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That seems incredibly foolish and I'm not even close to 35. The market pays about 10%, conservative bond funds pay about 6%, and auto loans, depending on credit, cost less than 5%. You would have to be insane, have an irrational fear of debt, or have bad credit to justify paying cash for a car. Besides, when you borrow money you are paying the money back with devalued dollars.
To illustrate, I bought a motorcycle 2 years ago at 3%. My total interest is going to be around $600 over the life of the loan and if I paid cash I would have saved that $600, but I would have given up several thousand dollars in just capital appreciation.
So you are basically saying you should borrow money to invest in stocks and/or bonds.
If this is your purpose, why not use a margin account instead?
I haven't had a car payment since 2001, when I paid off my 1998 VW, After I paid it off, I stowed the monthly payment amount in a savings account. When it was time to buy a new car in 2006, I was able to pay cash. I continued saving after I bought the new car, and opened a separate savings account just for that purpose.
My car may need replacing in the next year or so, and again I'm prepared to pay cash for a one- or two-year-old car.
Finally, some sensible people in this world for a change!
So you are basically saying you should borrow money to invest in stocks and/or bonds.
If this is your purpose, why not use a margin account instead?
That isn't actually what I said, but I can see where you are coming from. Paying cash for the motorcycle and then borrowing on margin would be more expensive than what I proposed. The first problem is that most brokerage accounts only allow you to borrow 50% of your account balance. The second problem is that brokerage accounts charge higher interest rates than auto loans. The third problem is that if the market dips you could be subject to a margin call and thereby give up the benefit of fixed payments. So if you wanted to borrow $12K you would need to have $24K, pay a higher interest rate, and give up the benefit of fixed payments. Financially speaking, that is a foolish strategy. Borrowing on margin can make sense, but not for an auto loan.
Current auto rates are below 3%. Margin rates start at 8.5% and go to 4% for large account balances. Also, gap insurance is available in conjunction with the car loan, but not with the margin account.
If "different situations" is a reason not to save the cash, the why don't the same "different situations" that made them not save also make them unable to make a car payment?
It still makes NO sense to me why people don't pay cash for their cars.
If they are so comfortable financially, why couldn't they save up the cash?
Also, if they are "nowhere near outside their means", why aren't they overpaying to knock the loan out and then making the payment to themselves so they can pay cash for the next car?
If this is so, why not just borrow against your financial assets (which doesn't require a credit history) ?
Show the math behind why it would not make sense to borrow for a car? I just checked my accounts and it looks like I am up anywhere from 30% to 50% over the last 2 years.
Show us the math behind paying a loan off early. Why would it even make sense to do an early pay off of a loan with 0.9% interest rate.
Why borrow at a higher interest rates when you can borrow at a lower interest rates?
That isn't actually what I said, but I can see where you are coming from. Paying cash for the motorcycle and then borrowing on margin would be more expensive than what I proposed. The first problem is that most brokerage accounts only allow you to borrow 50% of your account balance. The second problem is that brokerage accounts charge higher interest rates than auto loans. The third problem is that if the market dips you could be subject to a margin call and thereby give up the benefit of fixed payments. So if you wanted to borrow $12K you would need to have $24K, pay a higher interest rate, and give up the benefit of fixed payments. Financially speaking, that is a foolish strategy. Borrowing on margin can make sense, but not for an auto loan.
Current auto rates are below 3%. Margin rates start at 8.5% and go to 4% for large account balances. Also, gap insurance is available in conjunction with the car loan, but not with the margin account.
Show the math behind why it would not make sense to borrow for a car? I just checked my accounts and it looks like I am up anywhere from 30% to 50% over the last 2 years.
Show us the math behind paying a loan off early. Why would it even make sense to do an early pay off of a loan with 0.9% interest rate.
Why borrow at a higher interest rates when you can borrow at a lower interest rates?
Different firms charge different rates and I was under the (maybe you are saying mistaken?) impression that you could get lower rates on debt collateralized by liquid assets than you could on debt collateralized by less liquid assets or depreciating consumer products with high repossession cost.
If a loan really had 0.9% interest then it may well not make sense to pay off early once you have it. But then the question becomes, could you not have gotten a steep discount for paying cash? If so, why didn't you, and if not, how can the finance company make any money?
Different firms charge different rates and I was under the (maybe you are saying mistaken?) impression that you could get lower rates on debt collateralized by liquid assets than you could on debt collateralized by less liquid assets or depreciating consumer products with high repossession cost.
If a loan really had 0.9% interest then it may well not make sense to pay off early once you have it. But then the question becomes, could you not have gotten a steep discount for paying cash? If so, why didn't you, and if not, how can the finance company make any money?
Usually you don't get any more discount cash vs loan.
Different firms charge different rates and I was under the (maybe you are saying mistaken?) impression that you could get lower rates on debt collateralized by liquid assets than you could on debt collateralized by less liquid assets or depreciating consumer products with high repossession cost.
A boat will definitely have a higher interest rate than a house, but unless you have a very large account balance margin loans will be fairly high compared to traditional lending rates. Conversely, margin loan interest rates are lower than CC rates. Stocks are more liquid than autos, but borrowing against equities isn't currently cheaper than an auto installment loan.
Quote:
Originally Posted by ncole1
If a loan really had 0.9% interest then it may well not make sense to pay off early once you have it. But then the question becomes, could you not have gotten a steep discount for paying cash? If so, why didn't you, and if not, how can the finance company make any money?
Car dealers often provide a cash incentive or a low interest rate. Calculating which is a better deal would need to be done, but won't change the fact that it is still better to borrow under current conditions. For instance, when I bought my bike I had a choice between borrowing $10K at 3% or 7% and $500 back.
