Why is financing a car bad?

[mastrr]

I noticed that a lot of folks on here recommend buying a car cash.  I would assume that when a person who is mustachian purchases a car cash it is from funds that would be invested in the market (such as VTSAX) and not from their reserve funds that are in savings/checking account.

A good interest rate on a car loan can be 2% with no down-payment if your credit is excellent.  I'm not an expert in finance or cars, obviously this varies.  The examples below are not meant to be perfect but to illustrate a point.

Example 1: Tommy buys $10,000 car cash.

Example 2: Tommy finances $10,000 car for a 60 month term at 2% and doesn't have to make a down-payment.

In Example 1 Tommy would lose out on having $10,000 in VTSAX which returns an average of 7% for 5 years.  I don't know how to calculate the exact amount factoring in accumulating interest and other factors.  But for simplicity lets say $10,000 x .07 = $700 for only the first year.

In Example 2 the total interest payed is $516.80 for the entirety of the loan.  Payments would be $175.28 and the principle per month would be $166.67.  So the total interest payed per year is only $103.32.

It seems to me that financing comes ahead by a decent margin.  So expert mustachians, why is financing a car bad?

[HPstache]

To get a 2% interest rate, you are likely buying a brand new car and paying high full coverage insurance through the life of the loan.  The car will also depreciate substantially in the first 5 years you are owning & paying it off.  There is nothing saying that VTSAX will increase by 7% per year while you have the loan, what if instead it pays -3% over that time range, and you have a car that just depreciated $10K and you are paying interest and high insurance on it?  Just some things to consider.  I think buying a 3-4 year old vehicle with cash is the way to go.

[Philociraptor]

It's like financing furniture, a new computer, or any other depreciating asset: it encourages you to buy more than you need because of the low monthly payments and interest. Tommy could probably find a used car just as good for $5,000, but the ability to finance it makes nicer, more expensive cars more attractive. Also, those ultra-low interest rates are typically reserved for new or "Certified Pre-Owned" vehicles.

[TheAnonOne]

To get a 2% interest rate, you are likely buying a brand new car and paying high full coverage insurance through the life of the loan.  The car will also depreciate substantially in the first 5 years you are owning & paying it off.  There is nothing saying that VTSAX will increase by 7% per year while you have the loan, what if instead it pays -3% over that time range, and you have a car that just depreciated $10K and you are paying interest and high insurance on it?  Just some things to consider.  I think buying a 3-4 year old vehicle with cash is the way to go.

True, for used car purchases as this forum would push, financing is generally not needed or offered at the 2% rates.

If your going to buy a new car, financing is not always a bad option.

[nereo]

using very low interest can be an advanced mustachian tactic, but more often than not people take out auto-loans because they cannot otherwise afford the car that they are purchasing.

You are correct in your example that "Tommy" could do better having a 2% auto loan and leaving his $10k invested. 

Also, most auto-loans that low (2%) are for buying a car through a dealership, which means you payed a premium over private-party.  There's also the 'slippery slope' where someone buys slightly more than they need because the monthly payment is "only" $30 more.   

[Eric]

You need to carry full coverage insurance on a car with a loan, so factor that in as well for your calculations.  I think the general rule is not to borrow money for depreciating assets, but of course since interest rates are so low right now, it's worth running the numbers.

[jms493]

Also when you look at paying for a car in full with cash you know what you can afford.  a 30K car on a 5 year loan seems very affordable...but a 30K car paying with cash...makes you think twice.  You better really freaking love that car.

It all depends on your income as well.  Making 300K a year...a 30K is not much.


2-4 year old used....for the majority of the cars this is the best way financially to buy a car.  All cars have different rates of depreciation.

[Fishindude]

Example 1: Tommy buys $10,000 car cash.

Example 2: Tommy finances $10,000 car for a 60 month term at 2% and doesn't have to make a down-payment.

