Auto Loan [vs. investing]

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StevieG72
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Auto Loan [vs. investing]

Postby StevieG72 » Tue Jan 10, 2017 9:41 pm

What would you do?

Pay cash and be done with the deal, or finance at 2.19% and invest the difference?

Looks like the best rate just went up from 1.99% 12-48 months to 2.19% 12-48 months. Best rate in my area from local bank I deal with.

I am leaning towards paying cash and being done with the deal for simplicity and because I hate paying interest. I realize my net gain could be more if I take a loan and invest the difference but I tend to compartmentalize these things and interest would add to the price of my vehicle.

Thoughts?
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Traveler
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Re: Auto Loan [vs. investing]

Postby Traveler » Tue Jan 10, 2017 10:28 pm

I would pay cash

sport
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Re: Auto Loan [vs. investing]

Postby sport » Tue Jan 10, 2017 10:57 pm

It would be really expensive if you took the loan, invested the money, and your investments lost money during the term of the loan. Investing with borrowed money increases the risk of such investments.

Ace$
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Re: Auto Loan [vs. investing]

Postby Ace$ » Wed Jan 11, 2017 12:12 pm

I wouldn't finance a depreciating asset. Pay cash.

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Earl Lemongrab
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Re: Auto Loan [vs. investing]

Postby Earl Lemongrab » Wed Jan 11, 2017 12:30 pm

sport wrote:It would be really expensive if you took the loan, invested the money, and your investments lost money during the term of the loan. Investing with borrowed money increases the risk of such investments.

Why would that be? There's no requirement to sell the investments in a short term.
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sport
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Re: Auto Loan [vs. investing]

Postby sport » Wed Jan 11, 2017 1:00 pm

Earl Lemongrab wrote:
sport wrote:It would be really expensive if you took the loan, invested the money, and your investments lost money during the term of the loan. Investing with borrowed money increases the risk of such investments.

Why would that be? There's no requirement to sell the investments in a short term.

I consider gains and losses to be real, whether or not I sell the investment. YMMV.

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Earl Lemongrab
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Re: Auto Loan [vs. investing]

Postby Earl Lemongrab » Wed Jan 11, 2017 1:34 pm

sport wrote:
Earl Lemongrab wrote:
sport wrote:It would be really expensive if you took the loan, invested the money, and your investments lost money during the term of the loan. Investing with borrowed money increases the risk of such investments.

Why would that be? There's no requirement to sell the investments in a short term.

I consider gains and losses to be real, whether or not I sell the investment. YMMV.

But that's always true of any investments. Are you saying you're 100% cash? Otherwise I don't have the foggiest what your point is.
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Ketawa
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Re: Auto Loan [vs. investing]

Postby Ketawa » Wed Jan 11, 2017 2:19 pm

StevieG72 wrote:What would you do?

Pay cash and be done with the deal, or finance at 2.19% and invest the difference?

Looks like the best rate just went up from 1.99% 12-48 months to 2.19% 12-48 months. Best rate in my area from local bank I deal with.

I am leaning towards paying cash and being done with the deal for simplicity and because I hate paying interest. I realize my net gain could be more if I take a loan and invest the difference but I tend to compartmentalize these things and interest would add to the price of my vehicle.

Thoughts?


Have you read the Paying down loans versus investing wiki article?

Without more information about your investments, interest rates of other debt, financial goals, etc, none of us can give good advice. All we know is the potential interest rate of the auto loan, that you value simplicity, and that you hate paying interest. Only you have the full picture needed to make a decision.

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Ketawa
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Re: Auto Loan [vs. investing]

Postby Ketawa » Wed Jan 11, 2017 2:22 pm

Ace$ wrote:I wouldn't finance a depreciating asset. Pay cash.


There is nothing special about having a depreciating asset and financing it, unless you are considering the possibility of default. You are fully exposed to the asset's loss in value whether you finance it or pay cash.