At 3% my interest cost is $600, but at 7% my interest cost would have been $1500. Add in the cash discount and I am $400 better off with the low financing. Add in the market returns over the past 2 years and I am significantly better off by borrowing. Even if you use historical market returns it is better to borrow when interest rates are low. As interest rates go up it might be better to pay cash than keep the money in the market, but we aren't there yet.
If "different situations" is a reason not to save the cash, the why don't the same "different situations" that made them not save also make them unable to make a car payment?
Who knows? there are plenty of possible examples. I'll give you one right now: I'm planning on getting rid of my current car (a 2000 Honda Civic) in about another year and a half, thinking around the time it hits 15 years old. I am setting aside funds in my budget so that, when the time comes, I can purchase with cash. However, say something major happens to my car tomorrow that would cost thousands to repair (don't ask me what, I'm not a mechinic) - do I drop that kind of cash to fix it, or just say screw it and use the funds I have set aside already to make a healthy downpayment on a new car now, and then continue to make a payment for the remaining balance over the next year or so, as I was budgeting for anyways. I would do the latter; that makes the most sense to me.
Quote:
Originally Posted by ncole1
If they are so comfortable financially, why couldn't they save up the cash?
Also, if they are "nowhere near outside their means", why aren't they overpaying to knock the loan out and then making the payment to themselves so they can pay cash for the next car?
Again, there could be many reasons. Maybe the money they are making off of their investments is much greater than what they would pay in interet on a low-rate car loan. But, whatever the reason, what's it to you? If a couple making around $250k-$300k or more per year choose to finance their new car purchase instead of buying it outright (which they could easily do), the reasons for doing so are their business.
There are many reasons that people make certain financial decisions, many of which are sound and valid, even if you do not happen to think they are.
Quote:
Originally Posted by ncole1
If this is so, why not just borrow against your financial assets (which doesn't require a credit history) ?
That is, of course, one option. I prefer to have more options (for anything) than less.
Who knows? there are plenty of possible examples. I'll give you one right now: I'm planning on getting rid of my current car (a 2000 Honda Civic) in about another year and a half, thinking around the time it hits 15 years old. I am setting aside funds in my budget so that, when the time comes, I can purchase with cash. However, say something major happens to my car tomorrow that would cost thousands to repair (don't ask me what, I'm not a mechinic) - do I drop that kind of cash to fix it, or just say screw it and use the funds I have set aside already to make a healthy downpayment on a new car now, and then continue to make a payment for the remaining balance over the next year or so, as I was budgeting for anyways. I would do the latter; that makes the most sense to me.
Again, there could be many reasons. And, again, why do you even ask the question? What's it to you? If a couple making around $250k-$300k or more per year choose to finance their new car purchase instead of buying it outright, the reasons for doing so are their business.
There are many reasons that people make certain financial decisions, many of which a sound and valid, even if you do not happen to think they are.
That is, of course, one option. I prefer to have more options (for anything) than less.
This discussion has strayed too far from the situation implied by the OP.
I was speaking mostly in that context, which is to say, OP implied that buying a new car would necessarily result in having a payment, which requires the implicit assumption that sufficient cash is simply not available despite having the ability to fit a car payment into the budget.
The point I'm trying to make is, most people making car payments are doing do because they lack the discipline to put aside that money (rather than just wasting it on some other crap) until they are forced to under threat of repossession.
Having said that, not having a car payment, for such people, does not amount to "saving" money, because they are in fact SPENDING that money.
I was speaking mostly in that context, which is to say, OP implied that buying a new car would necessarily result in having a payment, which requires the implicit assumption that sufficient cash is simply not available despite having the ability to fit a car payment into the budget.
It is not an "implicit assumption". As stated in several posts on this thread, a person could have the cash to buy a new car, but may still choose to finance it instead.
Quote:
Originally Posted by ncole1
The point I'm trying to make is, most people making car payments are doing do because they lack the discipline to put aside that money (rather than just wasting it on some other crap) until they are forced to under threat of repossession.
And you know this to be a fact how? You keep stating this opinion as fact without actually backing that up.
One cannot make a blanket statement / judgement about the financial situations and decsions of others without knowing what their particular situations actually are.
Quote:
Originally Posted by lycos679
At 3% my interest cost is $600, but at 7% my interest cost would have been $1500. Add in the cash discount and I am $400 better off with the low financing. Add in the market returns over the past 2 years and I am significantly better off by borrowing.
Exactly. Someone mentioned on here financing their car for 0.9%. I make a significantly higher rate of return than that on my investments. I could take the lump sum to buy a car in cash out of my portfolio (and lose the interest that money would generate if I had left it in there), or I could maintain my rate of return on that money, finance my car at a rediculously low interest rate and, in the end, come out ahead.
It is not an "implicit assumption". As stated in several posts on this thread, a person could have the cash to buy a new car, but may still choose to finance it instead.
And you know this to be a fact how? You keep stating this opinion as fact without actually backing that up.
One cannot make a blanket statement / judgement about the financial situations and decsions of others without knowing what their particular situations actually are.
Exactly. Someone mentioned on here financing their car for 0.9%. I make a significantly higher rate of return than that on my investments. I could take the lump sum to buy a car in cash out of my portfolio (and lose the interest that money would generate if I had left it in there), or I could maintain my rate of return on that money, finance my car at a rediculously low interest rate and, in the end, come out ahead.
The multitude of surveys showing that most Americans have less in liquid assets than would be required to pay cash for a replacement vehicle. I'm not making this up, and it's not opinion. It is documented fact that can easily be looked up.
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