Which auto loan would you take?

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sippyCUP
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Which auto loan would you take?

Post by sippyCUP »

I am picking up a new Mazda in about 10 days (didn't wanna buy, however truck has nearly 200k miles). Should be around 34k after fees and taxes. I have performed my loan shopping and I will select one of these two options:

Either 1.99 % APR, 36 months (~$970/mo, $1000 total interest paid)
Or 2.79% APR, 60 months (~$600/mo, $2500 total interest)

These figures include all fees and taxes rolled into the loan and assume no down payment.

Which would you select and why?

The decision definitely won't make or break my financial future, but the main consideration that comes to mind would be beliefs about the likely path of inflation (all things being equal, the longer loan probably more appropriate if you think >5% inflation will last into 2026/2027). In addition, there might be considerations that I haven't yet considered, and I would love to hear those!

I'm very comfortable with debt and have stable government employment. Loan will not be used to "enable" consumptive spending. Intend to use car for at least 10 years. Only other debt is about 160k mortgage at 2.25% with 29 years remaining. MIGHT buy a second investment house in the next 5 years, which could necessitate paying off the car loan early depending on how second mortgage shopping might go.

This post is actionable because the thoughts & opinions solicited will inform my debt allocation :D
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StevieG72
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Re: Which auto loan would you take?

Post by StevieG72 »

I would go with the lower rate / term.
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Marjimmy
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Re: Which auto loan would you take?

Post by Marjimmy »

If you can afford the extra $$ to pay it off on a lower rate / quicker than I would.
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Valuethinker
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Re: Which auto loan would you take?

Post by Valuethinker »

sippyCUP wrote: Wed Jun 22, 2022 7:30 pm I am picking up a new Mazda in about 10 days (didn't wanna buy, however truck has nearly 200k miles). Should be around 34k after fees and taxes. I have performed my loan shopping and I will select one of these two options:

Either 1.99 % APR, 36 months (~$970/mo, $1000 total interest paid)
Or 2.79% APR, 60 months (~$600/mo, $2500 total interest)

These figures include all fees and taxes rolled into the loan and assume no down payment.

Which would you select and why?

The decision definitely won't make or break my financial future, but the main consideration that comes to mind would be beliefs about the likely path of inflation (all things being equal, the longer loan probably more appropriate if you think >5% inflation will last into 2026/2027). In addition, there might be considerations that I haven't yet considered, and I would love to hear those!

I'm very comfortable with debt and have stable government employment. Loan will not be used to "enable" consumptive spending. Intend to use car for at least 10 years. Only other debt is about 160k mortgage at 2.25% with 29 years remaining. MIGHT buy a second investment house in the next 5 years, which could necessitate paying off the car loan early depending on how second mortgage shopping might go.

This post is actionable because the thoughts & opinions solicited will inform my debt allocation :D
Since this is all after tax dollars I would go with the shorter term and the lower rate.

That $1000/ $2500 is a wealth transfer from you to lender.

The $370 pcm difference is probably de minimis to your savings plans. You can really only count that as equivalent to payment if you make entirely risk free investments such as ibonds.
RobLyons
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Re: Which auto loan would you take?

Post by RobLyons »

It sounds like you can easily afford the lower rate so that's your best option.
But to answer your question... me personally? I would go with the longer term and pay extra, just to have the financial cushion. The great "what if" always concerns me so I leverage low interest debt whenever possible.
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exodusNH
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Re: Which auto loan would you take?

Post by exodusNH »

sippyCUP wrote: Wed Jun 22, 2022 7:30 pm I am picking up a new Mazda in about 10 days (didn't wanna buy, however truck has nearly 200k miles). Should be around 34k after fees and taxes. I have performed my loan shopping and I will select one of these two options:

Either 1.99 % APR, 36 months (~$970/mo, $1000 total interest paid)
Or 2.79% APR, 60 months (~$600/mo, $2500 total interest)

These figures include all fees and taxes rolled into the loan and assume no down payment.

Which would you select and why?

The decision definitely won't make or break my financial future, but the main consideration that comes to mind would be beliefs about the likely path of inflation (all things being equal, the longer loan probably more appropriate if you think >5% inflation will last into 2026/2027). In addition, there might be considerations that I haven't yet considered, and I would love to hear those!

I'm very comfortable with debt and have stable government employment. Loan will not be used to "enable" consumptive spending. Intend to use car for at least 10 years. Only other debt is about 160k mortgage at 2.25% with 29 years remaining. MIGHT buy a second investment house in the next 5 years, which could necessitate paying off the car loan early depending on how second mortgage shopping might go.

