“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.
Quote of the Day
The test of our progress is not whether we add more to the abundance of those who have much, it is whether we provide enough for those who have too little.~Franklin D. Roosevelt
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