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re: Any baws with a $600+/month car note
Posted on 6/24/18 at 3:52 pm to BogeyGolf
Posted on 6/24/18 at 3:52 pm to BogeyGolf
quote:
1 People who can make more than 3-5% with their money and make an intelligent decision.
How exactly does this work?
If you bought a 50k vehicle and put 50k in an investment, you are continually draining that 50k every month, which brings your ability to generate a return closer to zero each month. Doesn't seem like it would offset the interest rate.
Posted on 6/24/18 at 4:04 pm to starsandstripes
quote:
How exactly does this work?
If you bought a 50k vehicle and put 50k in an investment, you are continually draining that 50k every month, which brings your ability to generate a return closer to zero each month. Doesn't seem like it would offset the interest rate.
Let's use a simplified interest model with no compounding (as is pointed out later, the below is not an actual simple interest calc, just a very simple model to illustrate a point), just to make it easier. In reality, the interest is a little more complicated, but the principle is the same.
Let's assume that your car loan interest is 3% of the principal annually and the note is 4 years. You also are able to invest your money and make 5% of the principal yearly. Again, we're using simple math without compounding to make the concept easier.
You take the 50k cash you have on hand and you invest it, then you borrow 50k to buy the car. At the end of the 4 years, your investment making 5% will have generated $10k (50000 * 0.05 * 4). You also will have paid off the $50k loan plus $6k in interest (50000 * 0.03 * 4). So, you end up with a car and $4k more than you started with. If you think this way, you likely are a "well qualified buyer" and will be eligible for a 0% interest deal when it periodically comes available. If you wait to buy then, you get to keep the entire $10k your investment makes over the life of the loan. Again, this math is extremely simplified, but it makes the point and keeps the numbers nice and round.
On the other hand, you can take your $50k and buy the car outright. After 4 years, you'll just have a car. The idea is that if you have the cash flow to pay the note, you can usually make more money by investing your cash on hand over the life of the note than you'll save in interest by using the cash on hand to buy outright up front. Also, if you don't have the cash flow to pay the note and have to dip into that cash on hand, maybe you can't afford the car you're buying.
Of course, as I B Freeman pointed out, there are a lot of intangibles that go into deciding where your money will best be served, but this is the general idea behind why you might choose to finance large purchases even if you have the cash on hand to buy it outright.
This post was edited on 6/24/18 at 4:59 pm
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