This post is actionable because the thoughts & opinions solicited will inform my debt allocation :D
If you think $370 month of liquidity might be a valid concern, the longer loan has that option. You can prepay the loan, but you'll still pay more in interest even if you pay it off in the same amount of time.

Otherwise, the lower interest is a guaranteed savings vs a potential flat stock market for the next few years. Only way to balance that out would be to buy a bond paying more interest, but that would require laying out the whole loan amount into bonds and still require monthly payments. Treasuries aren't paying that well (yet?) over either term.

Edit: fixed typo
Last edited by exodusNH on Thu Jun 23, 2022 6:22 am, edited 1 time in total.
Valuethinker
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Re: Which auto loan would you take?

Post by Valuethinker »

exodusNH wrote: Thu Jun 23, 2022 6:12 am
sippyCUP wrote: Wed Jun 22, 2022 7:30 pm I am picking up a new Mazda in about 10 days (didn't wanna buy, however truck has nearly 200k miles). Should be around 34k after fees and taxes. I have performed my loan shopping and I will select one of these two options:

Either 1.99 % APR, 36 months (~$970/mo, $1000 total interest paid)
Or 2.79% APR, 60 months (~$600/mo, $2500 total interest)

These figures include all fees and taxes rolled into the loan and assume no down payment.

Which would you select and why?

The decision definitely won't make or break my financial future, but the main consideration that comes to mind would be beliefs about the likely path of inflation (all things being equal, the longer loan probably more appropriate if you think >5% inflation will last into 2026/2027). In addition, there might be considerations that I haven't yet considered, and I would love to hear those!

I'm very comfortable with debt and have stable government employment. Loan will not be used to "enable" consumptive spending. Intend to use car for at least 10 years. Only other debt is about 160k mortgage at 2.25% with 29 years remaining. MIGHT buy a second investment house in the next 5 years, which could necessitate paying off the car loan early depending on how second mortgage shopping might go.

This post is actionable because the thoughts & opinions solicited will inform my debt allocation :D
If you think $370 month of liquidity might be a valid concern, the longer loan has that option. You can prepay the loan, but you'll still pay more in interest even if you pay it off in the same amount of time.

Otherwise, the lower interest is a guaranteed savings vs a potential flat stock market for the next few years. Only way to balance that out would be to buy a bond paying more interest, but that would require laying out the whole loan amount into bonds and still require monthly payments. Treasuries aren't paying that nice (yet?) over either term.
A very good summary, I think.
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JoeRetire
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Re: Which auto loan would you take?

Post by JoeRetire »

sippyCUP wrote: Wed Jun 22, 2022 7:30 pm Either 1.99 % APR, 36 months (~$970/mo, $1000 total interest paid)
Or 2.79% APR, 60 months (~$600/mo, $2500 total interest)

These figures include all fees and taxes rolled into the loan and assume no down payment.

Which would you select and why?
If these are the only two choices, I would choose the 1.99% 36 month loan.

Personally, I would pay cash. I don't believe in getting a car loan with a term longer than 24 month.
This is gonna be my time. Time to taste the fruits and let the juices drip down my chin. I proclaim this: The Summer of George!
runninginvestor
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Re: Which auto loan would you take?

Post by runninginvestor »

Valuethinker wrote: Thu Jun 23, 2022 6:19 am
exodusNH wrote: Thu Jun 23, 2022 6:12 am
sippyCUP wrote: Wed Jun 22, 2022 7:30 pm I am picking up a new Mazda in about 10 days (didn't wanna buy, however truck has nearly 200k miles). Should be around 34k after fees and taxes. I have performed my loan shopping and I will select one of these two options:

Either 1.99 % APR, 36 months (~$970/mo, $1000 total interest paid)
Or 2.79% APR, 60 months (~$600/mo, $2500 total interest)

These figures include all fees and taxes rolled into the loan and assume no down payment.

Which would you select and why?

The decision definitely won't make or break my financial future, but the main consideration that comes to mind would be beliefs about the likely path of inflation (all things being equal, the longer loan probably more appropriate if you think >5% inflation will last into 2026/2027). In addition, there might be considerations that I haven't yet considered, and I would love to hear those!

I'm very comfortable with debt and have stable government employment. Loan will not be used to "enable" consumptive spending. Intend to use car for at least 10 years. Only other debt is about 160k mortgage at 2.25% with 29 years remaining. MIGHT buy a second investment house in the next 5 years, which could necessitate paying off the car loan early depending on how second mortgage shopping might go.

