Sinking 'Auto Loan' against 'bond index fund'

[bootyman]

Its time for me to buy a new car.  I could pay cash for it -- 30k -- or I could get a below 2% auto loan.  What I am considering is putting the cash into a conservative bond index fund and financing the car at below 2% (the payment would be made out of ordinary income).  I see bond index funds are consistently returning 4-5%.  The seems like a very low risk way to come out ahead.  What are your thoughts?

Also first post here, thanks for all the info!  I'm a 25 yo cash hoarder and entrepreneur who just realized that the growing number in my checking account is really shriveling up and this site has been the best resource over the last 2 weeks of research. 

[vegasdude]

In both scenarios you're spending at least 30k on a car that is going to depreciate much faster than 5% annually. You aren't coming out ahead.

[TheMoneyBadger]

If you can get the loan below 2% AND you're committed to buying this car then yes, investing the money and taking the cash is a good alternative.  That assumes that you really will invest the money that you would have otherwise used to pay for the car and that you have the cash flow to make the payments without needing to cash out investments. 

It sounds like you're focused on making your money work for you and this site will certainly help with that.  The other thing this site can help with is resetting your idea of what normal spending can be to yield a life filled with happiness and good things.  In other words, it'll help you be less of a consumer sucka... in that sense, I'd think seriously about whether you want to invest $30,000 in an asset that won't make you any money at all.  Buying a nice, reliable used car would cost you far less and would give you more cash every month to invest. 

Ultimately it's your choice but think about whether the happiness you'll get from the car is enough to offset the additional time you'll need to work to get to financial independence as a result of not saving the money.  About a decade ago I bought a fancy car (an Audi) - man, I wish I could go knock some sense into my young self.  That same money, invested, would be worth a lot more today and I would have been just as happy in a used Honda.

[SaintM]

First of all, that is $30k in a quickly depreciating piece of property.

To get a 4-5% interest rate return on a bond fund, you have to go with some combination of long-term and lower credit rating.  Bond funds have gone up substantially in the past year, as interest rates have dropped.  In the past 13 months, the 10-year US treasury note went from 3% to 1.64%.  The 30 year long bond at 2.2% is at the lowest interest rate ever.  Will they go lower (and thus the price of bonds and bond funds go higher)...I don't know.  I'm not selling bonds, but I'm not putting new money into them either.

[2Birds1Stone]

Get a used car, preferably privately. I snagged a Nissan Sentra with 13,000 miles 4 years ago for $7000+ sales tax. It's still worth $4200 4 years and 50,000 miles later. Your $30,000 car would be worth $12,000 at best by now.

[HopefulMustache]

OP, it's good to think about new vs used, and as you can see the MMM community generally (strongly) favors used. To give a story on the other side, I bought a car last month, and carefully considered new vs used. We went new, partially because my partner felt more secure that way, but also in large part because for the car we wanted we found adding 4 years and 30000 miles to it only saved two or three thousand dollars, which didn't seem worth it.

Up-front cost is certainly a huge factor (ie: would you be just as happy with a 20K new car?), but as far as depreciation, I think it's key to look at MMM's most recent post about net worth:

Don’t bother with depreciating consumer stuff like your cars,  furniture, or Apple products, unless you are willing to sell them right now.

If you're going to drive it into the ground, forget about depreciation. Just make sure you're not overspending your needs in up-front costs. It's a different story if you plan to sell it in five years, of course.

As for your actual original question, I'm afraid I don't know a lot about bonds, but if you can afford to invest long term, even a more volatile equities index fund should come out ahead in the long run. I wouldn't carry too much debt but a little low interest stuff probably isn't a bad idea if it's to invest the rest.

[Jags4186]

Its time for me to buy a new car.  I could pay cash for it -- 30k -- or I could get a below 2% auto loan.  What I am considering is putting the cash into a conservative bond index fund and financing the car at below 2% (the payment would be made out of ordinary income).  I see bond index funds are consistently returning 4-5%.  The seems like a very low risk way to come out ahead.  What are your thoughts?

Also first post here, thanks for all the info!  I'm a 25 yo cash hoarder and entrepreneur who just realized that the growing number in my checking account is really shriveling up and this site has been the best resource over the last 2 weeks of research.

I won't comment on spending 30k on a car without your whole financial picture.  Almost no one here will agree with a 30k car purchase, however, if you are 25 and already have 500k or something crazy based on your "entrepreneur" status you probably can afford it.

1) As someone who spent 30k on a new car and kicks himself every day for it (I'm almost done paying it off...I'm just dealing with it) my suggestion is not to spend 30k on a new car.  That's not to say don't spend 30k on a car...that's don't spend 30k on a new car.  You can get a really really nice late model CPO BMW or Mercedes for 30k or less and it will be way nicer than any new 30k car and comes with warranty and everything.

2)  Just pay cash.  You're probably going to pay off this 2% loan in 2 or 3 years.  Bonds may be low risk over the long term and you MIGHT come out ahead but your best case scenario is probably in the +$100s of dollar range and your worst case scenario is in the likely in the -$1000s range.