Buying or Financing a Car?

[specialkayme]

First post for me here. I found MMM about a week and a half ago, and have been reading two to five posts per day getting caught up. Still have quite a few to read and get caught up on, but there are a few questions that I can't wrap my head around, so I figured I'd ask them here.

MMM suggests, several times, that one should never finance a car purchase. Instead, they should only pay cash for a car and be done with it. I understand the comment about buying the right car, the most fuel efficient car (with lowest TCO), and the power of buying used cars. But I don't understand why he's so against financing a car.

Say I wanted to buy a used car at $15,000 (slightly newer and with fewer miles than MMM himself would probably go for, but one I would realistically go for). I could dip into my savings, spend $15k in cash and be done with it. Or, lets say I have the cash, but I put it into the stock market to get a 7% per year return on it, and get a 5 year car loan at 5% interest. Now, I should be hoping for a greater than 7% return on the stock market over the next 5 years, and I should be able to get better than 5% interest on my car loan (mine right now is 2.4%), but I'll use those numbers for illustrative purposes.

My car loan would be $283.07 per month, which means I'd pay $16,984.11 for that car, or an extra $1,984.11 in interest. However, that same $15,000, compounded at 7% annual income, would be worth $21,264.38, or an increase of $6,264.38. Which means, by financing the car and investing the cash, over 5 years I profited $4,280.27 total, or $856.05 per year, or $71.34 per month.

Lower interest rates on car loans, or better returns on the stock market, would only increase those profits.

So what am I missing? What's so wrong with financing a car purchase?

[Frugalman19]

It has to do with a couple of factors. Risk, 5 years is a very short period to expect that type of return out of the market. Assume you did that in 2005, by 2009 your account only has $8,000 in it and you had to pay for the financing as well. PLus if you did invest it you would have to pay tax on the gain, if in a taxable account.

You will read alot of threads on here about financing vs investing, and the argument is a good one if you have enough time. 5 years is too short. Plus most people here will only agree to financing an appreciating asset(house, business etc..), not something that will be worth 1/4 of what it is now in 5 years.

[specialkayme]

It has to do with a couple of factors. Risk, 5 years is a very short period to expect that type of return out of the market. Assume you did that in 2005, by 2009 your account only has $8,000 in it and you had to pay for the financing as well. PLus if you did invest it you would have to pay tax on the gain, if in a taxable account.

I understand the point, but I don't understand the practice. 7% is used as an average. Some five year periods you'll outperform. Others you'll underperform. But as a whole, if you bought a car every 10 years, and you are driving for 60 years, you'll buy 6 cars. Over those 6 separate 5 year time periods, you should average a 7% return per year or better.

But you could also do significantly better. Say I paid off my 5 year car payment today. That means I borrowed $15,000 5 years ago. If I put that $15,000 into shares of SPY (the S&P 500 ETF) five years ago (which would make for 121.9 shares, less commissions), that same investment would be worth $26,218.60 today. That's not counting the SPY 2% per year dividend, or me reinvesting that same dividend. Assuming I got the same 2% dividend each year for 5 years, I'd walk away with an extra ~$1,500 in dividends. So just looking at the past five years, I'd "make" $12,718.60 on my $15,000 investment while I paid $1,251.93 in interest (at 3.2%, which was average for 5 years ago on used cars), for a total gain of $11,466.67 over a five year time period.

I used the 7% average return in the example in the first post simply as a demonstration on the whole. You can point to the '05-'10 crash, while I can point to the '02-'07 gain right before it, or the '10-'15 gain right after it. But averages probably make more sense, since no one can tell what the market will do tomorrow.

Plus most people here will only agree to financing an appreciating asset(house, business etc..), not something that will be worth 1/4 of what it is now in 5 years.

What's the difference?

A $15,000 car will be worth $3,750 in five years whether I finance it or not. I don't see why it makes a difference whether it increases or decreases in value in the future.

I understand the argument about financing an appreciating asset in order to leverage your income gains. But we aren't talking about the appreciation in value. We're talking about the difference in money you can make by investing savings and paying interest as opposed to buying it outright.

