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2018-10-07

Which is Smarter -- Repay Loan First Vs. Buy Financial Investment First?

By author Morgan Jassen

A thing I learned about loans, debt, and repayment from a friend; it can be distasteful to hear one's loan situation described as "debt". Instead of talking about repaying one's debt, to use a more tasteful choice of words one can talk about "repaying one's loan".

I didn't know much about loans or loan repayment strategies, in the context of investing. But I wanted to learn the answer. Then I came across this article on a finance-related website.

Link: https://blog.wealthfront.com/financial-advice-for-lawyers/

After my initial read of the article, according to what the article says, is its generally smarter to channel income into completely repaying the loan first, before channeling income into cash-flowing investments.

(keep reading for a different angle along the same lines)

Next, in an Aug. 2 , 2017 episode of Freakonomics radio/podcast, it's stated by the persona of Pollack (a guest of the show) that paying down loans is equivalent to "... getting a risk free, tax free return ..."
Source: ( "Everything You Always Wanted to Know About Money (But Were Afraid to Ask)" http://freakonomics.com/podcast/everything-always-wanted-know-money-afraid-ask/ )

Thus in other words unless you have another investment that the rate of return is higher than the loan interest payment, then its a better idea to pay the loan interest.

In conclusion, unless one has an investment that flows cash in greater than the loan interest charge flows cash out¹, then it is better to first repay the loan.

Now I know.

¹ The moment I concluded this I recalled part of "Rich Dad"² philosophy which points out good debt vs bad debt, and not overlooking opportunities that result in final postive cash flow, even if they involve borrowing a loan as one step of the whole operation.
² Rich Dad, Poor Dad : Kiyosaki, Robert T. ( https://bpl.bibliocommons.com/item/show/656002075_rich_dad,_poor_dad )

This blog post was republished in 2018 at https://i̶n̶v̶e̶s̶t̶o̶r̶w̶o̶r̶k̶e̶r̶.̶c̶o̶m̶/2018/