pay off a 7% loan?

wax42 · #1 11-09-2006, 06:45 AM

I have a $5,000 student loan that will soon begin accruing interest at a rate of 7%. I was wondering what you guys think about paying it off right away versus just making minimum monthly payments. My initial inclination is to set aside 10k or so (to cover variance) and invest it in mutual funds, and then set up automatic monthly payments from the mutual fund account to make the monthly loan payments. I think this would be better than paying the loan off immediately since many mutual funds have an expected return of greater than 7% a year. Is there any reason why I should not do this?

Big TR · #2 11-09-2006, 09:16 AM

For such a small loan, I would reccomend just paying it off.

Let's say you earn 10% on your mutual fund each year. 3% on $5,000 in year 1 is $150. There is no guarantee that in the short time frame you are paying back the loan you will earn 10% each year in the mutual fund.

Is all that worth the effort? It is up to you. For me, it would not be worth the effort.

gull · #3 11-09-2006, 01:25 PM

Pay it off.

yellowbastard · #4 11-09-2006, 10:12 PM

What mutual fund can you use to directly pay down a loan with?

wax42 · #5 11-09-2006, 10:39 PM

[ QUOTE ]
Pay it off.

[/ QUOTE ]Reason?

wax42 · #6 11-09-2006, 10:40 PM

[ QUOTE ]
What mutual fund can you use to directly pay down a loan with?

[/ QUOTE ]I haven't found any that you can directly make loan payments from, unfortunately. But almost all of the mutual fund companies have options to automatically withdraw to your bank account, and then you can set up automatic payments from your bank account. Not ideal since the EFT will take time, and you won't earn a return on your money during that time, but it should work.

Hornacek · #7 11-09-2006, 11:41 PM

Pay it off. Seriously. It's not even worth it. 10% is far from a guarantee, especially after you consider fees and taxes.

ItalianFX · #8 11-09-2006, 11:52 PM

Debt with any interest is not something you want to make minimum payments on. In the long-run you'll be paying more than $5000, so why let someone else have more of your money? You actually pay less if you just pay it off now and get that liability out of your life.

Don't make a dumb mistakes!

lastchance · #9 11-10-2006, 01:20 AM

I doubt you'd want to pay off .1% interest debt.

That said, 7% is far too much not to pay off as quickly as possible.

tribefan9 · #10 11-10-2006, 03:53 AM

Keep in mind that student loan interest is tax dedubtible (until you get into higher income brackets). So, if you have other debt you are probably better off paying that first (like credit cards, car loans). That being said, I agree with others that since it is a small amount and you have the cash you should probably just get rid of it so you don't even have to think about it.