In Example 1 Tommy would lose out on having $10,000 in VTSAX which returns an average of 7% for 5 years.  I don't know how to calculate the exact amount factoring in accumulating interest and other factors.  But for simplicity lets say $10,000 x .07 = $700 for only the first year.

In Example 2 the total interest payed is $516.80 for the entirety of the loan.  Payments would be $175.28 and the principle per month would be $166.67.  So the total interest payed per year is only $103.32.

It seems to me that financing comes ahead by a decent margin.  So expert mustachians, why is financing a car bad?


This sounds like great logic for a car salesman to use !
Stay away from the dealerships for a while.  You might wind up in a new set of wheels.

[mastrr]

I'm going out on a limb and saying if we think long term that VTSAX is going to return 7% we should finance EVERYTHING that possible if we can secure a interest rate under 5%.  For this to be applicable we should only use this strategy when we draw from funds that would otherwise be in VTSAX.  Because we are losing money by paying cash when we can borrow for cheap! :)  Beauty of "positive leverage".

[HPstache]

I'm going out on a limb and saying if we think long term that VTSAX is going to return 7% we should finance EVERYTHING that possible if we can secure a interest rate under 5%.  For this to be applicable we should only use this strategy when we draw from funds that would otherwise be in VTSAX.  Because we are losing money by paying cash when we can borrow for cheap! :)  Beauty of "positive leverage".

Sure, I agree you can expect a decent return long term... but in my opinion 5 years isn't the "long term" people talk about when they discuss overall upward trends and market stability.

[jms493]

Yeah...I mean they only way this works is if you guarantee me a positive return greater than what the loan is costing me.  I am all for simple...buy the car like you would buy anything.  Negotiate the price, give them a check and say babye! 

[Jack]

Financing (and investing the difference) is great if you're buying a new (or only slightly used) car.

However, buying a new (or only slightly used) car is completely fucking stupid to begin with in almost all cases.

[The_path_less_taken]

<dons full Kevlar body suit, climbs into bunker, pokes head over>

Because of depreciation, it 'usually' makes more sense to buy a used vehicle.

There are exceptions: if you're buying a work truck or have a farm or horses...there's a lot to be said for knowing that maintenance was done in a timely manner, and the thing wasn't regularly abused and red-lined by some drunken teen trying to prove 'he da man'.

One of the largest sheep ranches in Nevada buys their vehicles new every two years. Because at that point...stuff starts happening. Little things at first. But it all adds up.

I argued with the guy from the sheep ranch until he invited me back to look at their books: he knew he could back it up on paper.

Personally, if I intend to haul horses with a truck and intend to keep it for most of its useful life (my current pickup is a 2005, my car is a 2001), I'd just as soon get it new with 0% financing and as small of a down payment as they'll allow: that's free money for however many years they give me 0%. At that point, pay the sucker off in full.

If you're in your 30s and plan on doing the same with a car....there's a break even point. Example: some Camry models currently have a $2500 cash back rebate. And the new ones come with 2 years full maintenance and 2 years roadside assistance.

So....always do the math for yourself. Because your mileage very well may vary. You may be a realtor or someone who regularly hauls clients, in which case a lot of your vehicle expenses get written off, and a vehicle that projects a certain image---regardless of how little that has to do with reality---can affect your bottom line. You're buying a new house from somebody who has access to your ss number and finance report, and they drive up in a '77 Ford Pinto with one of those old "explodes on impact" band aids on the rear bumper....I dunno.

And car dealers will finance some used cars up to a certain age/mileage. That's extended a bit for diesel trucks. But used vehicles rarely have 0% financing.

[howie29]

leveraging an asset that is guaranteed to depreciate makes no sense, plus the investment is not guaranteed.  Worst case you get the double whammy of losing out on both and now you are -2% interest rate, negative the depreciation and negative the "investment" return. 

[Paul der Krake]

What about the extra friction created by having to bring the paperwork to the lender during the sale?

Typically you are in a better position to negociate a cash price because the seller doesn't want to deal with the hassle of going to some schmuck's bank and wait hours with the risk of the deal falling through.