I'm not trying to be argumentative here. I really just don't understand the reason behind the advice. When $5k-$12k in savings can be made over a 5 year time period by financing a car is at stake, why ignore it?

[kendallf]

There's an argument to be made for it in today's ultra low loan interest rate environment.  I have done exactly this; my wife's car has a loan on it at 1.99% that I've been in no hurry to pay off. 

A few factors to argue against, even with a low rate loan:

First, the temptation (evident in your post) to get just a bit nicer and newer car.  If you're plunking down $4k cash (my current car) it feels harder mentally than just signing that finance agreement.  It's harder to finance an older car, the rates are worse, and often pre-approved loans are only good on late model vehicles.   Don't let easy financing sucker you into buying a more expensive depreciating asset.

Second, comp/collision insurance.  Financing a car requires that you pay these coverages, which will add hundreds to thousands of dollars to your cost over the financing term.  Pay cash for your beater, you can leave 'em off.

Finally, more of your month-to-month income is locked into paying that bill.  You have less flexibility to save heavily, to jump on an unexpected good investment, pay for emergencies, etc.  You're reading all of these articles and working on your finances so you can get off the debt treadmill, right? 

[dycker1978]

Also remember that the audience that MM writes for is the typical consumer sucker.  those who think that you get a 5 year card loan and buy new every three years.

For those who actually understand how interest works, and how levering may make  finical  sense, go hard.  The thing with "normal" consumers is that they will buy the car on payments, then spend the 15k elsewhere...

[ketchup]

The arbitrage game like you're describing can be effective.  I would argue that the risk isn't worth the reward though for a car loan unless you have a larger spread (ie a <2% loan).  Also keep in mind that financing will generally require full coverage insurance on the car, which will likely eat up any gains.

The main downside to financing a car is that it allows, even encourages, one to buy far more car than they need.

[specialkayme]

First, the temptation (evident in your post) to get just a bit nicer and newer car.

I get the point about temptation for a newer, nicer car. But I think that comes down to discipline. If you don't have the discipline to buy a more conservative car, on a better budget, you probably don't have the discipline to invest money in the stock market and sit back and watch.

For me, the $15,000 car vs. the $8,000 car wasn't about how easy it was to finance. It was a cost per mile average. I only shop for reliable cars (hondas, toyotas, for example). I assume every car I have will get 200,000 miles. If I get less, that's life. If I get more, all the better. Most 150,000 mile camrys I saw were in the $7-8k range. Most 30,000 mile camrys were in the $14-15k range. Buying a $7k car and driving it for 50,000 miles gives me a $0.14 per mile cost. Buying a $14k car and driving it for 170,000 miles gives me a $0.08 per mile cost. Significantly less (which is also why I avoid the new $26k car that gives me a $0.13 per mile cost). All of that excludes regular maintenance and gas, which I assume I'll have to pay for anyway.

But I digress.

Second, comp/collision insurance.

 I don't think I'd go without collision insurance anyway. Having lost a car to an uninsured motorist, I'll pay the extra few hundred a year.

Finally, more of your month-to-month income is locked into paying that bill.  You have less flexibility to save heavily, to jump on an unexpected good investment, pay for emergencies, etc.  You're reading all of these articles and working on your finances so you can get off the debt treadmill, right? 

I get the point. I do. Which is something I think heavily about. But I'm trying to make the best decisions for 20 years from now. Not today, not tomorrow. Yes, I lock that monthly expense in. But I also lock in the monthly income from the investment. Which, according to the math, is greater than the monthly expense I'm signing up for. Plus, you've freed up the purchase price to be able to put into an unexpected good investment or emergency.

Also remember that the audience that MM writes for is the typical consumer sucker.  . . The thing with "normal" consumers is that they will buy the car on payments, then spend the 15k elsewhere...

I guess I didn't think MMM writes for the typical consumer sucker. I didn't think the typical consumer sucker would be able to retire at 30. Maybe I misunderstood the target audience.

