Buying a new car - 0% financing. (1 Viewer)

[culdeus]

Agree 100%. Unfortunately, the financially uneducated only look at things in terms of what they can afford month-to-month, so if you can make a $50K vehicle have $650/mos payments, that's all they see. It's the same thing that got people into trouble with home loans. Interest-only ARM's and other things that sold houses to people who could afford the initial payments, but had no clue what would REALLY happen when the big payments hit...or in this case, what would happen in 3 years when they totaled the car, insurance gave them $20K, and they still owed $30K on the loan. It's just not responsible, and the people that these things target aren't people like Chadstroma, they're people who just don't understand the implications.

If you get an 84 month loan, you can't afford the car. This applies to everyone. Buying a new car is not an investment, it is utility at best and the depreciation is well known.

In most cases, I agree...but in absolutes with finacially astute people, not true. Look back at my initial financing proof-of-concept early in the thread. If I can pay cash for a car, but they offer me financing at a rate at which I can make more money re-investing the money I'd have spent otherwise, I'll take the loan, invest the cash, and pocket the marginal returns above the loan interest rate. I'm not going to get rich doing it, but it's a positive value move.

Put simply, If I can pay cash for a $50,000 car, and you offer me $50,000 for 84 months at 2% interest, and I know there's a 7-year $50,000 muni bond that pays 4%, I'll take the loan, buy the bond and make 2% on the cash that I would've otherwise tied up.

No, financially astute people don't do this. A new car will be worth half of what it was worth when you bought it new after five years. So instead of getting marginal returns in some muni, you buy it as soon as possible to control the asset. You are losing 15% or more on the value of a vehicle every year, then paying 3-6% in interest on a car that you are more than likely under water on that loan. Not to mention most factory warranties are for just three years, meaning you are shelling out additional money for major repairs which will decrease the value of the bank's asset even further.

I agree with your theory if we are talking about taking out a second mortgage vice a reverse mortgage, or even a HEL, but not for a car. NEVER. NEVER, NEVER, NEVER.

If this is your mindset then why wouldn't you lease? In a lease environment you are effectively only financing the depreciation and never pay for upkeep. Just saying. You might pay another 100 basis points of interest, but you are covered in a gap situation (nearly always).

OTOH with that mindset why not buy a car coming off lease? 30k miles or so on it. Save the depreciation costs.

 

[Fat Nick]

Agree 100%. Unfortunately, the financially uneducated only look at things in terms of what they can afford month-to-month, so if you can make a $50K vehicle have $650/mos payments, that's all they see. It's the same thing that got people into trouble with home loans. Interest-only ARM's and other things that sold houses to people who could afford the initial payments, but had no clue what would REALLY happen when the big payments hit...or in this case, what would happen in 3 years when they totaled the car, insurance gave them $20K, and they still owed $30K on the loan. It's just not responsible, and the people that these things target aren't people like Chadstroma, they're people who just don't understand the implications.

If you get an 84 month loan, you can't afford the car. This applies to everyone. Buying a new car is not an investment, it is utility at best and the depreciation is well known.

In most cases, I agree...but in absolutes with finacially astute people, not true. Look back at my initial financing proof-of-concept early in the thread. If I can pay cash for a car, but they offer me financing at a rate at which I can make more money re-investing the money I'd have spent otherwise, I'll take the loan, invest the cash, and pocket the marginal returns above the loan interest rate. I'm not going to get rich doing it, but it's a positive value move.

Put simply, If I can pay cash for a $50,000 car, and you offer me $50,000 for 84 months at 2% interest, and I know there's a 7-year $50,000 muni bond that pays 4%, I'll take the loan, buy the bond and make 2% on the cash that I would've otherwise tied up.

No, financially astute people don't do this. A new car will be worth half of what it was worth when you bought it new after five years. So instead of getting marginal returns in some muni, you buy it as soon as possible to control the asset. You are losing 15% or more on the value of a vehicle every year, then paying 3-6% in interest on a car that you are more than likely under water on that loan. Not to mention most factory warranties are for just three years, meaning you are shelling out additional money for major repairs which will decrease the value of the bank's asset even further.

I agree with your theory if we are talking about taking out a second mortgage vice a reverse mortgage, or even a HEL, but not for a car. NEVER. NEVER, NEVER, NEVER.

I'm financially astute. Used to be a licensed CFA, work in finance for a large corporation now. If I need to buy a car, I do this. Every time. You're getting caught up in the details of what I'm saying I think.

The CAR is not the investment or the profit. Don't get caught up in that. I agree 100% that a car is not an investment. My comment wasn't about buying a car as an investment decision...it was about financing the car for 84 months. That said, there are smart ways to fund buying a car, which CAN include financing a car for 84 months if the interest rate is low enough, but the car is not the investment. You either need a car or you don't. It's not an investment. If you DO need it, there are smart ways to buy it if you have the financial leverage.

• Whether I buy the car outright in cash or finance it for 84 months doesn't impact wheter -I- (as a financially astute someone who CAN buy it in cash) can afford the car or not.
• How I pay for the car does not impact the "value" of the car. A 3 year old car with 50,000 miles on it is worth the same if I own it or if I have 60 months left on a loan.
• The warranty is also the same.

The CAR is not the question. How to pay for the car is. You said that NOBODY buys a car and finances it for 84 months. I said I would if I can make more than the interest rate I'm paying.

Let me put it to you this way. You need a car (again, not an investment). You can either a) buy a car for $50K CASH outright, or b) you can finance the car for 84 months at 3% interest, and keep your wad of $50K cash to pay off the car over time. Now what if there is a bank down the road with 1 month CD's that pay 5% interest. Guaranteed 5% return.

• If you bought the car for cash, you have $0 and $0 debt and a $50,000 car. Right?
• If you financed the car for 84 months at 3%, every single month, you could go to the bank and buy a 1 month CD for the amount of the $50,000 cash you still had, earn 5% interest, pay your loan at 3%, and profit 2%. You still have a car. You still have the money to pay the loan off. But now you also have the 2% spread as interest income. (As I said, the car isn't the investment. It's how you pay for it).

Which would you rather do? If you can earn a higher rate of return on money than what you are borrowing at, borrowing money makes sense. This is how every bank and business in the world operates.

It CAN make sense to finance a car for a long period of time if the interest rate charged is low enough and you can earn a higher rate of return. Period. That's VERY basic finance.

 

[mr roboto]

Fat Nick, in your scenario though you likely couldn't pay the monthly loan with simply the interest off the CD. So you have a 50k CD but you either continue to dip into principal to pay the note or you have a different source of income to pay the note.

 

[George Jefferson Airplane]

Agree 100%. Unfortunately, the financially uneducated only look at things in terms of what they can afford month-to-month, so if you can make a $50K vehicle have $650/mos payments, that's all they see. It's the same thing that got people into trouble with home loans. Interest-only ARM's and other things that sold houses to people who could afford the initial payments, but had no clue what would REALLY happen when the big payments hit...or in this case, what would happen in 3 years when they totaled the car, insurance gave them $20K, and they still owed $30K on the loan. It's just not responsible, and the people that these things target aren't people like Chadstroma, they're people who just don't understand the implications.

If you get an 84 month loan, you can't afford the car. This applies to everyone. Buying a new car is not an investment, it is utility at best and the depreciation is well known.

In most cases, I agree...but in absolutes with finacially astute people, not true. Look back at my initial financing proof-of-concept early in the thread. If I can pay cash for a car, but they offer me financing at a rate at which I can make more money re-investing the money I'd have spent otherwise, I'll take the loan, invest the cash, and pocket the marginal returns above the loan interest rate. I'm not going to get rich doing it, but it's a positive value move.

Put simply, If I can pay cash for a $50,000 car, and you offer me $50,000 for 84 months at 2% interest, and I know there's a 7-year $50,000 muni bond that pays 4%, I'll take the loan, buy the bond and make 2% on the cash that I would've otherwise tied up.

No, financially astute people don't do this. A new car will be worth half of what it was worth when you bought it new after five years. So instead of getting marginal returns in some muni, you buy it as soon as possible to control the asset. You are losing 15% or more on the value of a vehicle every year, then paying 3-6% in interest on a car that you are more than likely under water on that loan. Not to mention most factory warranties are for just three years, meaning you are shelling out additional money for major repairs which will decrease the value of the bank's asset even further.

I agree with your theory if we are talking about taking out a second mortgage vice a reverse mortgage, or even a HEL, but not for a car. NEVER. NEVER, NEVER, NEVER.

I'm financially astute. Used to be a licensed CFA, work in finance for a large corporation now. If I need to buy a car, I do this. Every time. You're getting caught up in the details of what I'm saying I think.