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Ketawa
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Re: Auto Loan [vs. investing]

Postby Ketawa » Wed Jan 11, 2017 2:28 pm

Earl Lemongrab wrote:
sport wrote:
Earl Lemongrab wrote:
sport wrote:It would be really expensive if you took the loan, invested the money, and your investments lost money during the term of the loan. Investing with borrowed money increases the risk of such investments.

Why would that be? There's no requirement to sell the investments in a short term.

I consider gains and losses to be real, whether or not I sell the investment. YMMV.

But that's always true of any investments. Are you saying you're 100% cash? Otherwise I don't have the foggiest what your point is.


Your portfolio should always be marked to market. Assets are only as valuable as what you can get for them.

As far as how it relates to the original point, I disagree that investing with borrowed money increases the risk of those investments. Individually, the investments are only as risky as they are. Looking at the investor's overall financial portfolio, investing borrowed money may or may not increase the investor's overall risk. It depends on the investment. If you had a way to invest money borrowed at 2.19% at guaranteed higher rates (not impossible, I recently had $25k in FDIC insured 5% prepaid cards), there's nothing risky about it.

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Re: Auto Loan [vs. investing]

Postby Ace$ » Wed Jan 11, 2017 2:36 pm

Ketawa wrote:
Ace$ wrote:I wouldn't finance a depreciating asset. Pay cash.


There is nothing special about having a depreciating asset and financing it, unless you are considering the possibility of default. You are fully exposed to the asset's loss in value whether you finance it or pay cash.


That is exactly what I am doing. That potential exists despite our best intentions.

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Ketawa
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Re: Auto Loan [vs. investing]

Postby Ketawa » Wed Jan 11, 2017 2:43 pm

Ace$ wrote:
Ketawa wrote:
Ace$ wrote:I wouldn't finance a depreciating asset. Pay cash.


There is nothing special about having a depreciating asset and financing it, unless you are considering the possibility of default. You are fully exposed to the asset's loss in value whether you finance it or pay cash.


That is exactly what I am doing. That potential exists despite our best intentions.


Well if we're talking about a depreciating asset, this is actually a benefit. In a default, a depreciating asset securing a loan will be worth less than an appreciating asset. So unless I'm missing something, the logic is completely backwards.
Last edited by Ketawa on Wed Jan 11, 2017 2:44 pm, edited 1 time in total.

leonard
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Re: Auto Loan [vs. investing]

Postby leonard » Wed Jan 11, 2017 2:44 pm

I don't finance cars, hammers, screwdrivers, or any other tools. Pay cash. If you can't afford that - you can't afford the tool.
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Re: Auto Loan [vs. investing]

Postby Ace$ » Wed Jan 11, 2017 2:49 pm

Ketawa wrote:
Ace$ wrote:
Ketawa wrote:
Ace$ wrote:I wouldn't finance a depreciating asset. Pay cash.


There is nothing special about having a depreciating asset and financing it, unless you are considering the possibility of default. You are fully exposed to the asset's loss in value whether you finance it or pay cash.


That is exactly what I am doing. That potential exists despite our best intentions.


Well if we're talking about a depreciating asset, this is actually a benefit. In a default, a depreciating asset securing a loan will be worth less than an appreciating asset. So unless I'm missing something, the logic is completely backwards.


I'd prefer to liquidate the asset rather than default which is harder to do when said asset is depreciating (often more quickly) than the loan balance is declining (especially earlier in the loan; especially on a new vehicle). I prefer to honor my obligations.

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Ketawa
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Re: Auto Loan [vs. investing]

Postby Ketawa » Wed Jan 11, 2017 2:52 pm

Ace$ wrote:
Ketawa wrote:
Ace$ wrote:
Ketawa wrote:
Ace$ wrote:I wouldn't finance a depreciating asset. Pay cash.


There is nothing special about having a depreciating asset and financing it, unless you are considering the possibility of default. You are fully exposed to the asset's loss in value whether you finance it or pay cash.


That is exactly what I am doing. That potential exists despite our best intentions.