MMM's writings are adamant about not financing a car, and how you're a moron if you do. Not about how it's right if you understand the interest rate terms and the time value of money, but not right for the average person. Just how it's wrong for everyone. Which is what caused me to ask the initial question.

[snogirl]

Also remember that the audience that MM writes for is the typical consumer sucker.  those who think that you get a 5 year card loan and buy new every three years.

For those who actually understand how interest works, and how levering may make  finical  sense, go hard.  The thing with "normal" consumers is that they will buy the car on payments, then spend the 15k elsewhere...

I like this answer. A great deal of U.S. consumers are brainwashed from birth to buy large & often. A coworker brought his 20 yr old kid down to GMC to buy a 50k leftover truck. Not even a current model year & 50k! A kid!
OP you sound pretty smart follow your gut. I own a paid for 2013 Toyota Tacoma, live in VT, retired US Army, no debt (thanks to MMM & a couple of other inspirational to me blogs). I'm pretty happy & frugally sound. Though my truck is not a mmm fav it works for me & holds resale even at 250k which is when I will dump it. Sorry I edited my post because I hit send on my tapatalk erroneously.

Sent from my DROID RAZR HD using Tapatalk

[JLee]

If you do intend to finance, you should be able to do a lot better than 5%.  Penfed is offering 1.99% on used cars right now.

$8k can typically get you something quite solid.  Financed for three years at 1.99%, the total cost of credit is $247.  A 7% return on $8k over 3 years would generate $1800.

[specialkayme]

If you do intend to finance, you should be able to do a lot better than 5%.  Penfed is offering 1.99% on used cars right now.

That's exactly my point. I should be able to do much better than a 5% loan, and I should be able to do much better than a 7% increase in my investments. I used very conservative numbers on both ends of the spectrum to show that I could still generate a 28.5% return on investment over a 5 year time period.

If you go with a 1.99% interest rate, a 10% stock market rate, you get a 59.3% return on investment over a 5 year time period. But I didn't want to through out 1.99% interest and a 10% investment gain in the original post just to have it blown to holes.

[Heroes821]

I tend to agree with you on this, but as I once had it visually explained to me, you need the bucket of $15k to start with and then put it towards asset investments. MMM followers are generally people who are smart financially already, but his writing is designed to grab the consuma SUCKAs out there who will buy the 15k car and not have 15k to start with.

If you have the money and you are confident you can grow it more than your loan interest, even after insurance and taxable income on gains then do it.  If you make $50 bucks profit, the loan still helped your credit and you did some fun math that helped you get even more financially savvy.

That being said if you have 15k to invest why isn't it invested already? Also why finance a car at that much, shop around and find one at 8k then invest your 15k. Make your profit margin larger. Just because you set aside X money for a car doesn't mean you need a car that costs that much look 2 years older than the model you want and you'll probably find a huge deal.

[ketchup]

Second, comp/collision insurance.

 I don't think I'd go without collision insurance anyway. Having lost a car to an uninsured motorist, I'll pay the extra few hundred a year.

Uninsured/underinsured motorist coverage (on State Farm or esurance anyway) is separate from comp/collision.  It's also way less.  I remember when I was crunching my numbers (25 year old male + 24 year old female, single car in Chicago suburbs) it would have added something like $80/mo (almost a grand a year) to add comp/collision on my 2009 car.

I'm of the opinion that you should have a as little insurance (for replacement, not including liability) as you can "afford."  If you can't afford to self-insure a car (again, liability aside), you probably can't really "afford" the car in the first place.

