Discussion in 'Economics' started by Banjo, Mar 29, 2012.
I kind of do the same thing. I've never been behind on my mortgage, but I always pay extra toward the car before the house. Like if i have two or three hundred extra dollars one money, I will put it towards the car, not the mortgage.
people shouldnt even have car loans. never borrow money to buy a depreciating consumable asset.
i have never borrowed money to buy a personal vehicle. always pay cash.
That depends. I got 0% over 5 years because of the dealer benefit to employees of my wife's company.
I guess if you negotiate down a sweet deal for cash, but if not, why fork out the dough all at once?
Personally, I'd rather buy a lightly used vehicle where the original owner ate the bulk of the depreciation. Even cars that have first rate resale value get killed in the first few years of depreciation. Once you get that out of the way you can drive the thing for years and still recoup a good chunk of what you paid.
It also helps to haggle a bit and search out only the best deals...of course most people hate the idea of buying used cars AND/OR of haggling which is why they pay up at a place like CarMax.
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.
Doesnt matter if the car is $2,000 or $200,000 the math is still the same it just different numbers. (although with the $2,000 you are almost guaranteed to have breakdowns over the next 4 years that will cost you more than you paid for the car)
You are correct though about easy finance allowing you to buy way more car than you can afford, but that is not an economics issue. That is a psychology issue.
When buying a car, one should always find out first, how much extra money they have left over every month and not spend more than half of it on a car payment. Then you can figure out your max price, then you can start shopping for cars that fit your needs.
I used to do what you do though...I paid cash old beater cars and I ALWAYS had problems. The hassle & expense of a mechanic (who in CA charge an average of $100-120 per hour for labor) was just not worth the aggravation. I bought this 10 year old mitsubishi eclipse for cash($5k) and I had it 6 months. I had about 3 breakdowns in that time including a blown head gasket that cost me over $1,000. A $1,000 surprise expense is alot of aggravation. My other cars that I paid cash for also had these "surprise" expenses. Some minor $200 expenses, some much much more. I have found that when you finance a newer car, (preferably a honda) you just rarely have any extra problems. And I dont know about you, but my idea of fun is not paying $70-$100 for a tow to a mechanic who knows he can quote me whatever price he wants because my car is there and I have to sit and wait for hours for it to be ready, or i have to rent a car if he decides to take his time fixing it.
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