Are there lenders that give competitive rates while removing the friction of the lien?

[HPstache]

And if Tommy is so confident in 7% returns over the next 5 years... buy a $5,000 used car with cash, put $5,000 in VTSAX imediately then add $166.67/mo + $40/mo or so additional for the insurance you're saving over the next 5 years and find the clear choice.

[tvan]

To get a 2% interest rate, you are likely buying a brand new car and paying high full coverage insurance through the life of the loan.  The car will also depreciate substantially in the first 5 years you are owning & paying it off.  There is nothing saying that VTSAX will increase by 7% per year while you have the loan, what if instead it pays -3% over that time range, and you have a car that just depreciated $10K and you are paying interest and high insurance on it?  Just some things to consider.  I think buying a 3-4 year old vehicle with cash is the way to go.

True, for used car purchases as this forum would push, financing is generally not needed or offered at the 2% rates.

If your going to buy a new car, financing is not always a bad option.

False. Just bought a used car at 1.74% finance rate. See your local credit union.

[HPstache]

To get a 2% interest rate, you are likely buying a brand new car and paying high full coverage insurance through the life of the loan.  The car will also depreciate substantially in the first 5 years you are owning & paying it off.  There is nothing saying that VTSAX will increase by 7% per year while you have the loan, what if instead it pays -3% over that time range, and you have a car that just depreciated $10K and you are paying interest and high insurance on it?  Just some things to consider.  I think buying a 3-4 year old vehicle with cash is the way to go.

True, for used car purchases as this forum would push, financing is generally not needed or offered at the 2% rates.

If your going to buy a new car, financing is not always a bad option.

False. Just bought a used car at 1.74% finance rate. See your local credit union.

Not false because I said "likely" and the OP is in fact "likely" talking about buying a new car because he hasn't corrected any of the other members who have stated their perspective from a new car buying perspective.

[RWD]

Financing is not inherently bad and can even be statistically advantageous for leveraging investments. However, if the ability to finance convinces you to purchase more than you need then it is counterproductive.

[Spork]

While I buy cars in cash, my rule is you should be ABLE to buy the car in cash.  In fact, you should be able to buy the car in cash, crash it and buy another one just like it.

If you find creative financing that lets you earn more: good for you.

But, if you're financing through the dealer, be very prepared for mathematical olympics.  Every dealer I've dealt with used the old 4 square system (trade-in, purchase price, down payment, monthly payment).  They scribble numbers down, talk to their manager, come back, scribble more....  I've seen more than a few people negotiate a price for a car, then add financing in there and -- with some scribbling and slight of hand -- end up paying more to get a low rate.  These guys do this all day every day.  For them, it can be like 3 card Monte.

The advantage of paying cash is: there is only one square.  If you find financing elsewhere before you walk in to the dealer, that also takes you back to one square.

[nath]

The example given by the original poster is spot on. If you are going to be buying the car anyway, it is actually cheaper to finance it and keep you money working for you in investments.

One other remarkable thing that not many people understand, is that the interest on the car loan is reducing, as you are constantly making repayments. Where the interest on an investment is compounding.
Even If the interest rate you where paying on the car loan was higher than the annual investment return, say 5% VS 3% you still come out ahead!
Do the math yourself and you will see.

Another additional benefit is if your vehicle is for business purposes you can claim some tax deductions on that interest payable.

[marty998]

What forum do you think this is? The choice is not between cash vs financing.

BUY A BIKE INSTEAD.

All this talk of $10,000 financed cars is doing my head in.

[Mechanista]

Not always bad. Just bad 95% of the time. There are many variable at play, including how quickly the car depreciates, how much its worth, how much to insure it, how much to run/maintain it, what actual ROI on in investments is, the interest rate, how it affects your cash flow etc. The idea is that most non mustachians are not going to to finance with optimal savings in mind, but rather with buying a nice but extremely expensive and unnecessary consumable entity in mind.