Well if we're talking about a depreciating asset, this is actually a benefit. In a default, a depreciating asset securing a loan will be worth less than an appreciating asset. So unless I'm missing something, the logic is completely backwards.


I'd prefer to liquidate the asset rather than default which is harder to do when said asset is depreciating (often more quickly) than the loan balance is declining (especially earlier in the loan; especially on a new vehicle). I prefer to honor my obligations.


Valid point, thanks for clarifying.

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Re: Auto Loan [vs. investing]

Postby Ace$ » Wed Jan 11, 2017 2:56 pm

Ketawa wrote:
Ace$ wrote:
Ketawa wrote:
Ace$ wrote:
Ketawa wrote:
There is nothing special about having a depreciating asset and financing it, unless you are considering the possibility of default. You are fully exposed to the asset's loss in value whether you finance it or pay cash.


That is exactly what I am doing. That potential exists despite our best intentions.


Well if we're talking about a depreciating asset, this is actually a benefit. In a default, a depreciating asset securing a loan will be worth less than an appreciating asset. So unless I'm missing something, the logic is completely backwards.


I'd prefer to liquidate the asset rather than default which is harder to do when said asset is depreciating (often more quickly) than the loan balance is declining (especially earlier in the loan; especially on a new vehicle). I prefer to honor my obligations.


Valid point, thanks for clarifying.


Thanks and sure. I'm new to the community, so I'm looking forward to learning perspectives that differ from mine. I'm fairly risk adverse which is why we lead a debt-free lifestyle and pay cash for pretty much everything nowadays. Have a good one!

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Re: Auto Loan [vs. investing]

Postby nash031 » Wed Jan 11, 2017 3:19 pm

Corollary option: accept financing if it can get you a better deal, then pay the loan off in short order (on the order of a couple of months or less). Often you can negotiate a lower sticker price if you accept financing through the dealership/auto maker. If you have the cash on hand, and assuming there is no penalty for early payment, you can accept financing and pay it off quickly to save yourself a few hundred or thousand dollars.

I have done this twice where I purchased cars at the end of sales quarters and model years, agreed to financing for the incentives, and took $500 and $1000 off the sticker price for financing. Those purchases were made in July, and the loan was paid off by December, which netted me several hundred dollars in both cases.

Otherwise, pay cash if you can. Auto loans aren't like a mortgage where you're paying the same amount 25 years later with depreciated dollars on a (theoretically) appreciating asset.

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Re: Auto Loan [vs. investing]

Postby mmmodem » Wed Jan 11, 2017 3:47 pm

I just took on a second car loan. The money that would've been used to pay it off was used to invest in our Roth IRA. I'm not risk adverse and I don't have issue with debt. I do have issue with not maxing out my Roth IRA every year especially when the car loan is <2%. It takes me a few minutes to set up autopay directly from my savings account. 60 months later it will be done and the title will be mailed to me. This adds no complication to my life. It's either this or delay the purchase. Easy choice for me.

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dm200
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Re: Auto Loan [vs. investing]

Postby dm200 » Wed Jan 11, 2017 5:00 pm

StevieG72 wrote:What would you do?

Pay cash and be done with the deal, or finance at 2.19% and invest the difference?

Looks like the best rate just went up from 1.99% 12-48 months to 2.19% 12-48 months. Best rate in my area from local bank I deal with.

I am leaning towards paying cash and being done with the deal for simplicity and because I hate paying interest. I realize my net gain could be more if I take a loan and invest the difference but I tend to compartmentalize these things and interest would add to the price of my vehicle.

Thoughts?


I would take the loan and increase investments (especially tax advantaged ones)

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Re: Auto Loan [vs. investing]

Postby Biglaw Investor » Wed Jan 11, 2017 5:47 pm

StevieG72 wrote:Pay cash and be done with the deal, or finance at 2.19% and invest the difference?


Would you borrow money at 2.19% from a bank so that you could invest it in the stock market? Would you do it at 4%?

