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No, you've got it backward. You want to minimize borrowing money for a depreciating asset, because there's no way you can sell it for more than you paid for it and overcome the cost of money. If you borrow money for an appreciating asset, the appreciation can offset the cost of borrowing.
IF you are going to spend the money, then it's spent
but why pay it off now? the interest rate on car loans are stupid low, 0-1% for me. I can make more money paying it off slowly and keeping money in bank.
besides, inflation makes paying it off over time a better plan. In X years, you still owe the same $ (that didn't keep up with inflation) so you are paying with $ that is worth less
the car is going to be worth the same in 10 years whether you pay it off in year 1 or year 10, you don't gain anything paying it off early
don't be afraid of loans... if you had the money to buy the car, then use the loan. Don't take on debt to buy a car you can't afford
What is the preferred amount for a down payment when purchasing a car? Websites indicate that you should put down 20% on a car (just like a house I guess), but some websites indicate 10%. And a recent article said that nowadays people put down even less money because cars are so expensive, especially new cars and even used cars that are 1-2 years old.
If you are able to get an auto loan with a rate of less than 4%, would you guys say putting a 50% down payment would be ideal? And then the idea would be to try to pay it off as early as possible.
They say that getting any auto loans over 4 years is a bad idea, but what if you put 50% or higher down payment on it? Then I don't see the big deal but you still have to try to pay it off early with extra payments.
Sometimes, I don't know how many people afford these brand new Tahoes that cost over 50k and numerous BMWs and Audis that definitely cost over 45k easily.
At 4% I'd more or less not care. I don't tend to hoard a ton of cash but I could $5,000 down. More than that and I'd have to hoard some cash for a some time or uncomfortably draw on my emergency fund. I'd probably do about $5,000 down and finance the rest. At 4%, again, I wouldn't really care. The higher expected return on investments come with risk so the higher return + risk is about the same as risk-free and the spread. Five or six years at 4% works for me. I wouldn't make any effort to pay it down sooner.
Lower than 4% I'd try and put as little down as possible and stretch the payments as long as possible.
Higher than 4% I'd put down more and pay it off quickly. Or just not buy a car at that time. Easy enough to wait a few months and get .9%.
Useful life span on a vehicle for me is about seven years (maybe more now, don't drive as much any longer). 0 down, 7 years at .9% or lower would be how I'd prefer to buy a car. You'll never get that though, usually it's .9% or lower for 5 years and they want a down payment. It's very tough for me to get alternative lending as I'm self-employed. Last time I tried the best I could get was 4.5% from my local Credit Union. It was an uncompetitive interest rate but the normal online lenders weren't interested. Too much hassle to look at three years of tax returns for them. They just want a W2 or paystub.
Most of those BMWs and such are leased. BMW 5-series is in the $500-600 range for a lease. I could afford that. The mileage would be the issue, not the monthly cost.
100% cash. Cars depreciate the minute you drive them off the lot. They're a consumer item. I've never had a card loan, and never will. Never bought a new car, either; although that might change in a decade or so when I replace the one I have, but it will be for something modest and fuel efficient.
Raise the bar for yourself. Challenge yourself to live like no one else does now, so you'll be able to live like no one else in the future. I know that sounds hokey, but it's true.
So my new Tahoe has an $798 payment. Company pays it 100%.......... I get a car allowance but they won't write me a 50K check upfront!
Not true on the depreciation, my buddy has bought 5 brand new Ferraris and sold them back to the dealer for a profit of up to $40,000 (rarer model). So in most cases he gets a loan, drives the car for a few months and sells the car to the dealer. He spends a few thousand and then leaves with a check. I'd call that living like no one else!
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Raise the bar for yourself. Challenge yourself to live like no one else does now, so you'll be able to live like no one else in the future. I know that sounds hokey, but it's true.
I understand but the Dave Ramsey method doesn't work for everybody. I have enough money in the bank to pay off the entire car but it doesn't seem like any other good reason to do it. This Dave Ramsey method you just preached is for people who are buying the BMWs and Tahoes who have no business buying them.