The CAR is not the investment or the profit. Don't get caught up in that. I agree 100% that a car is not an investment. My comment wasn't about buying a car as an investment decision...it was about financing the car for 84 months. That said, there are smart ways to fund buying a car, which CAN include financing a car for 84 months if the interest rate is low enough, but the car is not the investment. You either need a car or you don't. It's not an investment. If you DO need it, there are smart ways to buy it if you have the financial leverage.

• Whether I buy the car outright in cash or finance it for 84 months doesn't impact wheter -I- (as a financially astute someone who CAN buy it in cash) can afford the car or not.
• How I pay for the car does not impact the "value" of the car. A 3 year old car with 50,000 miles on it is worth the same if I own it or if I have 60 months left on a loan.
• The warranty is also the same.

The CAR is not the question. How to pay for the car is. You said that NOBODY buys a car and finances it for 84 months. I said I would if I can make more than the interest rate I'm paying.

Let me put it to you this way. You need a car (again, not an investment). You can either a) buy a car for $50K CASH outright, or b) you can finance the car for 84 months at 3% interest, and keep your wad of $50K cash to pay off the car over time. Now what if there is a bank down the road with 1 month CD's that pay 5% interest. Guaranteed 5% return.

• If you bought the car for cash, you have $0 and $0 debt and a $50,000 car. Right?
• If you financed the car for 84 months at 3%, every single month, you could go to the bank and buy a 1 month CD for the amount of the $50,000 cash you still had, earn 5% interest, pay your loan at 3%, and profit 2%. You still have a car. You still have the money to pay the loan off. But now you also have the 2% spread as interest income. (As I said, the car isn't the investment. It's how you pay for it).

Which would you rather do? If you can earn a higher rate of return on money than what you are borrowing at, borrowing money makes sense. This is how every bank and business in the world operates.

It CAN make sense to finance a car for a long period of time if the interest rate charged is low enough and you can earn a higher rate of return. Period. That's VERY basic finance.

This is not that hard to understand, negative equity is terrible and you again avoided the discussion about what happens when the vehicle with a seven year loan needs a major repair after the warranty expires. Or when you wreck the Arcadia and don't get the full value because you owe more than the car is worth. Or when you want to sell the vehicle and you lose your hat because again, you are under water. What are you gonna recommend then? Trade it in at a loss and buy another $50k CD? lol

Consumers Reports, Edmunds, and any financial advisor worth his weight in salt say avoid these loans at all costs.

 

[culdeus]

Agree 100%. Unfortunately, the financially uneducated only look at things in terms of what they can afford month-to-month, so if you can make a $50K vehicle have $650/mos payments, that's all they see. It's the same thing that got people into trouble with home loans. Interest-only ARM's and other things that sold houses to people who could afford the initial payments, but had no clue what would REALLY happen when the big payments hit...or in this case, what would happen in 3 years when they totaled the car, insurance gave them $20K, and they still owed $30K on the loan. It's just not responsible, and the people that these things target aren't people like Chadstroma, they're people who just don't understand the implications.

If you get an 84 month loan, you can't afford the car. This applies to everyone. Buying a new car is not an investment, it is utility at best and the depreciation is well known.

In most cases, I agree...but in absolutes with finacially astute people, not true. Look back at my initial financing proof-of-concept early in the thread. If I can pay cash for a car, but they offer me financing at a rate at which I can make more money re-investing the money I'd have spent otherwise, I'll take the loan, invest the cash, and pocket the marginal returns above the loan interest rate. I'm not going to get rich doing it, but it's a positive value move.

Put simply, If I can pay cash for a $50,000 car, and you offer me $50,000 for 84 months at 2% interest, and I know there's a 7-year $50,000 muni bond that pays 4%, I'll take the loan, buy the bond and make 2% on the cash that I would've otherwise tied up.

No, financially astute people don't do this. A new car will be worth half of what it was worth when you bought it new after five years. So instead of getting marginal returns in some muni, you buy it as soon as possible to control the asset. You are losing 15% or more on the value of a vehicle every year, then paying 3-6% in interest on a car that you are more than likely under water on that loan. Not to mention most factory warranties are for just three years, meaning you are shelling out additional money for major repairs which will decrease the value of the bank's asset even further.

I agree with your theory if we are talking about taking out a second mortgage vice a reverse mortgage, or even a HEL, but not for a car. NEVER. NEVER, NEVER, NEVER.

I'm financially astute. Used to be a licensed CFA, work in finance for a large corporation now. If I need to buy a car, I do this. Every time. You're getting caught up in the details of what I'm saying I think.

The CAR is not the investment or the profit. Don't get caught up in that. I agree 100% that a car is not an investment. My comment wasn't about buying a car as an investment decision...it was about financing the car for 84 months. That said, there are smart ways to fund buying a car, which CAN include financing a car for 84 months if the interest rate is low enough, but the car is not the investment. You either need a car or you don't. It's not an investment. If you DO need it, there are smart ways to buy it if you have the financial leverage.

• Whether I buy the car outright in cash or finance it for 84 months doesn't impact wheter -I- (as a financially astute someone who CAN buy it in cash) can afford the car or not.
• How I pay for the car does not impact the "value" of the car. A 3 year old car with 50,000 miles on it is worth the same if I own it or if I have 60 months left on a loan.
• The warranty is also the same.

The CAR is not the question. How to pay for the car is. You said that NOBODY buys a car and finances it for 84 months. I said I would if I can make more than the interest rate I'm paying.

Let me put it to you this way. You need a car (again, not an investment). You can either a) buy a car for $50K CASH outright, or b) you can finance the car for 84 months at 3% interest, and keep your wad of $50K cash to pay off the car over time. Now what if there is a bank down the road with 1 month CD's that pay 5% interest. Guaranteed 5% return.

• If you bought the car for cash, you have $0 and $0 debt and a $50,000 car. Right?
• If you financed the car for 84 months at 3%, every single month, you could go to the bank and buy a 1 month CD for the amount of the $50,000 cash you still had, earn 5% interest, pay your loan at 3%, and profit 2%. You still have a car. You still have the money to pay the loan off. But now you also have the 2% spread as interest income. (As I said, the car isn't the investment. It's how you pay for it).

Which would you rather do? If you can earn a higher rate of return on money than what you are borrowing at, borrowing money makes sense. This is how every bank and business in the world operates.

It CAN make sense to finance a car for a long period of time if the interest rate charged is low enough and you can earn a higher rate of return. Period. That's VERY basic finance.

This is not that hard to understand, negative equity is terrible and you again avoided the discussion about what happens when the vehicle with a seven year loan needs a major repair after the warranty expires. Or when you wreck the Arcadia and don't get the full value because you owe more than the car is worth. Or when you want to sell the vehicle and you lose your hat because again, you are under water. What are you gonna recommend then? Trade it in at a loss and buy another $50k CD? lol

Consumers Reports, Edmunds, and any financial advisor worth his weight in salt say avoid these loans at all costs.

Why is the upside down loan a sticking point after a major accident. If you pay cash for a car you've lit that money on fire as well.

 

[Nugget]

The value of the car has nothing to do with the financing of the car. Whether you have positive equity, negative equity, or a clear title doesn't change the value of the car. If you need new injectors at 6 years, it doesn't matter if you have already paid off your loan or not.

If you really wanted to protect against depreciation, it seems like you could take out a loan for as much of the value of the car as you could and purchase GAP/extended service contracts. A $300 GAP polciy probaby covers 150% of the value of the car, and $1200 could protect against expensive repairs.

 

[Chadstroma]

Just bought our new 2015 GMC Acadia. I took the rebate and then financed at 3.36% for 84 months. The cost on this over the term of the loan is more than the rebate but I needed to get the payments down for the time being as childcare costs are killing us financially right now. I will refinance it later and get it down even lower to save a few more bucks.

I tend to favor the new cars because it comes down to my lack of ability in fixing vehicles. For pretty much anything other than the most basic car issues- I have to either lean on the FIL or take it in to get fixed. That can be expensive. So, I rather spend the money on the new car and have the piece of mind of not having likely more issues with a used car plus enjoy a new car. That all being said, I am open to buying used but it looks like the Traverse/Acadia/Enclave hold their value fairly well so I did not see a ton of value in slightly used.

As for the question to start the thread off. I think it all matters. What kind of deal can you get on a new car vs a used one? Are you financing or using cash? If financing what are the options and with a new one vs rebate. I just think you crunch the numbers and then decide. The 0% can be a factor but it surely is not the only factor.

Wont the warranty expire long before you are finished making payments?