I'd pay cash.

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Re: Auto Loan [vs. investing]

Postby DGE » Wed Jan 11, 2017 5:53 pm

nash031 wrote:Corollary option: accept financing if it can get you a better deal, then pay the loan off in short order (on the order of a couple of months or less). Often you can negotiate a lower sticker price if you accept financing through the dealership/auto maker. If you have the cash on hand, and assuming there is no penalty for early payment, you can accept financing and pay it off quickly to save yourself a few hundred or thousand dollars.

I have done this twice where I purchased cars at the end of sales quarters and model years, agreed to financing for the incentives, and took $500 and $1000 off the sticker price for financing. Those purchases were made in July, and the loan was paid off by December, which netted me several hundred dollars in both cases.

Otherwise, pay cash if you can. Auto loans aren't like a mortgage where you're paying the same amount 25 years later with depreciated dollars on a (theoretically) appreciating asset.


Agree 100%. Others are trying to make this a much more complicated decision than it needs to be.

Financing vs. Paying cash is a decision that should tie to your risk tolerance. If you're confident you can beat 2.19% in the market over the course of the loan, and are ok taking that "gamble", then finance. If you want to keep things simple and "safe", pay cash. However, as nash031 stated, consider what additional incentives are available should you choose to finance the car. Dealerships often throw some additional incentives on the table for folks that finance through them, since they get kickbacks.

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Re: Auto Loan [vs. investing]

Postby DGE » Wed Jan 11, 2017 5:56 pm

leonard wrote:I don't finance cars, hammers, screwdrivers, or any other tools. Pay cash. If you can't afford that - you can't afford the tool.


This is such a radical statement.

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Re: Auto Loan [vs. investing]

Postby leonard » Wed Jan 11, 2017 5:57 pm

DGE wrote:
leonard wrote:I don't finance cars, hammers, screwdrivers, or any other tools. Pay cash. If you can't afford that - you can't afford the tool.


This is such a radical statement.


Can't tell if serious or sarcastic. Either way - I don't think it too radical. Pretty straightforward.
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Re: Auto Loan [vs. investing]

Postby steelerfan » Thu Jan 12, 2017 1:56 pm

I can't tell you what you should do, but if I were in your situation, I would pay cash. This is what I have done when purchasing my last two cars.

But, I am very debt adverse and do not even own a credit card.
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Re: Auto Loan [vs. investing]

Postby thenextguy » Thu Jan 12, 2017 2:22 pm

steelerfan wrote:I can't tell you what you should do, but if I were in your situation, I would pay cash. This is what I have done when purchasing my last two cars.

But, I am very debt adverse and do not even own a credit card.


I'm debt-averse and I own 6 credit cards!

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Re: Auto Loan [vs. investing]

Postby smitcat » Thu Jan 12, 2017 2:28 pm

Credit used to your advantage is just another financial tool.
While we have not carried a credit card balance for over 20 years the cards have paid us handsomely in benefits for basically free.
Similarly whether to finance anything including cars is just a decision on the spread between the rates and whether or not the rate will be taxed or tax advantaged.
At 2.19 % I would always finance the car/truck if it allowed me to make a 401k that also contained a company match.
With other details it would take a separate look with the exact tradeoffs. Home mortgages and business credit has other details related to the tax write-offs and n some cases it would make sense to finance a car/truck/bus etc.

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Re: Auto Loan [vs. investing]

Postby gregnc » Thu Jan 12, 2017 2:46 pm

I think its really a personal preference more than anything else. Can you come out on top using a loan vs cash? Sure. Have you ever met anyone who said, "Hey StevieG72, the way I became a millionaire is always having a car loan and investing the money"? Probably not.

My stance on car loans was primarily shaped by my father who always paid cash sedans for $10K to $15K and then drove them into the dirt. I always pay cash.

