Requesting advice on a major loan.

[frustrated_lefty]

Brief moment of explanation. My family and I lost everything to Katrina. I've got a new job paying 43k/year, we're not exactly secure, but we're making it month to month. Our credit cards are maxed out (roughly 8k in debt) because we had to use them to get back on our feet. All of that said, we're receiving a $40k loan from SBA to be repaid over 30 years at a 2% interest rate. I've never taken a loan of this size, and am honestly intimidated by it.

My initial thoughts are to pay off the credit cards and just not use them aside from a small purchase every few months to show we can pay our debts and build a better credit rating. I'm tempted to make a 10-20k lump payment on the SBA loan just to get it off our heads. That may not be the best thing to do, though, given the interest rate. We could easily invest 25-30k of that.

I am NOT a financial wiz. My attitude has always been, build credit and don't spend what you don't have. This is an unusual situation, though.

Are there investment options any of you would recommend? We're looking at CDs, but potential shifts in the value of the dollar have me worried. We are in no way in a shape to pursue risky investments. If there is anything you might suggest which just makes good, common sense, I'd really appreciate the suggestions.

-fl

[Onlooker]

1. CDs

Pay off your credit cards and get rid of them, pay off any other debt (unless it's ridiculously low interest). You are perfect prey for credit card companies to entice with low rates, only to trap you with high rates later on.

If I had that loan, I would invest as much of it as I comfortably could in CDs of different lengths -- six months, one year, two year, five year, seven year. Other approaches aren't worth the time and trouble. If you're not a gambling addict, you might give it a go and take $50 to buy lottery tickets or bet on a horse.

[DrDan]

2. I'd recommend you look at CDs also - after you get rid of your

credit card debt - do that now!

CDs are currently running in the mid-5% area. Make sure they are FDIC insured.

Don't get greedy - sound investing takes time - and a bit of diversification.

Those credit cards will eat up any profit you make elsewhere.

[MemphisTiger]

3. I would pay the credicard off as fast as possible and

then concentrate on getting rid of the loan as fast as possible. The 20k lump sum is a great idea to cut out some of the interest paid on the loan. Once you get that paid off you can build up an emergency fund of 3-6 months of living expenses. This is a terrible situation but sound financial planning is sound financial planning. I wouldn't look into CD's until that loan is paid off, then consider mutual funds for investments. Good luck.

[Lasher]

4. Pay off the credit cards at once but don't pay off the SBA loan

Credit card interest is killing you, get out of that before you do anything else. Don't pay off the SBA loan any sooner than you have to. Think about it:

You're paying 2% interest on what you owe on the SBA loan. Instead of paying it down you could invest the money in a money market fund, for example. Fidelity is currently paying 4.97% on theirs. Splitting the difference, you are 2.97% ahead by not paying off the SBA loan.

The current inflation rate is 3.82% and the SBA loan is just 2%. Wow, I wish I could get a loan for a billion dollars at 2%! I would invest the money and get rich on the difference between interest paid and interest received. You're not going to get rich on the difference here but I think I've made the point.

If you want a fancy economic label for this concept, it's called opportunity cost.

I'm sorry you've had to suffer on account of Katrina, but it looks like you are bouncing back. Good luck.

[trof]

5. Second the motion. Here's my story:

25 or so years ago I discovered a situation.
I could borrow money from my credit union on a collateralized loan (using cars, major appliances, etc. as collateral) for a little less than half the interest rate money market funds were paying.
I maxed the loan and put the money in a money market fund.
FREE MONEY!

For original poster:
You could also look at T bills.