[humbleMouse]

Most 150,000 mile camrys I saw were in the $7-8k range

I don't know what year camry you are talking about, but here are 6 camrys that I found in 2 minutes of craigslisting that are not $7k for 150k miles.

https://minneapolis.craigslist.org/hnp/cto/5840795498.html

https://minneapolis.craigslist.org/hnp/cto/5841163446.html

https://minneapolis.craigslist.org/hnp/cto/5819163784.html

https://minneapolis.craigslist.org/ank/cto/5842328988.html

https://minneapolis.craigslist.org/ank/cto/5823481534.html

https://minneapolis.craigslist.org/wsh/cto/5843017186.html

[ketchup]

Most 150,000 mile camrys I saw were in the $7-8k range

I don't know what year camry you are talking about, but here are 6 camrys that I found in 2 minutes of craigslisting that are not $7k for 150k miles.

https://minneapolis.craigslist.org/hnp/cto/5840795498.html

https://minneapolis.craigslist.org/hnp/cto/5841163446.html

https://minneapolis.craigslist.org/hnp/cto/5819163784.html

https://minneapolis.craigslist.org/ank/cto/5842328988.html

https://minneapolis.craigslist.org/ank/cto/5823481534.html

https://minneapolis.craigslist.org/wsh/cto/5843017186.html

Ditto that.  When I was looking (Chicago area) for a car a few months back, I found plenty of 75k-125k Camry-type cars for $3-4k.

[specialkayme]

I don't know what year camry you are talking about, but here are 6 camrys that I found in 2 minutes of craigslisting that are not $7k for 150k miles.

Ditto that.  When I was looking (Chicago area) for a car a few months back, I found plenty of 75k-125k Camry-type cars for $3-4k.

No offense, but not really the point of the discussion at all.

If you want to tell me you can get a used car for $4k, fine. Let me run the numbers based on a $4k car.
Financed at 1.99% interest, monthly payments (60 months) equals $70.09 per month. Total cost is $4,205.61.
$4k invested in the market, at 10% annual return, results in a value of $6,581.23 at the end of 5 years.
Total gain is $2,375.62, or a 59.39% gain.

I'm not asking about how to find the best car. Whether to buy new, used, super used, or ultra super used. Whether my budget should be $50k, 30k, 10k, 5k, or 2k. I'm asking about financing as opposed to purchasing outright.

[Heroes821]

I don't know what year camry you are talking about, but here are 6 camrys that I found in 2 minutes of craigslisting that are not $7k for 150k miles.

Ditto that.  When I was looking (Chicago area) for a car a few months back, I found plenty of 75k-125k Camry-type cars for $3-4k.

No offense, but not really the point of the discussion at all.

If you want to tell me you can get a used car for $4k, fine. Let me run the numbers based on a $4k car.
Financed at 1.99% interest, monthly payments (60 months) equals $70.09 per month. Total cost is $4,205.61.
$4k invested in the market, at 10% annual return, results in a value of $6,581.23 at the end of 5 years.
Total gain is $2,375.62, or a 59.39% gain.

I'm not asking about how to find the best car. Whether to buy new, used, super used, or ultra super used. Whether my budget should be $50k, 30k, 10k, 5k, or 2k. I'm asking about financing as opposed to purchasing outright.

The simple answer then is yes your math is solid, MMMs advice does not apply to your situation. I can't speak for him, but its similar to how he would rather pay off a 400k mortgage and not have it hanging over his head than to invest his 400k elsewhere. Its a preference and yours has the potential to make your more money.

[specialkayme]

MMM followers are generally people who are smart financially already, but his writing is designed to grab the consuma SUCKAs out there who will buy the 15k car and not have 15k to start with.

If you have the money and you are confident you can grow it more than your loan interest, even after insurance and taxable income on gains then do it.

I think that's the problem I may be having. Maybe I'm viewing it incorrectly. I don't know. But I see this one area where I'm like "that doesn't make sense to me." And it isn't a small thing. To me, that's a large savings of money over a 5 year time period. More than half the original purchase price of the car.

If the target audience is the suckers out there who will buy the $15k car and not have 15k to start with, or who would be tricked into buying new rather than used just because the monthly payments are less, maybe this isn't the best place for me to read. If I can find, in one weekend, an example where you're leaving 59% of the value of the car on the table over 5 years, what else is in the advice I'm reading that doesn't line up with what I already know, or will later find out.