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Re: Auto Loan [vs. investing]

Postby steelerfan » Thu Jan 12, 2017 2:56 pm

thenextguy wrote:
steelerfan wrote:I can't tell you what you should do, but if I were in your situation, I would pay cash. This is what I have done when purchasing my last two cars.

But, I am very debt adverse and do not even own a credit card.


I'm debt-averse and I own 6 credit cards!


That's great. Many people don't have the self control to pay them off every month or they buy more than they need. For me it was too easy to just swipe the card knowing I have a huge credit limit. Once I made the decision to get out of debt and stay out of debt, I "needed" to get rid of the CCs. Of course, YMMV.
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Re: Auto Loan [vs. investing]

Postby grabiner » Thu Jan 12, 2017 11:47 pm

I would pay cash, unless there is some substantial cost to getting the cash (capital gain on selling stock, losing the employer match on your 401(k)). Paying off the loan (or not taking it out) is a risk-free, tax-free return of 2.19%, and CD's don't return that much after tax. In addition, if you pay cash, you may be able to save more money by having a higher deductible on your auto insurance.
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Re: Auto Loan [vs. investing]

Postby antheus » Fri Jan 13, 2017 3:29 am

smitcat wrote:At 2.19 % I would always finance the car/truck if it allowed me to make a 401k that also contained a company match.
With other details it would take a separate look with the exact tradeoffs. Home mortgages and business credit has other details related to the tax write-offs and n some cases it would make sense to finance a car/truck/bus etc.


This is a pretty good comment. If financing the car allows you to meet other clear financial goals and doesn't overextend you financially then it makes sense to me. The real benefit of taking out a car loan to hope to beat the interest rate investing is probably quite low though.

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Re: Auto Loan [vs. investing]

Postby inbox788 » Fri Jan 13, 2017 5:00 am

Biglaw Investor wrote:
StevieG72 wrote:Pay cash and be done with the deal, or finance at 2.19% and invest the difference?


Would you borrow money at 2.19% from a bank so that you could invest it in the stock market? Would you do it at 4%?

I'd pay cash.

At 4% no!

At 2% maybe.

At 1% yes! (BTW, I have a 1% auto loan)

"We've already established that. Now we're just haggling over the price."

Would you turn down a 0% loan or even a negative interest rate loan?

Hans Peter Christensen got some unusual news when he opened his most recent mortgage statement. His quarterly interest payment was negative 249 Danish kroner.

Instead of paying interest on the loan he got a decade ago to buy a house in this northern Denmark city, his bank paid him the equivalent of $38 in interest for the quarter. As of Dec. 31, his mortgage rate, excluding fees, stood at negative 0.0562%.

It has been nearly four years since Denmark entered the world of negative monetary policy, and borrowers and lenders alike are still trying to make sense of the upside-down world it has brought.

Negative Rates Around the World: How One Danish Couple Gets Paid Interest on Their Mortgage
http://www.wsj.com/articles/the-upside- ... 1460643111

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Re: Auto Loan [vs. investing]

Postby Valuethinker » Fri Jan 13, 2017 6:36 am

StevieG72 wrote:What would you do?

Pay cash and be done with the deal, or finance at 2.19% and invest the difference?

Looks like the best rate just went up from 1.99% 12-48 months to 2.19% 12-48 months. Best rate in my area from local bank I deal with.

I am leaning towards paying cash and being done with the deal for simplicity and because I hate paying interest. I realize my net gain could be more if I take a loan and invest the difference but I tend to compartmentalize these things and interest would add to the price of my vehicle.

Thoughts?


First you must maximize all tax deferred opportunities: 401k, IRA etc.

Then you have to look at after tax returns. eg municipal bonds or US Treasuries or bank CDs. Other investments are not risk free and so cannot be easily compared to paying down a loan.

Also accelerated mortgage repayments may give a good return (depending) although this is the only truly long term finance you will ever get.

Generally I prefer to pay cash, because it helps me understand the true cost of a decision.

