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?