I always avoid this. Three year warranty=three year loan. If you have maintenance issues after the warranty expires, that's a good way of getting in over your head. Saw a news story about this recently, lots of repos on cars four and five years old because they break down and then people can't make their payments. Essentially if you are getting a seven year loan, you can't afford the car.

I will refinance it well before the 84 months is up to a lower term and lower rate.

I can afford the car, I just choose cash flow right now. If I can get an 84 month loan at 3.26% then why not? I can. So, I did.

Wouldn't leasing make a lot more sense for you, given the cash flow constraints and also what I'm assuming is a growing family?

Nah, the Acadia fits our needs now and any future additions. We have a girl that is about 3 months short of 4 years and a 16 month old. We may add another to the mix but even if we do the Acadia works well. This vehicle is the new primary family mover and will remain so for many years.

I did consider leasing though.

 

[Chadstroma]

Just bought our new 2015 GMC Acadia. I took the rebate and then financed at 3.36% for 84 months. The cost on this over the term of the loan is more than the rebate but I needed to get the payments down for the time being as childcare costs are killing us financially right now. I will refinance it later and get it down even lower to save a few more bucks.

I tend to favor the new cars because it comes down to my lack of ability in fixing vehicles. For pretty much anything other than the most basic car issues- I have to either lean on the FIL or take it in to get fixed. That can be expensive. So, I rather spend the money on the new car and have the piece of mind of not having likely more issues with a used car plus enjoy a new car. That all being said, I am open to buying used but it looks like the Traverse/Acadia/Enclave hold their value fairly well so I did not see a ton of value in slightly used.

As for the question to start the thread off. I think it all matters. What kind of deal can you get on a new car vs a used one? Are you financing or using cash? If financing what are the options and with a new one vs rebate. I just think you crunch the numbers and then decide. The 0% can be a factor but it surely is not the only factor.

Wont the warranty expire long before you are finished making payments?

I always avoid this. Three year warranty=three year loan. If you have maintenance issues after the warranty expires, that's a good way of getting in over your head. Saw a news story about this recently, lots of repos on cars four and five years old because they break down and then people can't make their payments. Essentially if you are getting a seven year loan, you can't afford the car.

I will refinance it well before the 84 months is up to a lower term and lower rate.

I can afford the car, I just choose cash flow right now. If I can get an 84 month loan at 3.26% then why not? I can. So, I did.

You are going to seriously refinance a car loan? Are you aware of a thing called an amortization table

Really? Do you really want me to dive in the details on this?

(hint- I do loans for a living)

 

[Chadstroma]

My advice is to talk to your bank first. I got a "best we can do is 5%" speach after I beat the dealership up for my wife's car a few months ago. I old them ok and Id be back the day after tomorrow to close. I went home and called my bank and they gave me a blank check at 2.1%.

Man was the finance guy and GM pissed when I walked in with a check.

Car dealerships financing works very much like a mortgage broker. They get more cash back from wholesale for the higher rate that they get. You always want to negotiate the purchase separate from the financing. If you are going with a rebate then shop around for a rate you can get from bank/credit union and then use that rate to work the dealer down. A little gamesmanship and you can work yourself into a better situation rate wise.

 

[Chadstroma]

I regret getting a 48 month loan on my last vehicle, can't imagine how much I'd regret an 84 month loan.

And DO NOT refinance it.

Those Arcadia's are pretty nice though.

Refinancing will do nothing but lower the rate/term as my cash flow becomes more plentiful thus saving money.

Sadly, I see way too often people who cost themselves money because they refuse to refinance a loan (usually mortgage/equity as this is what I deal with more so than car loans etc) because someone once told them about an amortization schedule and now they think it will cost them money.

People, run the numbers!!! When it comes to personal finance- there is no one size fits all!! Don't put yourself into a financial corner because you once were told something or heard it on the radio- etc.

(not directed at you Doc.... just in general a response about the refinancing)

 

[Chadstroma]

and yea ouch @ 84 month car loan, only seen in twice in the time I was there. Understand why you did from your side I suppose but umph. I am in a decent area in Texas and standard around me is 60 months it seems.

It's becoming much more popular:

Experian Automotive says that in the first quarter of 2014, 24.9% of all new-car loans were 73 to 84 months long. Four years ago, less than 10% of loans were that long. In fact, such lengthy terms have pulled the average new-car loan to 66 months. That's an all-time record.

Link

This is crazy scary that the general public is doing this. Its a clear sign of people putting "wants" above "needs" and common sense so that they can get the "monthly cost down"

Cars are getting stupid expensive. We went shopping about a year or so ago and I was amazed at the price of cars. I'd love a new Jeep Wrangler, but my hand-me down Mitsu Endeavor works just fine for now and its free. Does it act up from time to time, sure. But as long as i'm not putting the cost of 12mos or payments into it per year, then i'm still ahead of the game.

Agree 100%. Unfortunately, the financially uneducated only look at things in terms of what they can afford month-to-month, so if you can make a $50K vehicle have $650/mos payments, that's all they see. It's the same thing that got people into trouble with home loans. Interest-only ARM's and other things that sold houses to people who could afford the initial payments, but had no clue what would REALLY happen when the big payments hit...or in this case, what would happen in 3 years when they totaled the car, insurance gave them $20K, and they still owed $30K on the loan. It's just not responsible, and the people that these things target aren't people like Chadstroma, they're people who just don't understand the implications.

If you get an 84 month loan, you can't afford the car. This applies to everyone. Buying a new car is not an investment, it is utility at best and the depreciation is well known.

I could afford a 60 month loan.... but why? When the rate difference would have been 1.37% lower? No, I will take the longer term at the slightly higher rate for now.

I understand that most of you do not deal in finance but seriously- it is all a numbers game. If a higher cash flow is worth 1.37% financing to me then great. I can use the money in other areas in life. The cost is minimal and will even be reduced later.

There is no way that I will have a loan on this vehicle for 7 years. Zero chance of that.

 

[culdeus]

Just bought our new 2015 GMC Acadia. I took the rebate and then financed at 3.36% for 84 months. The cost on this over the term of the loan is more than the rebate but I needed to get the payments down for the time being as childcare costs are killing us financially right now. I will refinance it later and get it down even lower to save a few more bucks.

I tend to favor the new cars because it comes down to my lack of ability in fixing vehicles. For pretty much anything other than the most basic car issues- I have to either lean on the FIL or take it in to get fixed. That can be expensive. So, I rather spend the money on the new car and have the piece of mind of not having likely more issues with a used car plus enjoy a new car. That all being said, I am open to buying used but it looks like the Traverse/Acadia/Enclave hold their value fairly well so I did not see a ton of value in slightly used.

As for the question to start the thread off. I think it all matters. What kind of deal can you get on a new car vs a used one? Are you financing or using cash? If financing what are the options and with a new one vs rebate. I just think you crunch the numbers and then decide. The 0% can be a factor but it surely is not the only factor.

Wont the warranty expire long before you are finished making payments?

I always avoid this. Three year warranty=three year loan. If you have maintenance issues after the warranty expires, that's a good way of getting in over your head. Saw a news story about this recently, lots of repos on cars four and five years old because they break down and then people can't make their payments. Essentially if you are getting a seven year loan, you can't afford the car.

I will refinance it well before the 84 months is up to a lower term and lower rate.

I can afford the car, I just choose cash flow right now. If I can get an 84 month loan at 3.26% then why not? I can. So, I did.

You are going to seriously refinance a car loan? Are you aware of a thing called an amortization table

Really? Do you really want me to dive in the details on this?

(hint- I do loans for a living)

Go for it. I have nothing but time.

 

[Chadstroma]

I've never even heard of someone refinancing an auto loan outside of something like debt consolidation. Does that really happen frequently? I imagine the fees you end up paying on that aren't cheap.

I don't do many car loans because I focus more on real estate loans but I can do it for you at a $70 fee and that is it.

 

[Doctor Detroit]

I regret getting a 48 month loan on my last vehicle, can't imagine how much I'd regret an 84 month loan.

And DO NOT refinance it.

Those Arcadia's are pretty nice though.

Refinancing will do nothing but lower the rate/term as my cash flow becomes more plentiful thus saving money.

Sadly, I see way too often people who cost themselves money because they refuse to refinance a loan (usually mortgage/equity as this is what I deal with more so than car loans etc) because someone once told them about an amortization schedule and now they think it will cost them money.

People, run the numbers!!! When it comes to personal finance- there is no one size fits all!! Don't put yourself into a financial corner because you once were told something or heard it on the radio- etc.

(not directed at you Doc.... just in general a response about the refinancing)

I will never finance a new car again. I've only had five anyway, but the last one was it. I never thought a new car was a smart purchase, still don't. I will drive my 2010 and 2013 cars into the ground though, I went into the '10 knowing that but the '13 was something that came up because I totaled my 2007 Honda which I loved. DC has to have one of the worst used car markets in the country, getting a lease was actually the best bet (and leases are quite possibly worse than a seven year loan, so who am I to talk right?).