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Re: Auto Loan [vs. investing]

Postby Biglaw Investor » Sat Jan 14, 2017 1:28 pm

inbox788 wrote:
Biglaw Investor wrote:
StevieG72 wrote:Pay cash and be done with the deal, or finance at 2.19% and invest the difference?


Would you borrow money at 2.19% from a bank so that you could invest it in the stock market? Would you do it at 4%?

I'd pay cash.

At 4% no!

At 2% maybe.

At 1% yes! (BTW, I have a 1% auto loan)

"We've already established that. Now we're just haggling over the price."

Would you turn down a 0% loan or even a negative interest rate loan?


I'm not really a fan of investing on margin, no matter what rate you're offering me. See: viewtopic.php?t=5934

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Re: Auto Loan [vs. investing]

Postby inbox788 » Sat Jan 14, 2017 2:07 pm

Biglaw Investor wrote:
inbox788 wrote:Would you turn down a 0% loan or even a negative interest rate loan?


I'm not really a fan of investing on margin, no matter what rate you're offering me. See: viewtopic.php?t=5934

Opportunity seldom comes knocking, and you can pass it up if you choose, but if someone wants to loan me $1B at -0.1%, I will gladly take it and collect the $1M interest!

You need not take big risks with your investments. At low enough costs, a CD may be profitable. And low risk bonds may be worth taking a chance as well. It's a hedge play or an arbitrage with very favorable odds, and if the numbers added up, I'd take a small chance.

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Re: Auto Loan [vs. investing]

Postby stevekozak2 » Sat Jan 14, 2017 2:13 pm

Pay cash. Debt is risk.

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Re: Auto Loan [vs. investing]

Postby whodidntante » Sat Jan 14, 2017 2:15 pm

I took a 5 year loan for 40k at 1.89%. I also allow my mortgage at 3.125% to live on. It beats selling stock and paying cap gains tax. Since money is fungible, I've effectively borrowed against my house and my car to buy stock.

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Re: Auto Loan [vs. investing]

Postby Biglaw Investor » Sat Jan 14, 2017 2:36 pm

inbox788 wrote:Opportunity seldom comes knocking, and you can pass it up if you choose, but if someone wants to loan me $1B at -0.1%, I will gladly take it and collect the $1M interest!

You need not take big risks with your investments. At low enough costs, a CD may be profitable. And low risk bonds may be worth taking a chance as well. It's a hedge play or an arbitrage with very favorable odds, and if the numbers added up, I'd take a small chance.


Yes, you're right! I'd take $1B at -0.1%. Please DM me if someone reaches out to you with that offer. :D Happy to split the risk and we can each take $500M. I'll even buy you some beers.

:sharebeer

But in reality, most people are deciding between ~2.5% interest and putting that money in the stock market for a ~7% return. I definitely would not borrow money from a bank at 2.5% to invest in the stock market at an expected 7% return, which is really the same thing as having a 2.5% car loan and taking available cash and putting it in the market.

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Re: Auto Loan [vs. investing]

Postby inbox788 » Sat Jan 14, 2017 2:51 pm

Biglaw Investor wrote:But in reality, most people are deciding between ~2.5% interest and putting that money in the stock market for a ~7% return. I definitely would not borrow money from a bank at 2.5% to invest in the stock market at an expected 7% return, which is really the same thing as having a 2.5% car loan and taking available cash and putting it in the market.

Funny thing is that many people say exactly the former (would not borrow), but do exactly the latter (take the car loan). I do the latter because the risk/reward is worth it to me (especially when the loan is at 1% and not even 2.5%; my threshold is right around 2% where I'm buying bonds -- bnd yields about 2.5%).

Some folks pay cash, but if the manufacturer has a 0% loan available, they leave it on the table. If I can get 1% in a savings account, money market or CD account on $30k new car, I figure it's $300/year initially. If you say it's not worth the trouble, that's fine, but to me it's virtually free money, and I'd fill out a few forms and setup some automatic payments for that.