This post is actionable because the thoughts & opinions solicited will inform my debt allocation :D
If you think $370 month of liquidity might be a valid concern, the longer loan has that option. You can prepay the loan, but you'll still pay more in interest even if you pay it off in the same amount of time.

Otherwise, the lower interest is a guaranteed savings vs a potential flat stock market for the next few years. Only way to balance that out would be to buy a bond paying more interest, but that would require laying out the whole loan amount into bonds and still require monthly payments. Treasuries aren't paying that nice (yet?) over either term.
A very good summary, I think.
5 year Treasury rates are currently above 3%. At the 22% tax bracket, you'd want an after tax yield around 3.58%. but the 3 year yield is basically at the 5 year yield so you can make a little bit of money with the 3 year loan if you have the cash upfront.
UpperNwGuy
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Re: Which auto loan would you take?

Post by UpperNwGuy »

sippyCUP wrote: Wed Jun 22, 2022 7:30 pm the main consideration that comes to mind would be beliefs about the likely path of inflation (all things being equal, the longer loan probably more appropriate if you think >5% inflation will last into 2026/2027).
Bad logic. You don't know that high inflation will last that long.
jharkin
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Re: Which auto loan would you take?

Post by jharkin »

I am also not as averse to debt as some BHers are but i would still take the shorter lower rate loan unless your budget is really squezed.

I play the interest rate/inflation arbitage game with mortgage debt where there is some tax deductability and the underlying asset appreciates... but I don't like doing it with any consumer debt.
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HMSVictory
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Re: Which auto loan would you take?

Post by HMSVictory »

Option C - pay cash.

You are financing a depreciating asset. No thanks.
Stay the course!
nguy44
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Re: Which auto loan would you take?

Post by nguy44 »

Lower rate, short term loan is the one I would take.

I am still not mentally used to 5-6+ year loans for cars. I would feel like I am paying for something long after it has lost that "new car" luster :happy .
Valuethinker
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Re: Which auto loan would you take?

Post by Valuethinker »

jharkin wrote: Thu Jun 23, 2022 6:56 am I am also not as averse to debt as some BHers are but i would still take the shorter lower rate loan unless your budget is really squezed.

I play the interest rate/inflation arbitage game with mortgage debt where there is some tax deductability and the underlying asset appreciates... but I don't like doing it with any consumer debt.
The key with American mortgages are that they are long term and fixed rate. Values of houses fluctuate, but your cost of carry is fixed.

Thus that opens up the possibility of using mortgage debt to, in effect, inflate your portfolio. As long as the carry is positive (returns > cost of borrowing) then this is a good investment strategy. You are in effect leveraging your human capital ie your wage earning capacity.

The problem with margin debt as a counter example is you can be margin called. You are in effect short volatility. Statistically, you have a high chance of being wiped out-- forced to sell out (towards or at the bottom).
Valuethinker
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Re: Which auto loan would you take?

Post by Valuethinker »

nguy44 wrote: Thu Jun 23, 2022 7:20 am Lower rate, short term loan is the one I would take.

I am still not mentally used to 5-6+ year loans for cars. I would feel like I am paying for something long after it has lost that "new car" luster :happy .
Apparently there are now 7-8 year ones.

Since I imagine the average new car buyer keeps their car for around 5 years, you have a term of loan greater than the useful life of the asset to the owner.

In the UK we essentially have a car "usership" system. A car lease (Personal Contract Hire?) where the owner rolls their equity in the car into a new car lease every 3-4 years. These are very popular.
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Re: Which auto loan would you take?

Post by Triple digit golfer »

It depends.

If cash flow is an issue, the higher rate/longer term loan may be a better option.

If cash flow is not an issue and you have enough cash to pay in cash and still have ample savings, then I wouldn't take a loan at all.

If cash flow is an issue but you can afford the monthly payments of the lower rate/shorter term loan, that one may be a better option.
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sippyCUP
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Re: Which auto loan would you take?

Post by sippyCUP »

Thank you all very much for your responses! This gives me some additional perspectives to chew on. I think right now, I will lean towards the 1.99% loan, but I plan on researching what kind of cash flow I would need to buy an additional investment SFH in the next few years, which could drive me to the longer duration loan. I have maybe 2/3 of the cash to buy the car outright currently, but I'm seeing buying outright or paying off the loan early as a distant third option.
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sippyCUP
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Re: Which auto loan would you take?

