Registered: Nov 1999
03-30-12 12:39 AM
Quote from peilthetraveler:
Its not that simple, my simple minded friend. You like science & math,so lets do the science of finance and use some math.
Here are the details.
Car is used and costs $15k
Average interest rate for loan is 3.7% nationwide for a 48 month loan.
If i get a loan for $15k at 3.7%, that means I will have monthly payments of $336 and would have paid $1,160 in interest over the life of the loan.
Now if you wanted to save $15k before you bought a car, then you would have to save $312 per month for 48 months before you get $15k. Assuming you stuck it in the dow, the dividend payment would be approximately $890 over 4 years and you dont even know if the market is going to go up or down...if it goes down the last year, you might not have enough for a car after 4 years, so for this example we will say the dow stayed the same for 4 years (just like it has for the last 10 years)
Ok...so what we know now is getting a loan costs you $1,160 and saving for it gives you $890. (oh looks like you are winning so far...)
But wait...we didnt add the CPI!!! Oh noes! So assuming an average yearly CPI of 2% that car that cost $15k in 2012, will cost $16,236 in 2016.(and dont get technical with me, I dont mean the exact same car I mean if we use a 4 year old car example in 2012, then the 2016 example will also be 4 years old)
Ok...so we have now figured out that you couldnt save enough to buy the car in 4 years. You would still be $336 short.
Also, remember that the person with the loan is paying dollars that have decreased in value.
Now lets look at someone that has $15k already saved, but keeps it and gets a loan instead.
We will do the same thing. Put the $15k in the dow and get the 2.8% and get a 100% financed loan at 3.7% What happens?
Well I paid $1,160 in interest, but I made $1,751 in interest on my money giving me an extra $591.
#1 No money, save for car = +$890 interest - $1236 cpi = -$346
#2 No money, finance car = -$1,160 interest + $1,236 cpi= +$76
#3 Money, finance car = -$1,160 interest + $1,751 interest+ $1,236 CPI = $1,827
#4 Money, buy car, save monthly payments = -$1,751 lost in interest +$1,236 cpi + $890 in interest earned = $375
So as you can see, the numbers speak for themselves. If you have no money, its better to finance the car. If you have money it's still better the finance the car.
P.S. Why did you say never finance a depreciating consumable asset? If you pay cash, its still a depreciating consumable asset.
option #5. if you dont have much money buy a 1-2000 car for cash.
the problem with easy finance is it allows you to buy way more car than you can afford. thats how you can get under water and end up with a negitive net worth.