"Every dollar applied to a loan earns a risk-free, tax-free return equal to that loan's interest rate. Every dollar invested in equities earns an expected return that is neither guaranteed nor tax-free."
"A borrower paying 8% on a car loan effectively earns an 8% guaranteed return by paying it down. That beat Treasuries by about 360 basis points."
"If he kept only the 401(k) match, redirected the Roth contribution to debt, and threw an extra $400 a month at the loans, he would clear the balance in roughly 24 months and save thousands in interest."
A 26-year-old foreign exchange trader with $20,000 in student and car loans invests 20% of his income. This strategy may be flawed due to the tight spread between investment returns and loan rates. Paying off loans provides a guaranteed return equal to the loan's interest rate, while investments in equities carry risks. With student loan rates at 6%-9% and car loans at 8%-12%, prioritizing debt repayment can save significant interest costs. Redirecting investment contributions to loans can lead to financial benefits in the long run.
Read at 24/7 Wall St.
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