I'll pay cash if I ever want to buy another one, maybe lease if those are still around when I retire. I don't understand a seven year loan for someone who is smart, but you do loans so you know more than most. I yelled at my sister who doesn't do loans (but works at a bank so she is an expert in her own mind), for even suggesting she was going to do a seven year. She doesn't have the means and doesn't need a new car.

ETA: Or maybe I'll start a fantasy football league service and collect a bunch of money, never pay it out, and buy a Lambo like my man ZANGRILLILOLOL.

 

[JaxBill]

I regret getting a 48 month loan on my last vehicle, can't imagine how much I'd regret an 84 month loan.

And DO NOT refinance it.

Those Arcadia's are pretty nice though.

Refinancing will do nothing but lower the rate/term as my cash flow becomes more plentiful thus saving money.

Sadly, I see way too often people who cost themselves money because they refuse to refinance a loan (usually mortgage/equity as this is what I deal with more so than car loans etc) because someone once told them about an amortization schedule and now they think it will cost them money.

People, run the numbers!!! When it comes to personal finance- there is no one size fits all!! Don't put yourself into a financial corner because you once were told something or heard it on the radio- etc.

(not directed at you Doc.... just in general a response about the refinancing)

I will never finance a new car again. I've only had five anyway, but the last one was it. I never thought a new car was a smart purchase, still don't. I will drive my 2010 and 2013 cars into the ground though, I went into the '10 knowing that but the '13 was something that came up because I totaled my 2007 Honda which I loved. DC has to have one of the worst used car markets in the country, getting a lease was actually the best bet (and leases are quite possibly worse than a seven year loan, so who am I to talk right?).

I'll pay cash if I ever want to buy another one, maybe lease if those are still around when I retire. I don't understand a seven year loan for someone who is smart, but you do loans so you know more than most. I yelled at my sister who doesn't do loans (but works at a bank so she is an expert in her own mind), for even suggesting she was going to do a seven year. She doesn't have the means and doesn't need a new car.

ETA: Or maybe I'll start a fantasy football league service and collect a bunch of money, never pay it out, and buy a Lambo like my man ZANGRILLILOLOL.

It all depends on the car. Try buying a used Honda. In the space of two months my wife's car was totaled by some nitwit girl behind her who never hit the brakes, and my car was stolen. Went looking for replacements, and both times the cost of a two to three year old Honda was so close to sticker price of new that it wasn't worth the extra miles towards warranty, etc. Plus, I had money for a decent deposit but not enough to pay in cash so new got me 1.9 financing.

The CRV EX-L that I bought for 27 in February and have driven at a decent clip is still worth 24,500 in dealer trade-in (obviously more to a private party) according to kbb.com. And since the biggest depreciation is when you drive it off the lot, it will be worth close to that a year from now.

But, yeah, I went for a 4 year on one and a five year on the other.

I like to buy new and run the cars until they drop (if other drivers and thieves allow).

 

[Brony]

I don't do loans for a living.

 

[NutterButter]

Fat Nick, in your scenario though you likely couldn't pay the monthly loan with simply the interest off the CD. So you have a 50k CD but you either continue to dip into principal to pay the note or you have a different source of income to pay the note.

Good point. Every monthly payment is a lost investing opportunity if you'd paid for the car outright that needs to be factored into the comparison. That being said, if I was intending on financing, its not like I'm just building up that 50k in my bank account; that money would already be in investments as it was accrued. Compare that to the 50k you need to buy outright. If you were to put that in investments as it was accrued, those investments would have to be a lot safer and a lot more liquid as you absolutely need that 50k at a particular point in time. Personally, I like to be a little more aggressive with my money at a reasonably young age. I have more than enough money in reasonably liquid investments to cover any worst case scenarios so I'd typically always go the financing route if the interest was low enough.

 

[culdeus]

What if you put the 50k in wheat pennies

 

[Fat Nick]

Fat Nick, in your scenario though you likely couldn't pay the monthly loan with simply the interest off the CD. So you have a 50k CD but you either continue to dip into principal to pay the note or you have a different source of income to pay the note.

I'm not saying you can pay the loan simply off the interest. I'm saying that if you take $50,000, buy that CD, earn your 2%. Take whatever you need to make your payment out of the $50,000 (pocketing the 2% interest) in the 1st month. Now for Month 2, re-buy a new CD with the new balance ($50K less whatever the 1st payment was) and repeat. Every time you earn 2% of the balance on the loan over what you would've had if you just paid cash.

It's a little oversimplified because you rarely find 1 month CD's that pay squat...I'm just using that example for simplicity. Take a longer-term investment, say, a 7 year bond, and you will. If you have the cash to use, there are better things to do than tie it all up in a car.

 

[Slapdash]

Agree 100%. Unfortunately, the financially uneducated only look at things in terms of what they can afford month-to-month, so if you can make a $50K vehicle have $650/mos payments, that's all they see. It's the same thing that got people into trouble with home loans. Interest-only ARM's and other things that sold houses to people who could afford the initial payments, but had no clue what would REALLY happen when the big payments hit...or in this case, what would happen in 3 years when they totaled the car, insurance gave them $20K, and they still owed $30K on the loan. It's just not responsible, and the people that these things target aren't people like Chadstroma, they're people who just don't understand the implications.

If you get an 84 month loan, you can't afford the car. This applies to everyone. Buying a new car is not an investment, it is utility at best and the depreciation is well known.

In most cases, I agree...but in absolutes with finacially astute people, not true. Look back at my initial financing proof-of-concept early in the thread. If I can pay cash for a car, but they offer me financing at a rate at which I can make more money re-investing the money I'd have spent otherwise, I'll take the loan, invest the cash, and pocket the marginal returns above the loan interest rate. I'm not going to get rich doing it, but it's a positive value move.

Put simply, If I can pay cash for a $50,000 car, and you offer me $50,000 for 84 months at 2% interest, and I know there's a 7-year $50,000 muni bond that pays 4%, I'll take the loan, buy the bond and make 2% on the cash that I would've otherwise tied up.

No, financially astute people don't do this. A new car will be worth half of what it was worth when you bought it new after five years. So instead of getting marginal returns in some muni, you buy it as soon as possible to control the asset. You are losing 15% or more on the value of a vehicle every year, then paying 3-6% in interest on a car that you are more than likely under water on that loan. Not to mention most factory warranties are for just three years, meaning you are shelling out additional money for major repairs which will decrease the value of the bank's asset even further.I agree with your theory if we are talking about taking out a second mortgage vice a reverse mortgage, or even a HEL, but not for a car. NEVER. NEVER, NEVER, NEVER.

I'm financially astute. Used to be a licensed CFA, work in finance for a large corporation now. If I need to buy a car, I do this. Every time. You're getting caught up in the details of what I'm saying I think.

The CAR is not the investment or the profit. Don't get caught up in that. I agree 100% that a car is not an investment. My comment wasn't about buying a car as an investment decision...it was about financing the car for 84 months. That said, there are smart ways to fund buying a car, which CAN include financing a car for 84 months if the interest rate is low enough, but the car is not the investment. You either need a car or you don't. It's not an investment. If you DO need it, there are smart ways to buy it if you have the financial leverage.

• Whether I buy the car outright in cash or finance it for 84 months doesn't impact wheter -I- (as a financially astute someone who CAN buy it in cash) can afford the car or not.
• How I pay for the car does not impact the "value" of the car. A 3 year old car with 50,000 miles on it is worth the same if I own it or if I have 60 months left on a loan.
• The warranty is also the same.

The CAR is not the question. How to pay for the car is. You said that NOBODY buys a car and finances it for 84 months. I said I would if I can make more than the interest rate I'm paying. Let me put it to you this way. You need a car (again, not an investment). You can either a) buy a car for $50K CASH outright, or b) you can finance the car for 84 months at 3% interest, and keep your wad of $50K cash to pay off the car over time. Now what if there is a bank down the road with 1 month CD's that pay 5% interest. Guaranteed 5% return.

• If you bought the car for cash, you have $0 and $0 debt and a $50,000 car. Right?
• If you financed the car for 84 months at 3%, every single month, you could go to the bank and buy a 1 month CD for the amount of the $50,000 cash you still had, earn 5% interest, pay your loan at 3%, and profit 2%. You still have a car. You still have the money to pay the loan off. But now you also have the 2% spread as interest income. (As I said, the car isn't the investment. It's how you pay for it).

