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The (relatively) standard reply around here is "if the interest rate on the loan is below 8%, then take
your money and invest it elsewhere, if the loan rate is above 8%, pay off the loan first".
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I'm not sure what the rationale is for this "rule of thumb." Is the idea that the market always goes up more than 8%, so any loan with an interest rate below that is free money? I hope not, since the prior sentence is filled with illogical assumptions.

The idea that interest rates are low these days is also a bit illogical. Interest rates above the rate of inflation (real interest rates) are actually quite high historically. An 8% loan means you are paying 6.5-7% above inflation. That is not cheap.

Think of it this way: the market sets the risk free rate of return at the money market rate (for all practical purposes). What's that now? 4.75% or so I think. So if you can pay off a loan (a risk free investment) and get more than 4.75% then you have a maket beating return.

I would only think about taking out a loan to invest money if the interest rate were less than the average money market rate. Are margin rates ever less than the average money market rate? Don't think so.

I would take mortgages out of this discussion because a house is not only a necessity but an investment in itself. Student loans are a second tough one. One would hope a student loan would allow you to earn more money over your lifetime. That is an investment too. However, student loans carry high interest rates right now and I would direct some funds earmarked for invesment to paying off a student loan first.

Patick
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