioting
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      My current 401k.... now at 11 years old... is at 13.8% since inception

      My IRA, which started with a rollover 401k in 2004.... is at 11.5% since inception

      I am just struggling to find an advantage with a 401k loan when the other 2 options are on the table. Dont get me wrong.... I have taken a 401k loan in my younger years and it was a great option for me at the time. But now I have options.
       
    • PCGatorAlum

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      Sure, I personally do not like to pay interest to other people. However if you are actually going to buy a car and have stellar credit you should be able to get 0% right now anyway.
       
    • PCGatorAlum

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      13,8% and 11.5% is this annual return or ROI to date?
       
    • bradgator2

      bradgator2 Rioting
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      I like you PC... but you never address the post you are replying to.

      Where would I get this car loan at 0%?
       
    • bradgator2

      bradgator2 Rioting
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      Well, not entirely certain. I put in the the specific time period and it says, "your rate of return for the period beginning xx and end Aug 12, 2020 is 13.8%
       
    • PCGatorAlum

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      Well if you are getting 13.8% consistently I want to know what you are investing in! LOL No, Sounds like that is YTD
       
    • PCGatorAlum

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      Dealerships are offering it saw it on TV the other day as a matter of fact. 0% for 72 months

      Check this out:
      Best 0% APR Financing Deals Right Now [Updated Weekly]
       
    • bradgator2

      bradgator2 Rioting
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      Alright, let me restart the thread.

      Toyota, the $40,000 car I bought, is offering 1.9% financing... regardless of the term length.
      Or I can pay cash.
      Or (new twist to the game) I can take out a 401k loan to pay it.

      Sell me on the the 401k loan option. Go...
       
    • PCGatorAlum

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      Depends on how much 2k is worth to you. For me personally, I would have offered $1200 up front for 0% financing. Otherwise not worth the 401k hassle.
       
    • bradgator2

      bradgator2 Rioting
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      Due to my age, I've been floored ultra agressive.

      50% of it is in a Blue Chip growth with a 18.72% 10 year return.
      Then a mixture of (all reported at 10 year return numbers):
      Health and Science fund with a 20.8%
      Science and Tech Fund at 18.6%
      Mid Cap Stock Fund at 16.9%
      Small Cap Growth Fund at at 13.8%
      Real Estate Securities Fund at 9.9%
      Utilities Fund at 9.8%

      Now I am always tweaking these a few times a year.
       
      • bradgator2

        bradgator2 Rioting
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      • PCGatorAlum

        PCGatorAlum Well-Known Member
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        No but you could've offered half the interest up front to get them to 0% finance. Always room to negotiate. ;)
         
      • bradgator2

        bradgator2 Rioting
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        YTD is +17.18%

        Untitled.png
         
        • jeeping8r

          jeeping8r Your car may go fast, Mine will go anywhere

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          Do you have to pay income tax on the original 40K you loaned yourself?
           

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