Which would you rather do? If you can earn a higher rate of return on money than what you are borrowing at, borrowing money makes sense. This is how every bank and business in the world operates. It CAN make sense to finance a car for a long period of time if the interest rate charged is low enough and you can earn a higher rate of return. Period. That's VERY basic finance.

You aren't getting a 5% CD if auto loans are 3%

 

[Fat Nick]

Agree 100%. Unfortunately, the financially uneducated only look at things in terms of what they can afford month-to-month, so if you can make a $50K vehicle have $650/mos payments, that's all they see. It's the same thing that got people into trouble with home loans. Interest-only ARM's and other things that sold houses to people who could afford the initial payments, but had no clue what would REALLY happen when the big payments hit...or in this case, what would happen in 3 years when they totaled the car, insurance gave them $20K, and they still owed $30K on the loan. It's just not responsible, and the people that these things target aren't people like Chadstroma, they're people who just don't understand the implications.

If you get an 84 month loan, you can't afford the car. This applies to everyone. Buying a new car is not an investment, it is utility at best and the depreciation is well known.

In most cases, I agree...but in absolutes with finacially astute people, not true. Look back at my initial financing proof-of-concept early in the thread. If I can pay cash for a car, but they offer me financing at a rate at which I can make more money re-investing the money I'd have spent otherwise, I'll take the loan, invest the cash, and pocket the marginal returns above the loan interest rate. I'm not going to get rich doing it, but it's a positive value move.

Put simply, If I can pay cash for a $50,000 car, and you offer me $50,000 for 84 months at 2% interest, and I know there's a 7-year $50,000 muni bond that pays 4%, I'll take the loan, buy the bond and make 2% on the cash that I would've otherwise tied up.

No, financially astute people don't do this. A new car will be worth half of what it was worth when you bought it new after five years. So instead of getting marginal returns in some muni, you buy it as soon as possible to control the asset. You are losing 15% or more on the value of a vehicle every year, then paying 3-6% in interest on a car that you are more than likely under water on that loan. Not to mention most factory warranties are for just three years, meaning you are shelling out additional money for major repairs which will decrease the value of the bank's asset even further.

I agree with your theory if we are talking about taking out a second mortgage vice a reverse mortgage, or even a HEL, but not for a car. NEVER. NEVER, NEVER, NEVER.

I'm financially astute. Used to be a licensed CFA, work in finance for a large corporation now. If I need to buy a car, I do this. Every time. You're getting caught up in the details of what I'm saying I think.

The CAR is not the investment or the profit. Don't get caught up in that. I agree 100% that a car is not an investment. My comment wasn't about buying a car as an investment decision...it was about financing the car for 84 months. That said, there are smart ways to fund buying a car, which CAN include financing a car for 84 months if the interest rate is low enough, but the car is not the investment. You either need a car or you don't. It's not an investment. If you DO need it, there are smart ways to buy it if you have the financial leverage.

• Whether I buy the car outright in cash or finance it for 84 months doesn't impact wheter -I- (as a financially astute someone who CAN buy it in cash) can afford the car or not.
• How I pay for the car does not impact the "value" of the car. A 3 year old car with 50,000 miles on it is worth the same if I own it or if I have 60 months left on a loan.
• The warranty is also the same.

The CAR is not the question. How to pay for the car is. You said that NOBODY buys a car and finances it for 84 months. I said I would if I can make more than the interest rate I'm paying.

Let me put it to you this way. You need a car (again, not an investment). You can either a) buy a car for $50K CASH outright, or b) you can finance the car for 84 months at 3% interest, and keep your wad of $50K cash to pay off the car over time. Now what if there is a bank down the road with 1 month CD's that pay 5% interest. Guaranteed 5% return.

• If you bought the car for cash, you have $0 and $0 debt and a $50,000 car. Right?
• If you financed the car for 84 months at 3%, every single month, you could go to the bank and buy a 1 month CD for the amount of the $50,000 cash you still had, earn 5% interest, pay your loan at 3%, and profit 2%. You still have a car. You still have the money to pay the loan off. But now you also have the 2% spread as interest income. (As I said, the car isn't the investment. It's how you pay for it).

Which would you rather do? If you can earn a higher rate of return on money than what you are borrowing at, borrowing money makes sense. This is how every bank and business in the world operates.

It CAN make sense to finance a car for a long period of time if the interest rate charged is low enough and you can earn a higher rate of return. Period. That's VERY basic finance.

This is not that hard to understand, negative equity is terrible and you again avoided the discussion about what happens when the vehicle with a seven year loan needs a major repair after the warranty expires. Or when you wreck the Arcadia and don't get the full value because you owe more than the car is worth. Or when you want to sell the vehicle and you lose your hat because again, you are under water. What are you gonna recommend then? Trade it in at a loss and buy another $50k CD? lol

Consumers Reports, Edmunds, and any financial advisor worth his weight in salt say avoid these loans at all costs.

WHY DOES WHAT HAPPENS TO THE VEHICLE WHEN I NEED REPAIRS MATTER WITH REGARDS TO HOW SOMEONE PAYS FOR THE CAR IF THEY CAN AFFORD TO PAY CASH OR FINANCE?

Why do you keep taking this back to the value of the car? I'm ONLY talking about the better way to finance. Do you want to ignore the car scenario?

Person A is independently wealthy. He can borrow money or he can not. It doesn't matter to him.

Person B will charge 3% interest on $50,000 for 7 years.

Person C will pay 5% interest on $50,000 for 7 years.

If you were person A, why would you not borrow $50K at 3%, and then loan that same amount to person C and earn 5%?

Seriously? Do you not get this concept? If you reply about the value of the car and repair costs, I'm just going to assume you're

 

[Fat Nick]

Agree 100%. Unfortunately, the financially uneducated only look at things in terms of what they can afford month-to-month, so if you can make a $50K vehicle have $650/mos payments, that's all they see. It's the same thing that got people into trouble with home loans. Interest-only ARM's and other things that sold houses to people who could afford the initial payments, but had no clue what would REALLY happen when the big payments hit...or in this case, what would happen in 3 years when they totaled the car, insurance gave them $20K, and they still owed $30K on the loan. It's just not responsible, and the people that these things target aren't people like Chadstroma, they're people who just don't understand the implications.

If you get an 84 month loan, you can't afford the car. This applies to everyone. Buying a new car is not an investment, it is utility at best and the depreciation is well known.

In most cases, I agree...but in absolutes with finacially astute people, not true. Look back at my initial financing proof-of-concept early in the thread. If I can pay cash for a car, but they offer me financing at a rate at which I can make more money re-investing the money I'd have spent otherwise, I'll take the loan, invest the cash, and pocket the marginal returns above the loan interest rate. I'm not going to get rich doing it, but it's a positive value move.

Put simply, If I can pay cash for a $50,000 car, and you offer me $50,000 for 84 months at 2% interest, and I know there's a 7-year $50,000 muni bond that pays 4%, I'll take the loan, buy the bond and make 2% on the cash that I would've otherwise tied up.

No, financially astute people don't do this. A new car will be worth half of what it was worth when you bought it new after five years. So instead of getting marginal returns in some muni, you buy it as soon as possible to control the asset. You are losing 15% or more on the value of a vehicle every year, then paying 3-6% in interest on a car that you are more than likely under water on that loan. Not to mention most factory warranties are for just three years, meaning you are shelling out additional money for major repairs which will decrease the value of the bank's asset even further.I agree with your theory if we are talking about taking out a second mortgage vice a reverse mortgage, or even a HEL, but not for a car. NEVER. NEVER, NEVER, NEVER.

I'm financially astute. Used to be a licensed CFA, work in finance for a large corporation now. If I need to buy a car, I do this. Every time. You're getting caught up in the details of what I'm saying I think.

The CAR is not the investment or the profit. Don't get caught up in that. I agree 100% that a car is not an investment. My comment wasn't about buying a car as an investment decision...it was about financing the car for 84 months. That said, there are smart ways to fund buying a car, which CAN include financing a car for 84 months if the interest rate is low enough, but the car is not the investment. You either need a car or you don't. It's not an investment. If you DO need it, there are smart ways to buy it if you have the financial leverage.

• Whether I buy the car outright in cash or finance it for 84 months doesn't impact wheter -I- (as a financially astute someone who CAN buy it in cash) can afford the car or not.
• How I pay for the car does not impact the "value" of the car. A 3 year old car with 50,000 miles on it is worth the same if I own it or if I have 60 months left on a loan.
• The warranty is also the same.

The CAR is not the question. How to pay for the car is. You said that NOBODY buys a car and finances it for 84 months. I said I would if I can make more than the interest rate I'm paying. Let me put it to you this way. You need a car (again, not an investment). You can either a) buy a car for $50K CASH outright, or b) you can finance the car for 84 months at 3% interest, and keep your wad of $50K cash to pay off the car over time. Now what if there is a bank down the road with 1 month CD's that pay 5% interest. Guaranteed 5% return.