[cbgg]

Personally, I'm always a little wary of comparing guaranteed rates with non-guaranteed rates, especially over the short term.  So when you compare a 2% interest rate to a 7% estimated average return from the market, I think it's apples and oranges.  Over the next 5 years I might get a 7% annual return in the market, or I might get a -7% return or I might get a +20% return.  Who's to say over such a short time period? 

If you were to say that you could get a CD/GIC paying out guaranteed interest rate that was higher than the car loan, then I'd be interested. 

However, even then, I value the simplicity of not having a lot of different bills to keep track of.  If the monetary difference were small, I'd just pay cash for the car (as I always have in the past) and not worry about it. 

[Spork]

One other remarkable thing that not many people understand, is that the interest on the car loan is reducing, as you are constantly making repayments. Where the interest on an investment is compounding.

Not always.  In my youth I financed a car through Toyota.  The interest didn't reduce the way you think of interest payment working.  They added up what the total interest would be over the life of the loan and divided it by the number of payments.  The result: If you pay off early, the entire interest amount was still included. 

[HPstache]

Do the math yourself and you will see.

Ok I just put together a spreadsheet.  Be happy to share....

Inputs
New Car Cost: $10,000
Monthly Payment: $175
Monthly Inusrance: $100
Loan Intereste Rate: 2%
Market Returns: 7%

Used Car Cost: $5,000
Insurance: $50
Available funds to invest after initial Purchase: $5,000 + $225/mo
Market Returns: 7%

Outputs:
Financed Car:
Total Cost over 60 months to own financed car (incl. insurance): $16,500
Total value of Investment after 60 months: $14,176

Used car:
Total Cost over 60 months to own used car (incl. insurance): $8,000
Total value of investment after 60 months: $23,291

Interst rates are compounded monthly

[reader2580]

I don't know what new car anyone is buying for $10,000.  My credit union I believe will extend new car rates back five model years.  You could buy a used 2012 car for the same interest rate as a new car.  I am not saying you should finance a car.  I am just stating what my credit union offers for car loans.

[Telecaster]

The long term inflation rate is about 3%-ish (less than that now).   So if you can get financing at 2%-ish you're probably better off borrowing.  And that doesn't count opportunity cost.   

[tvan]

To get a 2% interest rate, you are likely buying a brand new car and paying high full coverage insurance through the life of the loan.  The car will also depreciate substantially in the first 5 years you are owning & paying it off.  There is nothing saying that VTSAX will increase by 7% per year while you have the loan, what if instead it pays -3% over that time range, and you have a car that just depreciated $10K and you are paying interest and high insurance on it?  Just some things to consider.  I think buying a 3-4 year old vehicle with cash is the way to go.

True, for used car purchases as this forum would push, financing is generally not needed or offered at the 2% rates.

If your going to buy a new car, financing is not always a bad option.

False. Just bought a used car at 1.74% finance rate. See your local credit union.

Not false because I said "likely" and the OP is in fact "likely" talking about buying a new car because he hasn't corrected any of the other members who have stated their perspective from a new car buying perspective.

Actually he said a 10k car. Which there are very few brand new 10k cars. So unlikely is I think the word you wanted to use.

[Bajadoc]

Tommy wants a new car. Tommy checks the math. Tommy face punches himself. Tommy buys a late model low milage used car from a private party with cash and drives it a long time. Tommy is going to retire early. Good Tommy.

[Jeremy E.]

I bought a car from a private sale and my bank gave me a 2.5% loan. I invested my money instead and it worked out well. That being said, I was paying an extra $30/month for full coverage insurance, so I probably broke even. If I had caused an accident I would of came out ahead.

[HPstache]

To get a 2% interest rate, you are likely buying a brand new car and paying high full coverage insurance through the life of the loan.  The car will also depreciate substantially in the first 5 years you are owning & paying it off.  There is nothing saying that VTSAX will increase by 7% per year while you have the loan, what if instead it pays -3% over that time range, and you have a car that just depreciated $10K and you are paying interest and high insurance on it?  Just some things to consider.  I think buying a 3-4 year old vehicle with cash is the way to go.

