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My wife and I were discussing some of Dave Ramsey's philosophies about living a debt free life and it got us thinking: Ramsey's advice appears to be very one-dimensional in that he doesn't go in to detail about how to get in to debt should you need to (I admit I haven't read all of his stuff).  In real life there may be circumstances where taking on debt is a necessary choice.

So I'm asking the question here:  Assume you are 100% debt free today.  Also assume that you fall under every circumstance that would allow you to borrow money from (owning home, retirement, etc).  You need to borrow $50,000 and will pay it back over 5 years.  What would be the most economical technique to ensure you pay back the least amount of money?

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The best type of loan is one that is tax deductible and has the lowest interest rate.

Loans for investment purposes are t... (more)

BradMajors (Nov. 12, 2013 @ 9:36p) |

My 401k is +25%YTD, so that would have been one expensive loan.  Granted, could have went the other way.

vipercon (Nov. 12, 2013 @ 11:18p) |

Pay back the least amount?

Take out a ton of BT's and go codename47?

christoj879 (Nov. 13, 2013 @ 11:35p) |

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Invest the loaned amount at a higher interest rate than you are paying the loaner? Is that where you are trying to go with the question?

Home loan: Look around for the lowest rate
Car loans: 1.99% or less (Penfed DCU Alliant)
Balance transfers: 5% for life through various cards such as Penfed

All this assuming that you have good credit. I never believed in taking out loans but you cant beat 2% when it comes to cars and invest in a diversified etf. Last year was great

talonesi said:   Invest the loaned amount at a higher interest rate than you are paying the loaner? Is that where you are trying to go with the question?
  
I'm not trying to go anywhere with the question.  My objective is to see if there is a general consensus on the best way to take on debt assuming you had all options are your disposal.  That being said, your suggestion is something that could be considered.

Generally speaking and aside from creative special circumstances (like stacking 0% BT offers, etc.), borrowing against your home will give you the best interest rate and tax benefits.

Easy, buy a BMW and watch your investment drop 20% the first year and 15% every year after.

Get married and have kids and divorce.....Rinse and repeat.

interactive brokers FTW. 1% borrowing rate.

Best way to borrow $50k over five years? Either do it at the least cost to you (conventional loan at low APR, or HELOC at low rate+tax advantages), or borrow from 401k so at least the interest you are paying, goes back to you...in a round about way. Still costs you money up front, and opportunity lost on potential investment growth in the 401k, but at least you get a steady "return" via the interest you pay back to your 401k.

print your own currency and give out promises

Where's BrettDoyle

What are interactive brokers?

So far it sounds like a HELOC and 401k are the best options. Of these two, which one would you do?

Marriage!

jpfern15 said:   What are interactive brokers?

So far it sounds like a HELOC and 401k are the best options. Of these two, which one would you do?

  If I owned a house and had access to a HELOC, I'd do that. No brainer. The interest rates are very competitive with 401k interest rates, minus tax advantages...

While you might pay yourself 2-5% (average) via a 401k loan, you're also missing opportunity for growth on that. Then again, no one can predict the future. I took a 50% 401k loan last year when I felt the market wasn't going to do so well. This "protected" me from a possible downside on a lot of my money. Then, after I felt more comfortable with the markets, I just paid the loan off and reinvested.

The reason I did this, is because I was going to invest in some PMs with that money, but decided not to (thankfully), and just put it back into the 401k as an early loan payment. The alternative would have been to just move it to cash, or a very stable but low earning fund.

Thanks for the info. To focus on car loans and take what a previous poster said, would a car loan with a 1.99% rate from penfed be worse than a HELOC with a, say, 2.99% rate if you were buying a car?

Chiron said:   Generally speaking and aside from creative special circumstances (like stacking 0% BT offers, etc.), borrowing against your home will give you the best interest rate and tax benefits.
 

  Yup. 

If you need a lump sum, as in the OP, a home equity loan with a fixed rate would beat a HELOC.

Although the MOST economical choice to ensuring that you pay back the least amount of money would be to put it all on credit cards and then declare bankruptcy.

jagec said:   
Chiron said:   Generally speaking and aside from creative special circumstances (like stacking 0% BT offers, etc.), borrowing against your home will give you the best interest rate and tax benefits.
  Yup. 

If you need a lump sum, as in the OP, a home equity loan with a fixed rate would beat a HELOC.