• If you bought the car for cash, you have $0 and $0 debt and a $50,000 car. Right?
• If you financed the car for 84 months at 3%, every single month, you could go to the bank and buy a 1 month CD for the amount of the $50,000 cash you still had, earn 5% interest, pay your loan at 3%, and profit 2%. You still have a car. You still have the money to pay the loan off. But now you also have the 2% spread as interest income. (As I said, the car isn't the investment. It's how you pay for it).

Which would you rather do? If you can earn a higher rate of return on money than what you are borrowing at, borrowing money makes sense. This is how every bank and business in the world operates. It CAN make sense to finance a car for a long period of time if the interest rate charged is low enough and you can earn a higher rate of return. Period. That's VERY basic finance.

You aren't getting a 5% CD if auto loans are 3%

You're right, but this is a simple example to prove the concept. I didn't want to make the jump to average S&P returns, mutual funds, muni bonds, etc. Seriously amazed at why this is such a hard concept to grasp. If you can borrow money, make a higher return on it than what you pay, it's good business. Why do you think companies with high cash flow (AAPL) still have debt? In the "no debt ever" theory, that wouldn't make sense. They do it because they can earn a higher rate of return investing that money (in themselves) than the rate they are paying. Pretty much every company in the world does this. It's simple leverage.

The 25 year S&P average return is around 10%. Do you feel better if I bought some shares of SPY instead of a CD?

 

[Fat Nick]

Fat Nick, in your scenario though you likely couldn't pay the monthly loan with simply the interest off the CD. So you have a 50k CD but you either continue to dip into principal to pay the note or you have a different source of income to pay the note.

Good point. Every monthly payment is a lost investing opportunity if you'd paid for the car outright that needs to be factored into the comparison. That being said, if I was intending on financing, its not like I'm just building up that 50k in my bank account; that money would already be in investments as it was accrued. Compare that to the 50k you need to buy outright. If you were to put that in investments as it was accrued, those investments would have to be a lot safer and a lot more liquid as you absolutely need that 50k at a particular point in time. Personally, I like to be a little more aggressive with my money at a reasonably young age. I have more than enough money in reasonably liquid investments to cover any worst case scenarios so I'd typically always go the financing route if the interest was low enough.

This. Period.

I don't understand why it's so hard to understand that if you can earn a higher return than you are paying on the loan, financing makes more sense than tying up your cash.

 

[Slapdash]

Agree 100%. Unfortunately, the financially uneducated only look at things in terms of what they can afford month-to-month, so if you can make a $50K vehicle have $650/mos payments, that's all they see. It's the same thing that got people into trouble with home loans. Interest-only ARM's and other things that sold houses to people who could afford the initial payments, but had no clue what would REALLY happen when the big payments hit...or in this case, what would happen in 3 years when they totaled the car, insurance gave them $20K, and they still owed $30K on the loan. It's just not responsible, and the people that these things target aren't people like Chadstroma, they're people who just don't understand the implications.

If you get an 84 month loan, you can't afford the car. This applies to everyone. Buying a new car is not an investment, it is utility at best and the depreciation is well known.

In most cases, I agree...but in absolutes with finacially astute people, not true. Look back at my initial financing proof-of-concept early in the thread. If I can pay cash for a car, but they offer me financing at a rate at which I can make more money re-investing the money I'd have spent otherwise, I'll take the loan, invest the cash, and pocket the marginal returns above the loan interest rate. I'm not going to get rich doing it, but it's a positive value move.

Put simply, If I can pay cash for a $50,000 car, and you offer me $50,000 for 84 months at 2% interest, and I know there's a 7-year $50,000 muni bond that pays 4%, I'll take the loan, buy the bond and make 2% on the cash that I would've otherwise tied up.

No, financially astute people don't do this. A new car will be worth half of what it was worth when you bought it new after five years. So instead of getting marginal returns in some muni, you buy it as soon as possible to control the asset. You are losing 15% or more on the value of a vehicle every year, then paying 3-6% in interest on a car that you are more than likely under water on that loan. Not to mention most factory warranties are for just three years, meaning you are shelling out additional money for major repairs which will decrease the value of the bank's asset even further.I agree with your theory if we are talking about taking out a second mortgage vice a reverse mortgage, or even a HEL, but not for a car. NEVER. NEVER, NEVER, NEVER.

I'm financially astute. Used to be a licensed CFA, work in finance for a large corporation now. If I need to buy a car, I do this. Every time. You're getting caught up in the details of what I'm saying I think.

The CAR is not the investment or the profit. Don't get caught up in that. I agree 100% that a car is not an investment. My comment wasn't about buying a car as an investment decision...it was about financing the car for 84 months. That said, there are smart ways to fund buying a car, which CAN include financing a car for 84 months if the interest rate is low enough, but the car is not the investment. You either need a car or you don't. It's not an investment. If you DO need it, there are smart ways to buy it if you have the financial leverage.

• Whether I buy the car outright in cash or finance it for 84 months doesn't impact wheter -I- (as a financially astute someone who CAN buy it in cash) can afford the car or not.
• How I pay for the car does not impact the "value" of the car. A 3 year old car with 50,000 miles on it is worth the same if I own it or if I have 60 months left on a loan.
• The warranty is also the same.

The CAR is not the question. How to pay for the car is. You said that NOBODY buys a car and finances it for 84 months. I said I would if I can make more than the interest rate I'm paying. Let me put it to you this way. You need a car (again, not an investment). You can either a) buy a car for $50K CASH outright, or b) you can finance the car for 84 months at 3% interest, and keep your wad of $50K cash to pay off the car over time. Now what if there is a bank down the road with 1 month CD's that pay 5% interest. Guaranteed 5% return.

• If you bought the car for cash, you have $0 and $0 debt and a $50,000 car. Right?
• If you financed the car for 84 months at 3%, every single month, you could go to the bank and buy a 1 month CD for the amount of the $50,000 cash you still had, earn 5% interest, pay your loan at 3%, and profit 2%. You still have a car. You still have the money to pay the loan off. But now you also have the 2% spread as interest income. (As I said, the car isn't the investment. It's how you pay for it).

Which would you rather do? If you can earn a higher rate of return on money than what you are borrowing at, borrowing money makes sense. This is how every bank and business in the world operates. It CAN make sense to finance a car for a long period of time if the interest rate charged is low enough and you can earn a higher rate of return. Period. That's VERY basic finance.

You aren't getting a 5% CD if auto loans are 3%

You're right, but this is a simple example to prove the concept. I didn't want to make the jump to average S&P returns, mutual funds, muni bonds, etc. Seriously amazed at why this is such a hard concept to grasp. If you can borrow money, make a higher return on it than what you pay, it's good business. Why do you think companies with high cash flow (AAPL) still have debt? In the "no debt ever" theory, that wouldn't make sense. They do it because they can earn a higher rate of return investing that money (in themselves) than the rate they are paying. Pretty much every company in the world does this. It's simple leverage.

The 25 year S&P average return is around 10%. Do you feel better if I bought some shares of SPY instead of a CD?

A large part of why they issue debt despite high cash flow is because the cash is trapped in tax haves and cannot be repatriated without paying US taxes.

I would prefer the SPY example because there is likely risk involved if you have a spread here. A lot of people thought taking out HELOCs to put into the market in 06-07 was a good move too. The point is that levering up a personal balance sheet is risky. Unless you're starting a business, buying a house, or going to school I'd avoid it personally. But I'm risk averse; slow and steady wins the race in personal finance.

 

[eoMMan]

Fat Nick, in your scenario though you likely couldn't pay the monthly loan with simply the interest off the CD. So you have a 50k CD but you either continue to dip into principal to pay the note or you have a different source of income to pay the note.

Good point. Every monthly payment is a lost investing opportunity if you'd paid for the car outright that needs to be factored into the comparison. That being said, if I was intending on financing, its not like I'm just building up that 50k in my bank account; that money would already be in investments as it was accrued. Compare that to the 50k you need to buy outright. If you were to put that in investments as it was accrued, those investments would have to be a lot safer and a lot more liquid as you absolutely need that 50k at a particular point in time. Personally, I like to be a little more aggressive with my money at a reasonably young age. I have more than enough money in reasonably liquid investments to cover any worst case scenarios so I'd typically always go the financing route if the interest was low enough.

This. Period.

I don't understand why it's so hard to understand that if you can earn a higher return than you are paying on the loan, financing makes more sense than tying up your cash.