Quote:
Originally Posted by lewdog_5
They do depreciate the moment you drive them off the lot, so why pay 100% cash for something that is going to lose money right away?!?!
I'll take a modest 10-15% down and the 2.34% interest rate we got on our car loan. I'll keep that extra cash we didn't use to buy the car in investments and come out ahead over the years we own the car.
Still have to have enough brains to get a car that doesn't cripple your monthly net income though. That's where people make the mistake. Getting a car they simply can't afford.
I'm leaning more towards this school of thought. I just came up with a 50% down payment figure to feel better about the loan.
Which weighs more a ton of feathers or a ton of bricks? ie. A car bought with 100% cash or 100% financed will depreciate at the same rate. It should have no bearing on the decision to finance or not.
I disagree. Yes, it will depreciate at the same rate, but that wasn't the point. The point was you don't borrow for things that fall in value.
People spend more when they borrow money to buy things. (Yeah, I know, you're the exception. That's what everyone says. It's true for a few. It isn't true for the vast majority of people).
You also have the interest expense when buying the car. Yes, I know, you could be investing that money if you get the car at a low rate of interest. Most people aren't doing that. Instead, they overpay for the car and they pay interest on top of that. That's what's typical.
They do depreciate the moment you drive them off the lot, so why pay 100% cash for something that is going to lose money right away?!?!
I'll take a modest 10-15% down and the 2.34% interest rate we got on our car loan. I'll keep that extra cash we didn't use to buy the car in investments and come out ahead over the years we own the car.
It makes no sense to pay interest on a depreciating asset. For the vast majority of people, this line of reasoning is a justification to buy more car than they can comfortably afford.
Quote:
Originally Posted by lewdog_5
Still have to have enough brains to get a car that doesn't cripple your monthly net income though. That's where people make the mistake. Getting a car they simply can't afford.
Right. And borrowing money just adds to that. Neuroscientists have proven that people spend more on things when they borrow money to buy them. Paying out of pocket affects the brain differently than using credit. Your brain feels less pain and spend more when buying on credit.
0%... you don't build equity in car so there is no reason to pay it off early, nothing to recoup
If you want to spend $10,20,30,100k on a car, you spend it. But if you want to put 20% for a lower payment, then buy a car that is 80% cheaper instead
Agreed. Especially if the interest-rate is super low there is no point giving up the cash. Cash is king!
Additionally, if your credit history is new then pay off the car on the regular scheduled payment plan. This will show a full and complete it credit history with at least one creditor. Paying it off early means the account age is lower than it should be and ironically can work against you if you’re new to the credit market.
So my new Tahoe has an $798 payment. Company pays it 100%.......... I get a car allowance but they won't write me a 50K check upfront!
Not true on the depreciation, my buddy has bought 5 brand new Ferraris and sold them back to the dealer for a profit of up to $40,000 (rarer model). So in most cases he gets a loan, drives the car for a few months and sells the car to the dealer. He spends a few thousand and then leaves with a check. I'd call that living like no one else!
Sure...obviously outliers...not something the average Joe will be able to do, but glad you could find these gold nuggets!
I see no issue with borrowing money to buy a new car. You need a reliable car to get to work. New cars last easily 125,000 to 150,000 miles without needing to do much to them beyond routine scheduled maintenance, tires, and brakes.
My issue is people rationalizing buying more car than they really need. The whole "it's only another $100/month" or "it's only another year on the car loan". If you can afford to pay cash for a luxury car, by all means do so. If you have to borrow, you should be buying basic transportation.
On the new vs used, I don't see much difference as long as you run the car until it becomes unreliable. Amortized over 150,000 miles, the depreciation on a new car ends up not all that different from buying used. I always buy new cars. I never pay anything close to sticker price. I buy the 7 year/100k mile extended warranty to bound the ownership costs and drive the car until it's off warranty.
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