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Re: Auto Loan [vs. investing]

Postby sport » Sat Jan 14, 2017 2:57 pm

inbox788 wrote:
Biglaw Investor wrote:But in reality, most people are deciding between ~2.5% interest and putting that money in the stock market for a ~7% return. I definitely would not borrow money from a bank at 2.5% to invest in the stock market at an expected 7% return, which is really the same thing as having a 2.5% car loan and taking available cash and putting it in the market.

Funny thing is that many people say exactly the former (would not borrow), but do exactly the latter (take the car loan). I do the latter because the risk/reward is worth it to me (especially when the loan is at 1% and not even 2.5%; my threshold is right around 2% where I'm buying bonds -- bnd yields about 2.5%).

Some folks pay cash, but if the manufacturer has a 0% loan available, they leave it on the table. If I can get 1% in a savings account, money market or CD account on $30k new car, I figure it's $300/year initially. If you say it's not worth the trouble, that's fine, but to me it's virtually free money, and I'd fill out a few forms and setup some automatic payments for that.

The other possibility is that if you pass up the 0% loan, you may be able to get a better price. Sometimes it will work, and sometimes not.

hille141
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Re: Auto Loan [vs. investing]

Postby hille141 » Sat Jan 14, 2017 3:09 pm

The main problem with theses sort of questions is the comparison is between borrowing say $30k at 2% versus keeping the money invested at say 8%. If buying a depreciating asset is going to cause a significant impact on your investments, it's too much car.

What's the analysis look like of pulling $10k out, buying a car in cash, leaving $20k invested, and investing the equivalent payment going forward?

Too many get caught up in the low rates as an excuse to spend too much. It's part of the reason the auto industry is doing so well right now.

Biglaw Investor
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Re: Auto Loan [vs. investing]

Postby Biglaw Investor » Sat Jan 14, 2017 4:11 pm

inbox788 wrote:If you say it's not worth the trouble, that's fine


It's not worth the trouble.

Plus, there's other reasons not to finance a car:

1. Total Cost. You will likely pay less for a car in cash (hurts more to take the cash out of savings than to sign up to a 0% loan). Multiple studies back this up that people spend more on credit than they do in cash.
2. Cash flow. I don't want to manage a car payment every month in my cash flow, which I'd have to do if I take a loan.
3. Limited market. Good luck showing up to buy a used car with a loan. They usually prefer cash.
4. Mistakes. Miss a payment? Screw something up one month? Suddenly the 0% rate is gone and maybe you owe back interest.
5. Living Debt Free. It feels pretty good. I'd like to stay that way.
6. Logical Conclusion. If you finance a car even at 1%, it really means you should finance everything. Buy your next iPhone at 0%. Open up Home Depot credit card to buy the next fridge at 0% for 18 months. I don't have the energy to keep up with all this.

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grabiner
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Re: Auto Loan [vs. investing]

Postby grabiner » Sat Jan 14, 2017 5:40 pm

hille141 wrote:The main problem with theses sort of questions is the comparison is between borrowing say $30k at 2% versus keeping the money invested at say 8%. If buying a depreciating asset is going to cause a significant impact on your investments, it's too much car.


Not necessarily. Any money not spent will be invested, so the question is whether this is the best use of the money. If you want to buy a $25K car and have $25K in the bank, you always have the option of paying cash for the car, or borrowing $20K and then putting the $20K you didn't spend into a brokerage account. Similarly, if you have $5K in cash and $20K already in the brokerage account, you can sell the $20K from the brokerage account, or leave it there and take out a loan.

When I bought my first car, this is the comparison I made, in both directions. I had enough money in my brokerage account to pay cash for the car, but selling enough stock to do this would have cost me more in capital-gains tax (20% federal and 7% state at the time) than the interest on the loan. I took out a loan and paid it off well in advance of the 36-month term; putting money against the loan was a better return than adding new money to my taxable mutual funds.

The "too much car" issue applies if you can't afford to pay cash for the car, rather than if you can afford to pay cash but have a better use of the money.
David Grabiner


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