Is it better to invest or pay off car loan?

Motley Fool

Q: Should I use some extra funds to pay off my car loan or invest in the stock market?

A: If you have any highinterest debt, such as from credit cards, pay that off first. Otherwise, compare your car debt with your alternatives.

Say your car loan interest rate is 5 percent. If you invest in the stock market, the average annual gain in that over many decades is roughly 10 percent, but that’s just an average and far from certain. The stock market can be volatile, especially over short periods. So consider your risk tolerance and decide whether you’d rather save a definite 5 percent or hope for a 10 percent gain.

It can be worth paying a little in interest while aiming to earn more through stock appreciation. Just make sure you’re investing for the long haul.

Fool’s School: Bonds, Explained

Stocks have outperformed bonds over most 20-year and 30-year periods, and between 1802 and 2017, stocks averaged annual post-inflation gains of 6.8 percent, while bonds averaged just 3.5 percent. Despite that, you might include some bonds in your portfolio for diversification, especially if you’re in or near retirement. First, though, be sure you understand what bonds are.

Bonds are essentially long-term loans. If a company or government issues bonds, it’s borrowing cash and promising to pay it back at a certain rate of interest. Bonds sold by the U.S. government’s Treasury Department are called Treasuries. State and local governments issue municipal bonds, while businesses issue corporate bonds. Companies on shaky ground attract buyers with highinterest-rate “junk” bonds.

If you buy a $1,000 bond with a “coupon rate” of 5 percent, you’ll receive $50 per year in interest payments. When the bond “matures,” you’ll be repaid your principal (the sum you originally loaned, the bond’s “par value”). Most corporate bonds have a par value of $1,000, while government bonds can run much higher.

Sometimes a company will “call” its bond, paying back the principal early. All bonds specify whether and how soon they can be called. Federal government bonds are never called.

Investors don’t necessarily buy a bond when it’s first issued and then hold it to maturity, for several years or decades. Bonds are often traded among investors, with their prices rising and falling in reaction to prevailing interest rates.

When rates fall, people tend to bid up bond prices. After all, if banks are offering 2 percent, a 5 percent bond will be appealing. When interest rates rise, newer bonds with higher interest rates will be more appealing than older bonds with lower rates.

Bonds can make sense for your portfolio, but if you’re looking for investment income, consider dividend-paying stocks as well. To see many stocks we have recommended, some of which offer dividends, try our “Motley Fool Stock Advisor” newsletter via fool. com/services.

Name that company

I was founded in 1946, and my founder’s granddaughter is currently my CEO. In 1974, I debuted the first money market fund against which investors could write checks. I began offering IRAs in 1975, a year after they were created. Today, based in Boston, I’m a global financial giant, employing more than 40,000 people and with more than $6 trillion of assets under administration. I serve more than 26 million individual investors (and their 25 million brokerage accounts) and more than 22,000 businesses. I offer investment advice, but you can’t invest in me as I’m a privately held company. Who am I?

Last week’s answer

I trace my roots back to 1955, when the United Business Services company, run by two Kansas City, Missouri, brothers, offered tax preparation services to its clients. Revenue more than tripled in a year. I started offering my services in cities where the IRS was discontinuing free tax-prep services and soon adopted the franchising model.

My services became more computerized in the 1980s, especially after I bought CompuServe. Now based in all 50 states and with about 12,000 offices and 70,000 tax pros worldwide, I’ve prepared more than 720 million tax returns. I offer tax-prep software, too. Who am I? (Answer: H&R Block)