In the world of personal finance bloggers, I’m something of an anomaly. While I think that paying down most debt as quickly as possible is a good idea, there are some debts that I refuse to get rid of early. There are types of debt that I think are worth carrying, rather than using my resources to pay them off ahead of time.
Low-Interest Rate Environment
To the chagrin of many savers, we are currently in a low-rate environment. This means that money is cheap. For savers, that means it’s harder to find a good yield. For borrowers, though, it means that it’s possible to get what you want for less.
Some of the loans that cost less right now are mortgages and car loans. (Paradoxically, student loans cost more now than they did before the financial crisis.) I currently have a car loan with a rate of 1.9%. I was also fortunate to consolidate my student loans and lock in an interest rate of 1.9% before the financial crisis. Because I have these low, low rates on my loans, I am in no hurry to pay them back. The student loan has the extra benefit of being tax-deductible, so it costs me even less.
Another loan that might not be worth paying off early is your mortgage. Many mortgage rates are at near-historic lows, below 4%. That’s pretty good, and if you itemize (like I did when I had a mortgage), you can benefit from a tax deduction.
These loans with super-low rates might not be worth paying off when you consider what else you can do with the money.
Investing Instead of Paying Down Debt
Rather than putting my resources into repaying loans (a guaranteed return of 1.9%), I put the money I would have used to pay off that debt early into investments. Most of my investments are modest, offering 6% or 7% annualized return. But, as you can see, that still beats the interest I’m paying on my debt plus average annual inflation. It’s true that there are going to be down years for my investments, but averaged out over a long period of time, I’m likely to come out ahead. It’s a risk I’m willing to take for the better chance of a higher return on my money.
It’s important to note that this thinking won’t work with high-rate debt. If you have high-interest credit card debt, it’s almost always much better to pay it down as fast as possible. It’s reasonable for me to expect a 6% annualized return on my index fund investments. It’s not reasonable to expect a sustainable 17.99% return that will beat what you pay on your credit cards. In fact, if you have one of the more expensive student loans and are paying 6% or more, it can make sense to retire those loans as quickly as possible.
Finally, don’t forget to factor in peace of mind. I’m comfortable carrying low-rate debt for my car and education. Some people just like the freedom of being debt-free, and there’s nothing wrong with that. That’s something you can’t put a price on, so it makes sense to pay off debt — even low-rate debt — quickly if it helps you sleep better at night.
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