Location: Western Hemisphere
Posted on: 21-03-06 15:25:55
I have a car payment that would last for another 24 months. In order to payoff the car, I have the possibility of getting a RSP loan. The RSP loan is to be paid-off in 12 months. The RSP loan carries an interest rate of 5.5% while the car payment is at a 1.8% interest rate.
Is it a wise option to do the above?
Am I paying the principal back to my RSP account (I would think yes, but pls confirm)?
Am I paying the interest of that RSP loan to my own RSP account or does the interest go to lala land making someone else richer?
If the interest payment is going back into my account, does that interest amount count against my contribution limits for the tax year or have I made myself “richer” by that interest amount?
Does my contribution limit for the tax year get affected in any way due to this loan?
Thanks for your input.
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Dimple2001
Quote:
Originally posted by dimple2001
I have a car payment that would last for another 24 months. In order to payoff the car, I have the possibility of getting a RSP loan. The RSP loan is to be paid-off in 12 months. The RSP loan carries an interest rate of 5.5% while the car payment is at a 1.8% interest rate.
Is it a wise option to do the above?
No. I do not think so.
Why should you pay off a loan which is at a cheaper rate of interest by taking another loan at a high rate of interest? Moreover, by taking a RRSP loan you have to invest in RRSPs and you only get tax refund at your marginal tax rate which could be 30% or 40% or more, and this refund you would get only after filing your tax return for 2007 when you file 2006 tax return. Also, in order to do a rigtht comparison, one has to take in to consideration the car loan amount balance, monthly installment amount and number of installments remaining, RRSP loan amount, monthly installment and available cash flow etc.
Quote:
Originally posted by dimple2001
Am I paying the principal back to my RSP account (I would think yes, but pls confirm)?
I do not follow this question. Your RRSP account and RRSP loans are two different things. When you take RRSP loan and invest in RRSP, you get the tax benefit on the amount invested in RRSP, however, you have to pay back the full amount of loan plus interest to the institution you borrowed the money from.
Quote:
Originally posted by dimple2001
Am I paying the interest of that RSP loan to my own RSP account or does the interest go to lala land making someone else richer?If the interest payment is going back into my account, does that interest amount count against my contribution limits for the tax year or have I made myself “richer” by that interest amount?
Please see above. The interest is going toward the RRSP loan account and not in your RRSP investment account.
Quote:
Originally posted by dimple2001
Does my contribution limit for the tax year get affected in any way due to this loan?Thanks for your input.
Your RRSP contribution limit gets affected by the amount you invest in RRSP. It does not matter if that money comes from a RRSP loan or from your own savings.
I hope it clarifies.
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Pramod Chopra
Senior Mortgage Consultant
Mortgage Alliance Company of Canada
Quote:
Originally posted by dimple2001
Am I paying the interest of that RSP loan to my own RSP account or does the interest go to lala land making someone else richer?
.
Interest defintiely going to "lala" land and making the "lala" who lending the money rich.
Ekdum liking that, yaar! Inadvertent khel on words. Yaan, it was planned?
But it is RRSP loan u r talking about yaan normal non-registered loan? Apun having one using Smith manoeuvre to write off interest on mortgage, but same type of can be used to pay off car lease yaan car loan.
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hinglish zindabad
Location: Western Hemisphere
Posted on: 22-03-06 09:16:47
Pramod,
Thank you for your reply.
I think I do not have a good understanding of the RRSP loan. That may be the problem in how I worded my questions.
When I take a RRSP loan, am I not taking a certain $ amount from my existing RSP account? Following that, am I not repaying the loan to myself to my own existing RSP account?
If the answer is no, then I guess, my earlier post is no longer valid.
Thanks for your input.
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Dimple2001
Location: Western Hemisphere
Posted on: 22-03-06 09:20:50
Quote:
Originally posted by transmogrifier
Interest defintiely going to "lala" land and making the "lala" who lending the money rich.
Ekdum liking that, yaar! Inadvertent khel on words. Yaan, it was planned?
But it is RRSP loan u r talking about yaan normal non-registered loan? Apun having one using Smith manoeuvre to write off interest on mortgage, but same type of can be used to pay off car lease yaan car loan.
Unfortunately, I do not understand hindi and I have to guess your writing which I do sometimes (but honestly, most times, I simply ignore your posts).
Having said that, thanks for the compliment on the use of words. "Lala land" is a loose term used in english to describe a non-existent location, something like utopia. That's what I meant.
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Dimple2001
When you take RRSP loan, it is a loan. It does not have any impact on your RRSP. Your banker gives you money invested in RRSP as RRSP loan against the security of your investments.
As far as whether to switch to RRSP loan from vehicle loan, just look at the interest rates you are paying. Since vehicle loan is at lower rate, i would keep vehicle loan.
Location: Western Hemisphere
Posted on: 22-03-06 10:12:07
Quote:
Originally posted by lana2005
When you take RRSP loan, it is a loan. It does not have any impact on your RRSP. Your banker gives you money invested in RRSP as RRSP loan against the security of your investments.
As far as whether to switch to RRSP loan from vehicle loan, just look at the interest rates you are paying. Since vehicle loan is at lower rate, i would keep vehicle loan.
Thank you.
I think I had a totally different understanding on how the loan worked. From the way it works, yes, it makes sense to keep the lower interest car loan.
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Dimple2001