Post by sippyCUP »

UpperNwGuy wrote: Thu Jun 23, 2022 6:29 am
sippyCUP wrote: Wed Jun 22, 2022 7:30 pm the main consideration that comes to mind would be beliefs about the likely path of inflation (all things being equal, the longer loan probably more appropriate if you think >5% inflation will last into 2026/2027).
Bad logic. You don't know that high inflation will last that long.
I wasn't presenting logic though, I was presenting a belief :happy .

That being said, I certainly wouldn't claim that any predictive belief (mine or another's) is sacrosanct, so your point is well taken!
gogreen
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Re: Which auto loan would you take?

Post by gogreen »

I take the longest loans now because of crazy inflation. Just got 72 months 3.7% which is still WAY smaller than IBonds
scophreak
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Re: Which auto loan would you take?

Post by scophreak »

JoeRetire wrote: Thu Jun 23, 2022 6:22 am
sippyCUP wrote: Wed Jun 22, 2022 7:30 pm Either 1.99 % APR, 36 months (~$970/mo, $1000 total interest paid)
Or 2.79% APR, 60 months (~$600/mo, $2500 total interest)

These figures include all fees and taxes rolled into the loan and assume no down payment.

Which would you select and why?
If these are the only two choices, I would choose the 1.99% 36 month loan.

Personally, I would pay cash. I don't believe in getting a car loan with a term longer than 24 month.
Not arguing with you, though curious about your stated 24 month cutoff. If a loan makes sense for 24 months, why not for a longer term? Again, just curious about the reasoning behind this as most posters on this board gravitate toward the extremes of either "pay cash, no auto loans ever" or "take the low rate loan for an extended period (i.e. 60 months)".
IowaFarmWife
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Re: Which auto loan would you take?

Post by IowaFarmWife »

Just a thought- if you're worried about cashflow and you want the longer term with the lower payment, can you put more money down? That would help offset some of the interest on the loan.
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jharkin
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Re: Which auto loan would you take?

Post by jharkin »

Valuethinker wrote: Thu Jun 23, 2022 7:33 am
nguy44 wrote: Thu Jun 23, 2022 7:20 am Lower rate, short term loan is the one I would take.

I am still not mentally used to 5-6+ year loans for cars. I would feel like I am paying for something long after it has lost that "new car" luster :happy .
Apparently there are now 7-8 year ones.

Since I imagine the average new car buyer keeps their car for around 5 years, you have a term of loan greater than the useful life of the asset to the owner.

In the UK we essentially have a car "usership" system. A car lease (Personal Contract Hire?) where the owner rolls their equity in the car into a new car lease every 3-4 years. These are very popular.
Car leases are also an option in the United States, and are fairly popular I believe. I think I saw a statistic somewhere that the majority of European brand luxury vehicles (BMW, Mercedes, Audi, Volvo, Land Rover, etc) are actually leased - usually on 2-3 year terms. Nobody cares that the reliability sucks because they trade them in before the warranty and "free" service contract expires.

This is how you see Americans who only make 50k/yr driving around in 60k SUVs.
deikel
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Re: Which auto loan would you take?

Post by deikel »

think about insurance

For the life time of the loan, you need comprehensive insurance. You may want that for 5 years anyway, but if you tend to self insure for the loss of the vehicle, then the 5 year loan would prevent you to do so for 2 extra years
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JoeRetire
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Re: Which auto loan would you take?

Post by JoeRetire »

scophreak wrote: Thu Jun 23, 2022 8:10 am
JoeRetire wrote: Thu Jun 23, 2022 6:22 am
sippyCUP wrote: Wed Jun 22, 2022 7:30 pm Either 1.99 % APR, 36 months (~$970/mo, $1000 total interest paid)
Or 2.79% APR, 60 months (~$600/mo, $2500 total interest)

These figures include all fees and taxes rolled into the loan and assume no down payment.

Which would you select and why?
If these are the only two choices, I would choose the 1.99% 36 month loan.

Personally, I would pay cash. I don't believe in getting a car loan with a term longer than 24 month.
Not arguing with you, though curious about your stated 24 month cutoff. If a loan makes sense for 24 months, why not for a longer term? Again, just curious about the reasoning behind this as most posters on this board gravitate toward the extremes of either "pay cash, no auto loans ever" or "take the low rate loan for an extended period (i.e. 60 months)".
It's just a personal arbitrary cutoff for me. No magic. Nothing mathematical.