That being said if you have 15k to invest why isn't it invested already?

Oh it is. That's my point. I had $15k to buy a car, ran the numbers, found out I could save a boatload of cash by financing and investing, and I did. A little over a year ago now. But when I read MMM say financing cars is for morons, I looked back at my math and said "what did I miss here?"

[JLee]

Second, comp/collision insurance.

 I don't think I'd go without collision insurance anyway. Having lost a car to an uninsured motorist, I'll pay the extra few hundred a year.

Uninsured/underinsured motorist coverage (on State Farm or esurance anyway) is separate from comp/collision.  It's also way less.  I remember when I was crunching my numbers (25 year old male + 24 year old female, single car in Chicago suburbs) it would have added something like $80/mo (almost a grand a year) to add comp/collision on my 2009 car.

I'm of the opinion that you should have a as little insurance (for replacement, not including liability) as you can "afford."  If you can't afford to self-insure a car (again, liability aside), you probably can't really "afford" the car in the first place.

Comprehensive with glass coverage is $56/year for my 2006 Mazda.  One windshield in 5 years would pay for it, let alone anything else.

I tend to agree with you on this, but as I once had it visually explained to me, you need the bucket of $15k to start with and then put it towards asset investments. MMM followers are generally people who are smart financially already, but his writing is designed to grab the consuma SUCKAs out there who will buy the 15k car and not have 15k to start with.

If you have the money and you are confident you can grow it more than your loan interest, even after insurance and taxable income on gains then do it.  If you make $50 bucks profit, the loan still helped your credit and you did some fun math that helped you get even more financially savvy.

That being said if you have 15k to invest why isn't it invested already? Also why finance a car at that much, shop around and find one at 8k then invest your 15k. Make your profit margin larger. Just because you set aside X money for a car doesn't mean you need a car that costs that much look 2 years older than the model you want and you'll probably find a huge deal.

With that logic, nobody should be able to buy any car with cash, because if you have $xxx why isn't it invested already? :P

[ketchup]

Ditto that.  When I was looking (Chicago area) for a car a few months back, I found plenty of 75k-125k Camry-type cars for $3-4k.

No offense, but not really the point of the discussion at all.

If you want to tell me you can get a used car for $4k, fine. Let me run the numbers based on a $4k car.
Financed at 1.99% interest, monthly payments (60 months) equals $70.09 per month. Total cost is $4,205.61.
$4k invested in the market, at 10% annual return, results in a value of $6,581.23 at the end of 5 years.
Total gain is $2,375.62, or a 59.39% gain.

I'm not asking about how to find the best car. Whether to buy new, used, super used, or ultra super used. Whether my budget should be $50k, 30k, 10k, 5k, or 2k. I'm asking about financing as opposed to purchasing outright.

And people here are trying to help you with the situation you present.  I had a similar question in my mind (auto loan arbitrage) when car shopping a few months back, and after some analysis and thought, came to the conclusion that financing a car making any sense broke down when I a) factor in increased cost of required comp/collision insurance, or b) factor in getting a cheaper car for cash than can be financed at a reasonable rate. 

I wouldn't want you to move forward with your decision-making without at least taking those facts into account.  You also said some things objectively wrong about $7-8k cars, and people here including were trying to help you correct for that and factor it into your process.  As you know, there are many many things to consider when buying a car.

This isn't the kind of crowd you can just say "I'm going to buy a 15k car" to and expect to not at least have to have alternatives to that brought up as options (just be glad nobody's broken out the bicycle card yet).

[ketchup]

I tend to agree with you on this, but as I once had it visually explained to me, you need the bucket of $15k to start with and then put it towards asset investments. MMM followers are generally people who are smart financially already, but his writing is designed to grab the consuma SUCKAs out there who will buy the 15k car and not have 15k to start with.

If you have the money and you are confident you can grow it more than your loan interest, even after insurance and taxable income on gains then do it.  If you make $50 bucks profit, the loan still helped your credit and you did some fun math that helped you get even more financially savvy.

