“I try to live below my means (and invest the surplus in no-load, low-fee mutual funds) … but my 13-year old Honda needs to be replaced (with a late-model used car). Through my credit union, I can obtain a share-secured 2-year loan at 4.5%…meanwhile, the shares earn 3.8%. I do realize that the 3.8% dividend will be taxed, and unlike a home equity loan, there is no deduction of the 4.5% interest…but it still looks like ‘cheap money’ to me…is it something that I should take advantage of? I’ve read a bunch of personal finance books…but don’t see much discussion of share-secured loans…you’re my last hope.” — Fred

If I’m your last hope, Fred, you’re in deeper trouble than you realize. But I can see only three reasons to borrow at 4.5% so you can continue to earn 2.5% (which is about what you’re earning, after federal and state income tax, by keeping that dough in a 3.8% credit-union account).

The first is to have a little ready flexibility for emergencies. If you’d be wiped out buying the car for cash, maybe you shouldn’t.

The second is to have a better “balance sheet” if you expect to be applying for other credit (since a savings account may be more impressive to a lender than ownership of a used car).

The third, related, reason, is to establish good credit. If you have no credit history, this would be a painless and inexpensive way to establish that you can pay off a loan responsibly.

But basically, your instinct is right. For every $1,000 you borrow this way, you lose about $20 a year. An exceptionally slow way to get rich.


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