True, for used car purchases as this forum would push, financing is generally not needed or offered at the 2% rates.

If your going to buy a new car, financing is not always a bad option.

False. Just bought a used car at 1.74% finance rate. See your local credit union.

Not false because I said "likely" and the OP is in fact "likely" talking about buying a new car because he hasn't corrected any of the other members who have stated their perspective from a new car buying perspective.

Actually he said a 10k car. Which there are very few brand new 10k cars. So unlikely is I think the word you wanted to use.

Ok. Whatever you say!  Feels like you just want to argue for the sake of arguing.

[nereo]

I bought a car from a private sale and my bank gave me a 2.5% loan. I invested my money instead and it worked out well. That being said, I was paying an extra $30/month for full coverage insurance, so I probably broke even. If I had caused an accident I would of came out ahead.

can anyone spell "fungible"?
you still bought the car with a loan.

[Jeremy E.]

I bought a car from a private sale and my bank gave me a 2.5% loan. I invested my money instead and it worked out well. That being said, I was paying an extra $30/month for full coverage insurance, so I probably broke even. If I had caused an accident I would of came out ahead.

can anyone spell "fungible"?
you still bought the car with a loan.

Yes I bought a car with a loan and am richer because of it, which will happen a majority of the time you follow the same process because the market usually goes up.
Check out this graph, over a 5 year period, historically the worst stock returns are an average of 2%, yet the best stock returns are an average of 28%! Thus investing and getting a loan is usually more profitable than paying cash for a car. The problem is when people don't invest the money they would of used to buy the car. Yes full coverage costs more than liability, but being fully covered is worth slightly more(although not the premium the insurance companies charge).

[nereo]

Yes I bought a car with a loan and am richer because of it, which will happen a majority of the time you follow the same process because the market usually goes up.

I'm not arguing the results with you.  As stated in my post upthread, when used correctly a loan can certainly come out in your favor.  I was just making the point that taking a loan out while paying for the car with cash is fundamentally the same as just buying the car with the money from the loan. in your earlier post it seemed like you were suggesting something different.

[Jeremy E.]

Yes I bought a car with a loan and am richer because of it, which will happen a majority of the time you follow the same process because the market usually goes up.

I'm not arguing the results with you.  As stated in my post upthread, when used correctly a loan can certainly come out in your favor.  I was just making the point that taking a loan out while paying for the car with cash is fundamentally the same as just buying the car with the money from the loan. in your earlier post it seemed like you were suggesting something different.

I don't understand what you're saying. If you mean to say that paying cash is fundamentally the same as using a car loan then I disagree. If you mean that getting a personal loan is the same as getting a car loan then I still disagree.

[JLee]

To get a 2% interest rate, you are likely buying a brand new car and paying high full coverage insurance through the life of the loan.  The car will also depreciate substantially in the first 5 years you are owning & paying it off.  There is nothing saying that VTSAX will increase by 7% per year while you have the loan, what if instead it pays -3% over that time range, and you have a car that just depreciated $10K and you are paying interest and high insurance on it?  Just some things to consider.  I think buying a 3-4 year old vehicle with cash is the way to go.

I just bought a (2006) $6000 car at 1.99% for 36mo. So...not necessarily! :)

[nereo]

Yes I bought a car with a loan and am richer because of it, which will happen a majority of the time you follow the same process because the market usually goes up.

I'm not arguing the results with you.  As stated in my post upthread, when used correctly a loan can certainly come out in your favor.  I was just making the point that taking a loan out while paying for the car with cash is fundamentally the same as just buying the car with the money from the loan. in your earlier post it seemed like you were suggesting something different.