That being said if you have 15k to invest why isn't it invested already? Also why finance a car at that much, shop around and find one at 8k then invest your 15k. Make your profit margin larger. Just because you set aside X money for a car doesn't mean you need a car that costs that much look 2 years older than the model you want and you'll probably find a huge deal.

With that logic, nobody should be able to buy any car with cash, because if you have $xxx why isn't it invested already? :P

I can see that though.  Just because someone has 15k lying around doesn't mean it should necessarily be spent on a car if it's serving a different purpose (emergency fund, reserves for rental property, etc.) that needs cash.  You'd need 15k *extra* lying around not earmarked for anything else.  I'd just cashflow it from income, save less that month, and not have to draw it from savings/save extra cash for it (not bragging on my income; I tend to go for cheap cars).

I had $15k to buy a car, ran the numbers, found out I could save a boatload of cash by financing and investing, and I did. A little over a year ago now. But when I read MMM say financing cars is for morons, I looked back at my math and said "what did I miss here?"

  Now this all makes sense.  Everyone was reading it as a "I'm planning on doing this," not an "I already did this."  That's all you had to say to shut down that other chatter.

[dogboyslim]

I financed my car based on this reasoning.  My car is not mustachian at all though, and I have a fairly high risk tolerance so maybe don't listen to me.  ;)

I think the best way to answer this question is to take the car out of it.  You are essentially investing on margin.  If the car wasn't a part of the deal, would you borrow money 2% for 60 months to invest in the market?  Why or why not?  If your answers are different, be honest with yourself about your reasons for financing and ask again.  I would do this in a heartbeat, and didn't skip a beat about doing it for the car purchase.  Yes, I might lose, but I probably won't.  Good enough for me.

[dycker1978]

Also remember that the audience that MM writes for is the typical consumer sucker.  . . The thing with "normal" consumers is that they will buy the car on payments, then spend the 15k elsewhere...

I guess I didn't think MMM writes for the typical consumer sucker. I didn't think the typical consumer sucker would be able to retire at 30. Maybe I misunderstood the target audience.

MMM's writings are adamant about not financing a car, and how you're a moron if you do. Not about how it's right if you understand the interest rate terms and the time value of money, but not right for the average person. Just how it's wrong for everyone. Which is what caused me to ask the initial question.

Do you actually read the blog?  He financed the electric car he just bought for the very reason the OP is talking about.

http://www.mrmoneymustache.com/2016/10/04/so-i-bought-an-electric-car/

[ooeei]

It's just borrowing to invest, with a few fees involved.  A few mitigating factors:

• Loans for private car purchases sometimes have rates based on the age of the car, the older the car, the higher the rate.  For a typical "MMM style" car, that means you're likely paying a higher rate than a new car.
• You're required to pay for comprehensive coverage if you have a loan, which most MMM types will not do otherwise.  This is an additional cost (or fee) that you need to take out of your return.  Since you want to do this anyway, it's not a factor for you.
• Generally you'll be tempted to buy more car when you finance.
• You may get a better deal not financing.  I know if I was selling a car, I'd be more inclined to give someone paying cash a deal compared to someone who has to go get approval from their bank to get a loan. 
• If buying a low cost car, the return likely won't be very high in absolute terms, and for some people won't justify the hassle and costs outlined above.
• Generally MMM doesn't recommend $15k cars, so that plays a role into whether it's worth it or not

So yes, you can make money this way, but make sure to run the numbers for yourself.  You could say the same about financing any number of things.  Televisions, bicycles, furniture.  For some people it's worth it, others don't bother.

[frugaliknowit]

What's wrong is you would be effectively be making a high risk investment with borrowed money.

Paying cash for the car is the equivalent of a risk free, tax free return of whatever the borrowing rate would be if you borrowed.  I am of the view that the risk free return is a better deal.

[specialkayme]

Do you actually read the blog? 

First post for me here. I found MMM about a week and a half ago, and have been reading two to five posts per day getting caught up. Still have quite a few to read and get caught up on[/I], but there are a few questions that I can't wrap my head around, so I figured I'd ask them here.