Although the MOST economical choice to ensuring that you pay back the least amount of money would be to put it all on credit cards and then declare bankruptcy.

  Then OP could post here about his financial situation, and about how "even though" he filed BK two years ago, he finds himself unable to live off of his current salary. Then he'd post about how he has the best FIOS package, a brand new M5 lease, also a brand new Honda Civic Si for commuting, and a penthouse apartment...and ask us to give advice.

Then follows "pay your bills, deadbeat" posts from FWF members...

I'm not Ms. Cleo, but I can tell the future.

Only take on debt to purchase assets that produce money, not liabilities that cost you money.

cristinaaaron said:   Get married and have kids and divorce.....Rinse and repeat.
  Actually one divorce with kids will put you deep in the whole.

H&B?

Well, I was debt free for 12 years and I mean completely debt free - no mortgages, no car loans, nothing. And when it came time to go into debt, it was harder than you might imagine. I was completely off the credit report radar and had to get approved for a mortgage by alternative means. Still got the best rate avaialable at that time (3.375%) but it took a while. About four months later my mailbox was overflowing with people offering me credit. So...my advice to the OP is you have to get into debt, in order to get into debt.

The best way to get in to debt is to completely finance your education with Sallie Mae but never actually graduate.

The Value of Debt: How to Manage Both Sides of a Balance Sheet to Maximize Wealth

This is a good book that is related to your question... it focuses on running your personal finances like a corporation.

Start with apporama and carry it out to the extreme end.

codename47 said:   interactive brokers FTW. 1% borrowing rate.
  1.58% up to $100k: https://www.interactivebrokers.com/en/index.php?f=interest&p=schedule2 

jpfern15 said:   Thanks for the info. To focus on car loans and take what a previous poster said, would a car loan with a 1.99% rate from penfed be worse than a HELOC with a, say, 2.99% rate if you were buying a car?
 

I think there's a very interesting question within your post that you're obscuring by trying to pursue specifics. The best way is the cheapest, and that applies to these choices too. So it would depend on specifics - are there any startup costs, like an appraisal, for the heloc? Penalties for closing out either account early? What do tax benefits add up to? It's pointless to discuss these hypothetically.

The interesting question that I think many replies have answered is "What are good options for borrowing money?" I see answers including:
Heloc (or refi with cash out)
Car loan
CC BT
Borrow against stock holdings (IB)
401k loan

When you've got an actual need to borrow, or just find a great long-term offer in one of those, you just need to do the research & arithmetic. The only one that I think is a bit subjective to compare is the 401k loan, because you're not simply borrowing someone else's money, you're effectively shifting your own money out of certain investments. There are times when the impact of that is far more significant than interest rate & other fees, but identifying that requires predicting the future. So it involves a different kind of decision & risk than the others.

RealEstateMatt said:   Only take on debt to purchase assets that produce money, not liabilities that cost you money.
  Yep.  College is acceptable, a mortgage is acceptable.  If you absolutely have to, a car loan if you can't just get a beater car for cash.

Also do 2 chicks at a time

Dave is one dimensional.
He has helped many people, but his thoughts on credit cards is poor.

You should have no debt I agree.  But some calculated and controlled debt is necessary in life.
He says live like no one else ---- so ----- later you can live like no one else.
How much later, we all need to live life now, for some of use there may not be a tomorrow --- or far off future.

I have been on many vacations I could not afford, if it were not for multiple credit card sign up bonus and free hotel nights.
I only have one loan and that is for a car.  I keep that loan even though I could pay it off.  Its with PenFed at 1.49%
I keep that loan because I believe an installment loan is necessary to keep my credit score high enough to keep getting
more and more credit card sign up bonus and reward nights.

Note: I am weird --- I have no credit card debt, most are paid before the bill arrives.

So, some calculated debt can actually be profitable.
 

I admit I don't know everything about Dave Ramsey's philosophies, but I don't think I've ever heard him (or any of his followers) say there is a good time to take on debt. However, generally speaking, debt can be a good thing. Especially when you are able to leverage that debt to make a larger return on your investment than what you are paying in interest. If you are in a position to take a $50,000 loan at a low interest rate and, assuming you are comfortable with the risk involved, invest that money in something (ie. purchase a business, real estate for rentals, etc.) than it might be a good idea.

