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Originally Posted by cbmeeks
I see what you are saying. Maybe I wasn't that clear. The person that had $200k and $100k probably has some decent cash in their checking account. That's where I would pull it. Besides, yes, math is math but reality is also reality. cbmeeks
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I don't disagree with you that a car is not an investment. That is, it is a purchase, consumption, and yes, it depreciates. I also wouldnt disagree with a person who simply stated that they were not going to obtain a loan or use credit no matter what, if that's what they wanted to do, especially if they had the cash to clearly and easily avoid doing so.
However, in my opinion, 'reality is reality' doesn't trump 'math is math'. The vehicle depreciates whether is paid for with cash or obtained with a low-interest loan.
Let us assume a 2.5% loan could be had on a 4 year schedule. Lets also allow me to use simple math (very simplified, w/o taking into consideration compounding either way) for the purposes of this illustration.
Pay cash:
Car cost $10,000
You pull cash from a 4.5% interest earning account
You pay 0 interest on the car, but do not gain what you would otherwise ($450 per year) from not having those funds working in an account. So, after four years, paying cash for the car has cost you $1800 besides the cost of the car.
2.5% loan for 4 years:
Car cost $10,000
You make payments for 4 years
The total interest paid per year is $250. Over 4 years, $1000.
The interest earned on the $10,000 that you did not take from the 4.5% account over that same period of time is $1800.
In four year's time, you will own the car, the financing having cost $1000 and your interest bearning account having earned $1800.
At the end of four years, in each case, the car will have depreciated to the same level. It will, in fact, be worth considerably less than you purchased it. However, this is true for both methods of purchase. In the latter version, however, you profited by earning greater interest on your money that you spent on the purchase.
I don't see why, expect for just being determined not to use loans/credit at all, one would not accept such a low rate and obtain an auto loan under these circumstances.
Am I missing something? I am perfectly willing to be educated.
Let me also add, that I believe purchasing a new car is one of the worst things a person can do. Purchasing a pre-owned car, even with very low mileage and significant warranty, will save you lots of money in purchase price and let someone bear the brunt of the initial depreciation.