re: spinoff thread - why pay off a car as soon as possible?

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You’re not taking the car’s value into account. By not paying it off, you have less cash towards the next car you’ll inevitably need at some point. Failure to account for that is akin to ignoring a 7% capital loss on a stock and focusing only on its 4% dividend. Except with the stock, you can at least hold it forever in the hopes that it eventually recovers its lost value. Not the case with a car.

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I don't understand this line of thinking or analogy at all.

You pay $50k in one scenario, you only have the value of the car to show for it at whatever point down the road you want to choose.

You pay $10k in the other scenario, invest the $40k (that's growing faster than your loan) and you have the value for the car down the road.

Scenario one gives you a "net worth" of the value of the car, let's call it C. NW = C Scenario two gives you a net worth of the value of the investment account, I, minus the value of the loan account, L, plus the value of the car, C. NW = I - L + C

If I is larger than L, scenario two is the better option.

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Because leverage magnifies gains and magnifies losses. That's precisely the point. When your Unlevered Return > Cost of Debt, leverage makes the gains even better. Likewise, when your Unlevered Return < Cost of Debt, leverage makes the losses even worse.

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I mean higher as in closer to zero. Your IRR calculation on paying for the car up front makes the IRR better (-14%) than the actually depreciation of the car (-16%). How is that possible?

However, before you answer that, I have a different question:

I'll give you a loan of $40k for the next 5 years at a 3.5% rate. You've got an investment that will net 6% after taxes per year. You're not going to take that deal because you also have a car? But seriously, explain to me like I'm 5 how you can come up with math that would suggest that's a bad deal.

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However, before you answer that, I have a different question:

I'll give you a loan of $40k for the next 5 years at a 3.5% rate. You've got an investment that will net 6% after taxes per year. You're not going to take that deal because you also have a car? But seriously, explain to me like I'm 5 how you can come up with math that would suggest that's a bad deal.

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Man, it's been a while since I've done one of these late-night rants:

If I was only ever going to drive for 5 years, maybe I'd do the deal.

If I knew I'd have to buy a new car in 5 years, I should probably account for that when thinking about the 3.5% rate (i.e. maybe I'd layer a "set aside" each year on top of that 3.5% in terms of thinking about whether the 6% actually covers me).

But here's the important point: in either scenario, I'd probably think about whether there was something better I could do with my money (both my own and that which I can borrow) than use finite debt capacity towards a car.

You're in the land of NPV and exclusivity (i.e. 6% > 3.5% so do the deal (ignoring, for the moment, things like depreciation and replacement cost)).

I'm in the land of IRR and maximizing the yield I get on every dollar I spend (both my own and those that are loaned to me).

Unless the only two options available to me within my opportunity set are buying a car with debt or buying a car without debt, I'd try to deploy those dollars elsewhere to begin with, given how horribly unattractive the "returns" on a car are.

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I mean higher as in closer to zero. Your IRR calculation on paying for the car up front makes the IRR better (-14%) than the actually depreciation of the car (-16%). How is that possible?

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The -16% doesn't take the reinvested savings into account during Y1-Y5 in which you don't have a car note. That's an intermediate value of sorts before taking any assumptions around opportunity cost into account.

Compare the figures in orange. In the home scenario, the Total IRR without leverage is 3.0%. Given that this is higher than your after-tax cost of debt, you can juice that return by using leverage.

Likewise, in the car scenario, the Total IRR is -14.2%. Given that this is lower than your cost of debt, leverage makes your return even worse, just as 2:1 leverage on a stock that returns -5% would generate a worse return than if no leverage were used.

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This is true, to an extent. Depreciation will catch up with you eventually. You can defer it, but the maintenance is coming. What's more, the assumed sale value in Year 5 is one of the major contributors to the return shown.

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In my life's experience, I have come to believe that money/financial decisions are often more about psychology than math. Don't hear me wrong. Math is certainly important but sometimes misses the very human driven parts of behavior (eg, Long Term Capital Mgmt of 1990s case in point).

Some people are very passionate about their cars, status, sense of accomplishment, building wealth, combo of these, none of these, and many more. And most of the time, financial decisions are anchored in personal context that is very meaningful to them, and not others.

For me, we buy new and drive it until book value is next to nil. Generally, we use dealer financing (mostly time, at 0% for 60mos) and unwind invested $ set aside for car purchases (eg, in a VASGX type of asset/risk) to pay the monthly payment, earning +spread in doing so. After payoff, we continue to pay the note into similar asset for historically what has been 7-9 years per car, while driving car to its end.

Presently, we have 2 cars (1 seven years old, other twelve years old), no car notes and pumping 2 cars worth of notes ($1600+/month) into said investment acct for several years (and hoping a few more!).

Have yet to experience maintenance costs, breakdowns, or other to suggest this method is bad method. Not naive, but so far do good (knock / wood).

The options, choice, and great feeling of investing this $ per month from this method is hard to measure. Of course, blessed beyond measure and our personal context may not resonate for many -- especially the no-shame of driving a 12-yo car! Kidding).

P.S. We buy far nicer ones than I could imagine when growing up (lower-middle class). Grateful!

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I DESPISE having monthly payments, on ANYTHING. Phone bill, gas bill, power bill, you name it. I hate it.

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it’s all just inflows and outflows. Make inflow>outflow in your achieving years.

Also never start or own a business.

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Does the car depreciate less if you pay cash?

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boom, checkmate.

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I understand this to be an argument if individual or entity sees and is using debt as a finite resource... maximizing the total credit available for ROA and using making the best decision for use of available credit.

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Yup - that’s the whole point.

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My commentary in this thread has been primarily directed towards #2, and boiled down to its core, simply argues that debt used to finance appreciating assets is more productive than debt used to finance depreciating "assets."

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It makes me wonder though…

If you have $X amount of assets and $Y amount of debt at Z%, I still struggle to see how your net worth is any different now or down the road based on what the collateral of the debt is. I’m not trying to be difficult.