I don't understand what you're saying. If you mean to say that paying cash is fundamentally the same as using a car loan then I disagree. If you mean that getting a personal loan is the same as getting a car loan then I still disagree.

well that makes too of us.  To answer your questions, 'no' and 'no.
from your earlier post:

I bought a car from a private sale and my bank gave me a 2.5% loan. I invested my money instead and it worked out well.

my point was merely that taking out the 2.5% loan to buy a car from a private sale, then investing it simply means you bought the car with a loan.  I'm not saying it was a bad strategy.  Just that the car was purchased with the loan: money is fungible.  if that's not what you were saying and I've misinterpreted what you did then we're not understanding one another.

[Goldielocks]

To get a 2% interest rate, you are likely buying a brand new car and paying high full coverage insurance through the life of the loan.  The car will also depreciate substantially in the first 5 years you are owning & paying it off.  There is nothing saying that VTSAX will increase by 7% per year while you have the loan, what if instead it pays -3% over that time range, and you have a car that just depreciated $10K and you are paying interest and high insurance on it?  Just some things to consider.  I think buying a 3-4 year old vehicle with cash is the way to go.

I just bought a (2006) $6000 car at 1.99% for 36mo. So...not necessarily! :)

I don't know if I am excited or sad for you.... 
I will choose excited as you did not take the 78 month loan...   (D'oh!)

[One Noisy Cat]

For me it was psychological. I had car loans twice in my life and I did not like having "The Sword of Debtoscles" hanging over my head for years.

[JoeBlow]

I think if you are mostly FI, financing a new car can be a good decision.  I know many people here will disagree but I recently bought a 2015 Honda Fit on loan (2.2%).  I was planning on driving my 2000 Ford Ranger for many more years but it got to the point where I was looking at 3k in repair work and I was getting sick of getting stranded 3 times in the past 3 years because of mechanical issues.  The repairs that I already paid in the last year are greater than my first years of payments.  I am older so my insurance isn't that much more for full coverage.  I basically have to have that anyway (for a paid off vehicle) for my umbrella policy.

[GizmoTX]

Financing anything adds unnecessary cost.

[obstinate]

Two main reasons: one historical, and one psychological.

The historical reason is that interest rates have not always been this low, and not everyone can get that low interest rate.

The psychological reason is that people tend to buy more car when they can take a loan. More car that might not actually be good for them.

Of course you are correct that it is more efficient to buy the car with leverage if you can get an interest rate lower than your expected market returns, and you are not remotely the first person to observe that. It comes up on here constantly, to the point that it's a bit tiresome.

[PaulMaxime]

For me it's simple. If you can't afford to write a check for it and not feel a pinch when you do, then you can't afford it. If it's such a big part of your world that you are working so hard to justify it, you can't afford it.

Those who are in favor of financing also leave out risk. If you lost a job or something you still have to make that payment. Sure, you might have the money invested somewhere, but then you are taking the risk of selling at the wrong time. Any money you have tied up in an emergency fund should not be in the market, so you're not making more on it there. If you have car payments that means that your emergency reserves need to be that much larger.

Write a check, be done with it. No worries about payment schedules and all that stuff. Simple and clean.

If you really must make payments, pay the money to yourself every month and invest it. Next time you buy a car you'll have more than enough money to write a check from this money. Keep paying yourself that same payment forever and watch the growth compound.

[gecko10x]

Those who are in favor of financing also leave out risk. If you lost a job or something you still have to make that payment. Sure, you might have the money invested somewhere, but then you are taking the risk of selling at the wrong time. Any money you have tied up in an emergency fund should not be in the market, so you're not making more on it there. If you have car payments that means that your emergency reserves need to be that much larger.

Write a check, be done with it. No worries about payment schedules and all that stuff. Simple and clean.

I'm really surprised it took 43 posts for someone to say this!

+1

[alsoknownasDean]

It's not all that bad.

