We are replacing our family's main car. I intended to pay cash. A friend was recently asking if she should invest $$ or pay off her car loan. Since her rate was really low (~2%), I suggested she invest the $, because her long term investment will likely out earn the interest she is paying. After telling her this, I realized that this logic makes my choice to pay cash a bad idea, assuming I can get a rate lower than I would expect an investment to return.
So I started googling about it and saw in reddit someone else uses a 401K loan when they are buying a vehicle, since the interest you pay on the loan is to yourself, rather than to the bank. I checked out my plan, and to borrow $15K (as an example, IDK how much we will spend), there is a $175 set up fee and then I pay myself 4.5% interest. For a 2 year loan, this works out to be $1048.23 in interest I pay to myself. In the meantime, I take the cash I have saved up, and put it in my index fund (taxable brokerage at vanguard, all tax shelters are maxed out), and leave it there until I start drawing down after FI. But, the $15K I take out of the 401K is no longer invested, so I am forgoing gains. Assuming the index funds that I invest in my taxable account perform equally in comparison to what the 401K money would have earned if left invested, doesn't this all wash out to just mean paying $175 to spread out my payments over 2 years, an overall less $ in my pocket situation? Am I missing something?
But, if I could get a loan for a few percent, and invest the cash I have, then my investment could out earn my interest payments. Of course the risk here is that the gain on the investment might not exceed the loan interest, but I think generally people are in the logical/mathematical camp of not rushing to pay off loans under a certain %, and not in the emotional camp of just wanting to say "I'm debt free!" I've been debt free all my life, anyway, its NBD to me...