Because a lot of personal finance involves habits and having discipline along with patience. If it was solely a numbers game, the answer would be simple. We can't assume that the average people with a 0% rate will invest the money they are saving or have saved. This is America. The average person doesn't do that. It's like when people are paying off loads of debt. It's sometimes better to pay off smaller debts with lower interest rates first so people stay motivated and keep plowing through all of the debt.

 

[Buck Bradcanon]

I regret getting a 48 month loan on my last vehicle, can't imagine how much I'd regret an 84 month loan.

And DO NOT refinance it.

Those Arcadia's are pretty nice though.

Refinancing will do nothing but lower the rate/term as my cash flow becomes more plentiful thus saving money.

Sadly, I see way too often people who cost themselves money because they refuse to refinance a loan (usually mortgage/equity as this is what I deal with more so than car loans etc) because someone once told them about an amortization schedule and now they think it will cost them money.

People, run the numbers!!! When it comes to personal finance- there is no one size fits all!! Don't put yourself into a financial corner because you once were told something or heard it on the radio- etc.

(not directed at you Doc.... just in general a response about the refinancing)

I will never finance a new car again. I've only had five anyway, but the last one was it. I never thought a new car was a smart purchase, still don't. I will drive my 2010 and 2013 cars into the ground though, I went into the '10 knowing that but the '13 was something that came up because I totaled my 2007 Honda which I loved. DC has to have one of the worst used car markets in the country, getting a lease was actually the best bet (and leases are quite possibly worse than a seven year loan, so who am I to talk right?).

I'll pay cash if I ever want to buy another one, maybe lease if those are still around when I retire. I don't understand a seven year loan for someone who is smart, but you do loans so you know more than most. I yelled at my sister who doesn't do loans (but works at a bank so she is an expert in her own mind), for even suggesting she was going to do a seven year. She doesn't have the means and doesn't need a new car.

ETA: Or maybe I'll start a fantasy football league service and collect a bunch of money, never pay it out, and buy a Lambo like my man ZANGRILLILOLOL.

It all depends on the car. Try buying a used Honda. In the space of two months my wife's car was totaled by some nitwit girl behind her who never hit the brakes, and my car was stolen. Went looking for replacements, and both times the cost of a two to three year old Honda was so close to sticker price of new that it wasn't worth the extra miles towards warranty, etc. Plus, I had money for a decent deposit but not enough to pay in cash so new got me 1.9 financing.

The CRV EX-L that I bought for 27 in February and have driven at a decent clip is still worth 24,500 in dealer trade-in (obviously more to a private party) according to kbb.com. And since the biggest depreciation is when you drive it off the lot, it will be worth close to that a year from now.

But, yeah, I went for a 4 year on one and a five year on the other.

I like to buy new and run the cars until they drop (if other drivers and thieves allow).

Sorry about the bad luck back to back on the 2 rides, Jax.

 

[NutterButter]

Fat Nick, in your scenario though you likely couldn't pay the monthly loan with simply the interest off the CD. So you have a 50k CD but you either continue to dip into principal to pay the note or you have a different source of income to pay the note.

Good point. Every monthly payment is a lost investing opportunity if you'd paid for the car outright that needs to be factored into the comparison. That being said, if I was intending on financing, its not like I'm just building up that 50k in my bank account; that money would already be in investments as it was accrued. Compare that to the 50k you need to buy outright. If you were to put that in investments as it was accrued, those investments would have to be a lot safer and a lot more liquid as you absolutely need that 50k at a particular point in time. Personally, I like to be a little more aggressive with my money at a reasonably young age. I have more than enough money in reasonably liquid investments to cover any worst case scenarios so I'd typically always go the financing route if the interest was low enough.

This. Period.

I don't understand why it's so hard to understand that if you can earn a higher return than you are paying on the loan, financing makes more sense than tying up your cash.

Because a lot of personal finance involves habits and having discipline along with patience. If it was solely a numbers game, the answer would be simple. We can't assume that the average people with a 0% rate will invest the money they are saving or have saved. This is America. The average person doesn't do that. It's like when people are paying off loads of debt. It's sometimes better to pay off smaller debts with lower interest rates first so people stay motivated and keep plowing through all of the debt.

As long as we agree that it makes financial sense to take the financing. This wouldn't be an option for the average person b/c they'd never have the discipline to save up 50k.

 

[Fat Nick]

Agree 100%. Unfortunately, the financially uneducated only look at things in terms of what they can afford month-to-month, so if you can make a $50K vehicle have $650/mos payments, that's all they see. It's the same thing that got people into trouble with home loans. Interest-only ARM's and other things that sold houses to people who could afford the initial payments, but had no clue what would REALLY happen when the big payments hit...or in this case, what would happen in 3 years when they totaled the car, insurance gave them $20K, and they still owed $30K on the loan. It's just not responsible, and the people that these things target aren't people like Chadstroma, they're people who just don't understand the implications.

If you get an 84 month loan, you can't afford the car. This applies to everyone. Buying a new car is not an investment, it is utility at best and the depreciation is well known.

In most cases, I agree...but in absolutes with finacially astute people, not true. Look back at my initial financing proof-of-concept early in the thread. If I can pay cash for a car, but they offer me financing at a rate at which I can make more money re-investing the money I'd have spent otherwise, I'll take the loan, invest the cash, and pocket the marginal returns above the loan interest rate. I'm not going to get rich doing it, but it's a positive value move.

Put simply, If I can pay cash for a $50,000 car, and you offer me $50,000 for 84 months at 2% interest, and I know there's a 7-year $50,000 muni bond that pays 4%, I'll take the loan, buy the bond and make 2% on the cash that I would've otherwise tied up.

No, financially astute people don't do this. A new car will be worth half of what it was worth when you bought it new after five years. So instead of getting marginal returns in some muni, you buy it as soon as possible to control the asset. You are losing 15% or more on the value of a vehicle every year, then paying 3-6% in interest on a car that you are more than likely under water on that loan. Not to mention most factory warranties are for just three years, meaning you are shelling out additional money for major repairs which will decrease the value of the bank's asset even further.I agree with your theory if we are talking about taking out a second mortgage vice a reverse mortgage, or even a HEL, but not for a car. NEVER. NEVER, NEVER, NEVER.

I'm financially astute. Used to be a licensed CFA, work in finance for a large corporation now. If I need to buy a car, I do this. Every time. You're getting caught up in the details of what I'm saying I think.

The CAR is not the investment or the profit. Don't get caught up in that. I agree 100% that a car is not an investment. My comment wasn't about buying a car as an investment decision...it was about financing the car for 84 months. That said, there are smart ways to fund buying a car, which CAN include financing a car for 84 months if the interest rate is low enough, but the car is not the investment. You either need a car or you don't. It's not an investment. If you DO need it, there are smart ways to buy it if you have the financial leverage.

• Whether I buy the car outright in cash or finance it for 84 months doesn't impact wheter -I- (as a financially astute someone who CAN buy it in cash) can afford the car or not.
• How I pay for the car does not impact the "value" of the car. A 3 year old car with 50,000 miles on it is worth the same if I own it or if I have 60 months left on a loan.
• The warranty is also the same.

The CAR is not the question. How to pay for the car is. You said that NOBODY buys a car and finances it for 84 months. I said I would if I can make more than the interest rate I'm paying. Let me put it to you this way. You need a car (again, not an investment). You can either a) buy a car for $50K CASH outright, or b) you can finance the car for 84 months at 3% interest, and keep your wad of $50K cash to pay off the car over time. Now what if there is a bank down the road with 1 month CD's that pay 5% interest. Guaranteed 5% return.

• If you bought the car for cash, you have $0 and $0 debt and a $50,000 car. Right?
• If you financed the car for 84 months at 3%, every single month, you could go to the bank and buy a 1 month CD for the amount of the $50,000 cash you still had, earn 5% interest, pay your loan at 3%, and profit 2%. You still have a car. You still have the money to pay the loan off. But now you also have the 2% spread as interest income. (As I said, the car isn't the investment. It's how you pay for it).

Which would you rather do? If you can earn a higher rate of return on money than what you are borrowing at, borrowing money makes sense. This is how every bank and business in the world operates. It CAN make sense to finance a car for a long period of time if the interest rate charged is low enough and you can earn a higher rate of return. Period. That's VERY basic finance.

You aren't getting a 5% CD if auto loans are 3%

You're right, but this is a simple example to prove the concept. I didn't want to make the jump to average S&P returns, mutual funds, muni bonds, etc. Seriously amazed at why this is such a hard concept to grasp. If you can borrow money, make a higher return on it than what you pay, it's good business. Why do you think companies with high cash flow (AAPL) still have debt? In the "no debt ever" theory, that wouldn't make sense. They do it because they can earn a higher rate of return investing that money (in themselves) than the rate they are paying. Pretty much every company in the world does this. It's simple leverage.