As far as how to take out a five year loan and ensure that you pay back the least amount of money, there are numerous ways to borrow. Collateral loans are generally going to be cheaper than unsecured loans unless you employ some strategic and creative methods (ie. credit card balance transfers). The best way to ensure that you pay back the least amount of money is to pay the money back way earlier than what the loan terms call for, which is essentially tied to what you intend to do with the money borrowed and what type of return on investment you are looking for.

just get married and you'll find all the debt you need. if that's not enough, have kids. if you still can't get there, try a divorce.

The eaiest way to get into debt if you have good credit is with 0% credit cards.  Note credit card(s).  You can easily take out $50K+ in CC debt if you have a good job and credit.

If you own a home, take out an HELOC.  Borrow from money from CC to make money.  Your backup is your heloc in case the credit card company doesn't like you anymore.

I purchased a $100K rental property using all credit card money at 1%-2% transcation fee.  Now if you want to try something like that, you better have a good backup for paying the debt.



 

StevenColorado said:   
RealEstateMatt said:   Only take on debt to purchase assets that produce money, not liabilities that cost you money.
  Yep.  College is acceptable, a mortgage is acceptable.  If you absolutely have to, a car loan if you can't just get a beater car for cash.

I think this is the more important issue - so many people blindly yell "no debt under any circumstances!!" and for most people that's not terribly realistic. For instance, I don't live in an area where a house costs as much as or less than a car. Entry level prices in the market in which I live are probably closer to $250,000. 99.9% of people need a mortgage to get a home. Paying out rent for years while saving up to buy a home outright in cash doesn't make good financial sense. Putting off college until you can pay for it in cash makes little sense too. There are SOME things that justify taking on debt for. Many of the most successful investors and entrepreneurs have used leveraging while building their businesses. But the trick is to understand what you're getting and to manage your risk properly.

Not living beyond your means is an excellent philosophy for your day-to-day living. But not all debt is bad debt. I think a lot of people would also benefit from learning in what situations they should consider debt and how to best shop for rates, etc., and ensure they do so intelligently. The lack of understanding of how debt works gets people into more trouble than the debt itself. For instance, it's amazing how many people who get a mortgage have no idea how mortgages work, what fees are reasonable, what fees are negotiable, how PMI works, etc. And how to minimize their risk. I think a lot of students would be also well served to view their student debt in the context as being part of a personal financial business plan. The Dave Ramsay hyperbole encourages people to completely avoid financial tools available to them rather than educating them about how to better utilize those tools.

RealEstateMatt said:   Only take on debt to purchase assets that produce money, not liabilities that cost you money.
Agreed.
Buy a limo; don't lease a BMW.
The discussion has laser-focused on obtaining the actual debt; which is good; let's reinforce the money-making principle of what to do 5 seconds after you get that $50,000 lump sum...assuming Gary Sinise isn't demanding Ransom and OP isn't Mel Gibson.

http://www.westernsky.com/

The money is a little expensive, but when you need some quick cash for a heroin trade
they can help, and its only 360% interest rate

Get new furniture or appliances,floors use the X years same as cash Calculate the payoff 2 months prior to the end of the program

Neither a borrower or a lender be.

gooddealie said:   The Dave Ramsay hyperbole encourages people to completely avoid financial tools available to them rather than educating them about how to better utilize those tools.
 

  To be honest, much of America needs to hear what Ramsey has to say.  Most people are too bad at math and impulsive to use debt wisely.

brettdoyle said:   The Value of Debt: How to Manage Both Sides of a Balance Sheet to Maximize Wealth 

This is a good book that is related to your question... it focuses on running your personal finances like a corporation.

  Interesting new book. Will have to browse it sometime. From skimming the pages on Amazon and checking out the website, I came to 2 conclusions.
1) It recommends some low level of debt, calculated very conservatively (overstating liabilities, understating assets, ignoring income for the most part).
2) It depends on the assumption that investments after taxes will exceed loan costs over time, which over a long enough time-frame is likely, but coming up with reasonable estimate values for 1 year and 5-10 years is difficult for me. If I'm conservative, today I'd use 2-3% for return and 3-4% for interest. I'd have to make more aggressive assumptions to make adding debt worthwhile.

If you believe there is an arbitrage opportunity, then take out as much debt as you can tolerate, and make money! Otherwise, the least expensive way to borrow $50,000 is from yourself and pay yourself the interest!


 



 

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Pay back the least amount?

Take out a ton of BT's and go codename47?



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