. . .

Literally the second sentence of the original post.

I'm in August of 2011. Haven't gotten to the new car he purchased yet.

"Do you even lift bro?"

[specialkayme]

Now this all makes sense.  Everyone was reading it as a "I'm planning on doing this," not an "I already did this."  That's all you had to say to shut down that other chatter.

And people here are trying to help you with the situation you present.

No, people are trying to interject a different question than the one I presented.

The question is whether you should pay cash or finance a car. Not the purchase price of the car. That's irrelevant to the question. The math works the same whether you buy a $50k car, or you find the deal of a lifetime and get a sweet ride for $1k.

$15k was the example. Interject whatever car price you want.

*EDIT*
Sorry, didn't see this post till later

Now this all makes sense.  Everyone was reading it as a "I'm planning on doing this," not an "I already did this."  That's all you had to say to shut down that other chatter.

I think it clears that part up, either way.

[specialkayme]

What's wrong is you would be effectively be making a high risk investment with borrowed money.

I don't consider investing in the stock market (SPY for example) a high risk investment. If you do, that may change the assessment. Of course, it kinda changes the entire math behind everything MMM shows you if you don't believe in investing in the stock market as a whole.

[frugaliknowit]

What's wrong is you would be effectively be making a high risk investment with borrowed money.

I don't consider investing in the stock market (SPY for example) a high risk investment. If you do, that may change the assessment. Of course, it kinda changes the entire math behind everything MMM shows you if you don't believe in investing in the stock market as a whole.

With a "hurdle rate" of the cost of the car loan, it's hard to argue that it is not. 

[specialkayme]

Well, in any event, it appears my original question was answered.

Thanks everyone for the insight and help. Onto my next question.

[neil]

These kinds of plans are low value, high variance plays.  A quick calculation on a 5 year loan (the way I do it anyway) shows a +$1500 median with a standard deviation of $4000 on a 2% loan.  The math is probably not exactly right but the point of the exercise is valid - you're accepting significantly more variation for the value you receive.  Variation is not irrelevant to a human being with limited lifespan.  People have different opinions on it, but one wouldn't suggest borrowing billions at 5% because it has a positive +EV to do it.  There is a very sizable chance of becoming completely bankrupt.  People do it anyway on Wall Street all the time.

For many on these forums, that variance represents devation for time to FIRE.  Some would not want to do anything to increase the chance to work longer.  So many things are unpredictable that adding to it seems rather unnecessary.  Personal finance is different from running a business because there are more unique and personal variables at play.  As a relative loner with low and predicatable expenses, it is much easier for me to add variance than someone with a large tight knit family and significant responsibilities.  In the end, someone with a solid net worth isn't going to be derailed by a car loan, but I would much rather not have the stress in my life for what little value it really provides.

There's also a psychological component.  Debt is simply not a good system for building wealth because it encourages wealth-destroying activities - especially when successful in the short run.  People who win through borrowing tend to borrow bigger the next time.  Even if you have very strong odds to win individual events, the odds of never losing is really bad.  Average people don't stop at a car loan, and it's why they are broke.  Most millionaires are people who took the boring path to wealth because there are far less roadblocks in the way.

No one is going to be mad if you do or do not take a single unnecessary car loan because a specific car loan will neither make you rich or ruin you.  It's more about avoiding systems that eventually encourage you to ruin.

[zephyr911]

I think cash-vs-financing is a rare area where MMM has historically acted more like Dave Ramsay - that is to say, basing advice on behavioral psych rather than math. Numerically, price being equal, financing wins unless the APR is abusive; psychologically, it can encourage higher spending and therefore is discouraged.

But he did just finance his recent LEAF purchase, for reasons explained in that blog post, despite having the cash for it.

Our cars are financed, because of the math already shown above. As we wind down our high earning phase and look to optimize cash flow, and reduce our income requirements so we can FIRE in a nice low tax bracket, paying off the debt will make more sense.