The 25 year S&P average return is around 10%. Do you feel better if I bought some shares of SPY instead of a CD?

A large part of why they issue debt despite high cash flow is because the cash is trapped in tax haves and cannot be repatriated without paying US taxes.

I would prefer the SPY example because there is likely risk involved if you have a spread here. A lot of people thought taking out HELOCs to put into the market in 06-07 was a good move too. The point is that levering up a personal balance sheet is risky. Unless you're starting a business, buying a house, or going to school I'd avoid it personally. But I'm risk averse; slow and steady wins the race in personal finance.

Can't argue with the fact that there is inherent risk. One could argue that the faulty thought on the folks taking out HELOC was that they shouldn't have taken out HELOC's, while another side is that they made bad investment decisions. We can debate about that all day. The ultimate investment decision isn't want I was getting at.

My simple comment is that you can't judge that taking out an 84 month car loan at 3% (or whatever) is 100% always a bad move. It's not. It can be. It likely IS if that's the only way you can afford the payments...but it's not de facto a bad move.

That said, I paid cash for my last car simply because I'm like you...risk averse. The dealership offered me 5%. I could've probably done a little better, but the marginal amoutn wasn't worth my time keeping up with the loan, managing the invested part, etc.

 

[Fat Nick]

Fat Nick, in your scenario though you likely couldn't pay the monthly loan with simply the interest off the CD. So you have a 50k CD but you either continue to dip into principal to pay the note or you have a different source of income to pay the note.

Good point. Every monthly payment is a lost investing opportunity if you'd paid for the car outright that needs to be factored into the comparison. That being said, if I was intending on financing, its not like I'm just building up that 50k in my bank account; that money would already be in investments as it was accrued. Compare that to the 50k you need to buy outright. If you were to put that in investments as it was accrued, those investments would have to be a lot safer and a lot more liquid as you absolutely need that 50k at a particular point in time. Personally, I like to be a little more aggressive with my money at a reasonably young age. I have more than enough money in reasonably liquid investments to cover any worst case scenarios so I'd typically always go the financing route if the interest was low enough.

This. Period.

I don't understand why it's so hard to understand that if you can earn a higher return than you are paying on the loan, financing makes more sense than tying up your cash.

Because a lot of personal finance involves habits and having discipline along with patience. If it was solely a numbers game, the answer would be simple. We can't assume that the average people with a 0% rate will invest the money they are saving or have saved. This is America. The average person doesn't do that. It's like when people are paying off loads of debt. It's sometimes better to pay off smaller debts with lower interest rates first so people stay motivated and keep plowing through all of the debt.

I agree with what you said 100%. The ONLY statement I've been arguing is the below. That's it. My only point is that you can't make a blanket statement like that. I agree that MOST people shouldn't take out that kind of loan, and that MOST people do it to afford a car they shouldn't be buying. But it does not apply to everyone, and there are situations where a financially saavy person can take out an 84 month loan for a car they CAN afford, and make it more profitable than paying cash.

If you get an 84 month loan, you can't afford the car. This applies to everyone. Buying a new car is not an investment, it is utility at best and the depreciation is well known.

 

[Fat Nick]

Fat Nick, in your scenario though you likely couldn't pay the monthly loan with simply the interest off the CD. So you have a 50k CD but you either continue to dip into principal to pay the note or you have a different source of income to pay the note.

Good point. Every monthly payment is a lost investing opportunity if you'd paid for the car outright that needs to be factored into the comparison. That being said, if I was intending on financing, its not like I'm just building up that 50k in my bank account; that money would already be in investments as it was accrued. Compare that to the 50k you need to buy outright. If you were to put that in investments as it was accrued, those investments would have to be a lot safer and a lot more liquid as you absolutely need that 50k at a particular point in time. Personally, I like to be a little more aggressive with my money at a reasonably young age. I have more than enough money in reasonably liquid investments to cover any worst case scenarios so I'd typically always go the financing route if the interest was low enough.

This. Period.

I don't understand why it's so hard to understand that if you can earn a higher return than you are paying on the loan, financing makes more sense than tying up your cash.

Because a lot of personal finance involves habits and having discipline along with patience. If it was solely a numbers game, the answer would be simple. We can't assume that the average people with a 0% rate will invest the money they are saving or have saved. This is America. The average person doesn't do that. It's like when people are paying off loads of debt. It's sometimes better to pay off smaller debts with lower interest rates first so people stay motivated and keep plowing through all of the debt.

As long as we agree that it makes financial sense to take the financing. This wouldn't be an option for the average person b/c they'd never have the discipline to save up 50k.

Agree. Financing for cars exists primarily to allow people to buy something they can't afford out-of-pocket. As a side-effect, people who CAN afford a car out of pocket can use financing as a way to leverage and potentially pay less for a car net-net.

 

[Fat Nick]

My concept put more eloquently...

 

[George Jefferson Airplane]

You at Clown Car Investments Nick?

 

[George Jefferson Airplane]

My concept put more eloquently...

Interesting, no where in there did the author recommend taking the $50k you would have used to buy a new car, and use it to by a CD and then use the interest to make your payments. But yeah, that's exactly how you explained it.

0% over 60 months<>3.5% over 84 months

 

[Fat Nick]

My concept put more eloquently...

Interesting, no where in there did the author recommend taking the $50k you would have used to buy a new car, and use it to by a CD and then use the interest to make your payments. But yeah, that's exactly how you explained it.

0% over 60 months<>3.5% over 84 months

You need to work on your reading comprehension and ability to understand concepts that aren't EXACTLY as the above example. You're correct. 0% over 60 months <> 3.5% over 84 months, but get this....An 8% market return is still greater than both of those, so the example still applies. Gasp!

I'm sorry nobody has written an interent article with these exact concepts spelled out in EXACTLY the way you need it to understand the concept. If you can't bridge from the below example, using 0% to 8% in stocks to our example of a 3% 84 month loan and a 5% CD, then I'd suggest you spend more time reading about investment concepts.

Let’s say you have the cash to pay for a car, but you then get offered 0% to finance the car through the dealer. If it was me, I would go with the financing. Why, you ask? The dealer is giving me free money to finance through them. I can get into a brand new car and not pay a dime in interest for it. Yes, I have to pay a monthly payment each month, but now I have my cash to do whatever I want with.

I would take the cash for the car and then invest it. The average return on the stock market is around 8%. Would you rather pay cash for a car or be able to finance it with no interest and then have your money make money? I choose to make money.

 

[Fat Nick]

You at Clown Car Investments Nick?

Nope. Got out of the personal investment business. Got tired of listening to people who didn't understand basic investment concepts.

 

[George Jefferson Airplane]

You at Clown Car Investments Nick?

Nope. Got out of the personal investment business. Got tired of listening to people who didn't understand basic investment concepts.

I'm surprised, you explain them so well.

 

[George Jefferson Airplane]

Best CD rates

 

[Fat Nick]

Best CD rates

Average mutual fund returns for those who think CD's are the only investments out there...

I'm done. You're either an idiot or

 

[Mr. Ected]

Fat Nick, in your scenario though you likely couldn't pay the monthly loan with simply the interest off the CD. So you have a 50k CD but you either continue to dip into principal to pay the note or you have a different source of income to pay the note.

I'm not saying you can pay the loan simply off the interest. I'm saying that if you take $50,000, buy that CD, earn your 2%. Take whatever you need to make your payment out of the $50,000 (pocketing the 2% interest) in the 1st month. Now for Month 2, re-buy a new CD with the new balance ($50K less whatever the 1st payment was) and repeat. Every time you earn 2% of the balance on the loan over what you would've had if you just paid cash.

It's a little oversimplified because you rarely find 1 month CD's that pay squat...I'm just using that example for simplicity. Take a longer-term investment, say, a 7 year bond, and you will. If you have the cash to use, there are better things to do than tie it all up in a car.

I may be picking nits, but with a CD, don't you only get the interest at the end of the period of the CD? Isn't that kinda the point of the CD, that the bank, or whoever, gets the $$$ for the length of the term, and gives you a little bit better than average interest?

Long time ago, I was a bank teller for a summer in the late 80's and our credit union gave 1 year CDs for 10% interest. 5k minimum if I remember correctly.

 

[George Jefferson Airplane]

Best CD rates

Average mutual fund returns for those who think CD's are the only investments out there...

I'm done. You're either an idiot or

You sell insurance annuities don't you? How about a variable life annuity that will make you 8% a year with 6% in fees, and a 84 month auto loan at 5%? Big money right? Better or worse than a CD?