Car financing qusetion

[dantownehall]

I know MMM says never to finance a car, but I'm not sure the current interest rate environment makes that always the best choice.  I am, however, willing to be persuaded otherwise by smater people than myself.

Let's start by hypothetically asuming a person has a legitimate need to make a car purchase.

I see current rate quotes in my area (just from a quick internet search) of 2.5-3.5% for a 48-month used car loan.  I think it's reasonable to say that there are plenty of investments out there that yield more than that.

How is it not the best choice to borrow cheap money for the car, and invest the difference, as opposed to saving a lump sum to buy the car?

This is the same logic I'm using to not pay down my mortgage early, since the interest rate there is 4.5%.  The money that would go to the mortgage goes to investments instead. (There's also the mortgage interest deduction that helps with that decision, although that doesn't figure into the car decision).

[nereo]

I have no problem taking out a loan if it is less than 4%.  However, I always make sure that I am not taking out a loan because I couldn't afford it otherwise.
At 3.5% I agree with you - keep your savings invested and take out a loan to pay for the most mustachian car that will fit your needs.

[bikebum]

I'm with you fellars!

[Vorpal]

The real question here is "how expensive is the car?" Don't buy more car than you need. Since a vehicle is a depreciating asset, you want to spend as little as possible on it. The interest rate math may very well tell you that investing is preferable to buying a car with cash. That's fine. Just don't use that as an excuse to go out and finance a used BMW.

EDIT: I should mention that I made this same choice (essentially) when I shipped a chunk of change to my online brokerage account earlier this month. Had I not done that, I could (and would) have paid off my car loan next month. With a 1.9% interest rate, that seemed sub-optimal... so I invested the money in mutual funds instead. Obviously my balance might decrease between now and then, but as of this post I have already made about 50% more money in those funds than I will pay in interest for the remaining life of the loan (25 months).

[Argyle]

My question would be: is an exact equivalent of that car payment going go to into investments?  Say you're going to end up paying $15,000 for the car — are you putting $15,000 into investments starting today?  Or is some of it going to get frittered away, and meanwhile you've got a monthly payment for however many years?

I myself think the wonderfulness of living without a large monthly payment — and getting a guaranteed return for living without it — beats the theoretical extra money I'd be making in the stock market. 

[dantownehall]

Well, I'm pretty good about investing anything left over with my iron will and all, so I'm not worried about that, mostly just making sure there wasn't any hidden trap I'm missing mathematically.

Thanks y'all!

[dantownehall]

I think I can honestly think of the wonderfulness of having a monthly payment and simultaneously knowing I'm making more money by having a payment with just as much satisfaction!

[Thegoblinchief]

Make sure to factor in the additional cost of full collision coverage when looking at the cost/benefit.

[La Bibliotecaria Feroz]

Ah, but are those investments GUARANTEED? Because if not, they could lose money over the term of the loan, and then you would have been better off paying cash.

[bikebum]

Guaranteed 2.5-3.5% return vs. 7% return with risk? I'll take the stock market.

Inflation is around 2-3%. It's almost like borrowing money for free.

[daverobev]

Just make sure you take into account any loan admin fees, and also if the car would be cheaper cash (cash discount). Other than that, and any insurance stipulations, yeah take the cheap money... Just not too much of it.

[Gin1984]

Just make sure you take into account any loan admin fees, and also if the car would be cheaper cash (cash discount). Other than that, and any insurance stipulations, yeah take the cheap money... Just not too much of it.

This is the only place I have ever heard where people think there is a cash discount for cars, and I have read it twice in two days.  All I have learned has said not to discuss payment type because you pay for if you tell them you are paying in cash.

[CarDude]

Make sure to factor in the additional cost of full collision coverage when looking at the cost/benefit.

Yes. So many folks forget this. If you don't own the car, you don't choose your coverage, as a rule.

[Vorpal]

Make sure to factor in the additional cost of full collision coverage when looking at the cost/benefit.

Yes. So many folks forget this. If you don't own the car, you don't choose your coverage, as a rule.

IMO, any car that costs enough to finance should be under full coverage... but then again I'm here in Houston and the risk factor is very high.

Certainly a good argument in favor of a $5k beater, though.

[shotgunwilly]

Guaranteed 2.5-3.5% return vs. 7% return with risk? I'll take the stock market.

Inflation is around 2-3%. It's almost like borrowing money for free.

These are my thoughts also... If you can borrow at 3% vs saving that many years to pay cash, isn't it roughly the same cost because of inflation?