But I couldn't get finance for a 13 year old $3000 car, even if I tried. IIRC most car loans here can't be taken out to buy something more than seven years old. :)

[JLee]

To get a 2% interest rate, you are likely buying a brand new car and paying high full coverage insurance through the life of the loan.  The car will also depreciate substantially in the first 5 years you are owning & paying it off.  There is nothing saying that VTSAX will increase by 7% per year while you have the loan, what if instead it pays -3% over that time range, and you have a car that just depreciated $10K and you are paying interest and high insurance on it?  Just some things to consider.  I think buying a 3-4 year old vehicle with cash is the way to go.

I just bought a (2006) $6000 car at 1.99% for 36mo. So...not necessarily! :)

I don't know if I am excited or sad for you.... 
I will choose excited as you did not take the 78 month loan...   (D'oh!)

If I went any longer than 36 months, the rate went up. That's the lowest rate offered, and I'm perfectly happy to pay less than 2% on $6k while I put $2800+/mo into investment accounts.

You're free to disagree with my choice, of course.

[RWD]

That's the lowest rate offered, and I'm perfectly happy to pay less than 2% on $6k while I put $2800+/mo into investment accounts.

You're free to disagree with my choice, of course.

At that interest rate you're so close to inflation that you almost don't even have to invest to make it worthwhile.

[Goldielocks]

To get a 2% interest rate, you are likely buying a brand new car and paying high full coverage insurance through the life of the loan.  The car will also depreciate substantially in the first 5 years you are owning & paying it off.  There is nothing saying that VTSAX will increase by 7% per year while you have the loan, what if instead it pays -3% over that time range, and you have a car that just depreciated $10K and you are paying interest and high insurance on it?  Just some things to consider.  I think buying a 3-4 year old vehicle with cash is the way to go.

I just bought a (2006) $6000 car at 1.99% for 36mo. So...not necessarily! :)

I don't know if I am excited or sad for you.... 
I will choose excited as you did not take the 78 month loan...   (D'oh!)

If I went any longer than 36 months, the rate went up. That's the lowest rate offered, and I'm perfectly happy to pay less than 2% on $6k while I put $2800+/mo into investment accounts.

You're free to disagree with my choice, of course.

The math is fine, just two things

-- $6000 x 2% x 3 years = $360 plus gains in interest, max.  not a lot of dollars, for risk... Many of the finance companies try to have "tricks", as in legal but tricky, to incur payment penalties (like those no money down furniture loans).

-- i mentioned 78 month loan, because no one wants a loan on a car that is going on 17 years old... :-0

[JLee]

To get a 2% interest rate, you are likely buying a brand new car and paying high full coverage insurance through the life of the loan.  The car will also depreciate substantially in the first 5 years you are owning & paying it off.  There is nothing saying that VTSAX will increase by 7% per year while you have the loan, what if instead it pays -3% over that time range, and you have a car that just depreciated $10K and you are paying interest and high insurance on it?  Just some things to consider.  I think buying a 3-4 year old vehicle with cash is the way to go.

I just bought a (2006) $6000 car at 1.99% for 36mo. So...not necessarily! :)

I don't know if I am excited or sad for you.... 
I will choose excited as you did not take the 78 month loan...   (D'oh!)

If I went any longer than 36 months, the rate went up. That's the lowest rate offered, and I'm perfectly happy to pay less than 2% on $6k while I put $2800+/mo into investment accounts.

You're free to disagree with my choice, of course.

The math is fine, just two things

-- $6000 x 2% x 3 years = $360 plus gains in interest, max.  not a lot of dollars, for risk... Many of the finance companies try to have "tricks", as in legal but tricky, to incur payment penalties (like those no money down furniture loans).

-- i mentioned 78 month loan, because no one wants a loan on a car that is going on 17 years old... :-0

Your math doesn't account for the fact that the principal amount decreases over time, so you aren't paying 2% on $6000 continuously. My total cost of credit is $185.85 in finance charges over three years, or roughly $5.16/month.

I financed through a legitimate credit union, not a "buy here and drive away free!!!" car dealer.  If I lose my job and somehow can't afford a $172 payment (at which point I have bigger problems), then I can sell the car (~$7500 market value).