Whenever I have been able to afford it, I've always purchased cars for cash. When I couldn't, I got a 2 year loan, or I waited to get a car.
This is gonna be my time. Time to taste the fruits and let the juices drip down my chin. I proclaim this: The Summer of George!
Raspberry-503
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Re: Which auto loan would you take?

Post by Raspberry-503 »

are you putting cash down or financing the whole thing?
I'm of big fan of the Money guy's 20/3/8 rule of thumb: put 20%, pay it off in 3 years and don't spend more than 8% of your monthly income, or you may be buying something you shouldn't.

Note that paying it in 3 years doesn't always mean take a 3-year loan, you could take a longer one and pay it off faster but have flexibility if you have uneven cash flow.

either way, I would go with low interest/shorter, too easy to get underwater on care value, sometime through no fault of your own.
Topic Author
sippyCUP
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Re: Which auto loan would you take?

Post by sippyCUP »

IowaFarmWife wrote: Thu Jun 23, 2022 8:34 am Just a thought- if you're worried about cashflow and you want the longer term with the lower payment, can you put more money down? That would help offset some of the interest on the loan.
Certainly an option that gives me some granularity adjustment on the monthly payment!
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sippyCUP
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Re: Which auto loan would you take?

Post by sippyCUP »

deikel wrote: Thu Jun 23, 2022 9:52 am think about insurance

For the life time of the loan, you need comprehensive insurance. You may want that for 5 years anyway, but if you tend to self insure for the loss of the vehicle, then the 5 year loan would prevent you to do so for 2 extra years
Yes, this is a big factor... I have some more number crunching on this aspect to do. I will say that generally the additional insurance isn't too crazy, but it will add up to $1000's over the years.
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Re: Which auto loan would you take?

Post by Broken Man 1999 »

I haven't financed a vehicle since the dark ages, but I would jump all over a 1.99% loan. That despite having the means to pay cash.

The 2.79% option might work well, also. That loan is less attractive, but for someone reluctant to sell assets at the present time, make make a lot of sense.

It is kinda funny seeing such low interest rates, even the 2.79% was never available for us to jump on. We faced double-digit mortgages and high single-digit auto loans.

Through all these years of low interest, we didn't make any purchases that needed a loan. I'm almost jealous. :D

OP, you might be just fine on either loan.

I certainly wouldn't pay cash, but that is just me.

Broken Man 1999
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Re: Which auto loan would you take?

Post by dknightd »

I'd look for 1.9%, or less, for 5 years. But they might not exist anymore.

Insurance is not a consideration IMO. Any car less than 5 years old is likely worth insuring for full value.
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Californiastate
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Re: Which auto loan would you take?

Post by Californiastate »

Mileage isn't always the main factor in selling a vehicle. 200k mileage isn't the end date if maintenance and repairs are reasonalble. I'd suggest keeping the vehicle (assuming it's running right) and save up for a newer vehicle. Put that $1k a month in the bank and wait two or three years. That's just me. The fuel savings won't offset new vehicle cost. I assume the truck is liability only. The new vehicle insurance will be a lot more. Save all of that and include it with your new vehicle savings. I know I'm preaching to the choir. Carry on. Don't worry about inflation. Your depreciation in a new vehicle will obliterate and inflation savings.
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Re: Which auto loan would you take?

Post by jmw »

sippyCUP wrote: Thu Jun 23, 2022 7:59 am Thank you all very much for your responses! This gives me some additional perspectives to chew on. I think right now, I will lean towards the 1.99% loan, but I plan on researching what kind of cash flow I would need to buy an additional investment SFH in the next few years, which could drive me to the longer duration loan. I have maybe 2/3 of the cash to buy the car outright currently, but I'm seeing buying outright or paying off the loan early as a distant third option.
Buy a cheaper car that you can afford with the 2/3 value or less all cash. Go used if you have to. There is nothing wrong buying used and I do it too.

I think you'd want a pristine credit report with low DTI for future RE investing. The car loan will increase DTI. Low interest isn't everything.

You want to do investment property but you're unable to raise sufficient cash for a new car? I'm not saying go Dave Ramsey on the investment property purchase transaction itself, but you should have a decent ability to raise cash and hold a good cushion of cash because that will be very useful for things like home repairs, mandatory rehab, and not getting into the trap of deferred maintenance and being a slumlord. You don't want your investment property maintenance fund to be a credit card because if you do, I'll bet all-in that it will end badly. Part of raising more cash faster is to decrease your living standards for now, which might mean downgrading a new car you can't afford with cash. Using a car loan to indirectly raise cash for the investment property or its maintenance fund is a huge warning sign.
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