Quote:
Originally Posted by kilrb
I could agree with your logic if the question was "I have $25,000. Should I buy a car with it, or keep the one I have and invest the money in a CD?" To answer that question by saying that you'd be better off investing your money in a low yielding CD as opposed to a depreciating asset is perfectly sound reasoning.
The way I see it however, the question is "I'm buying a car. Should I borrow or pay cash?" It's a given that you're buying a car; the negative rate of return on that investment is what it is, regardless of whether you pay cash or finance it.
If you have the $25,000 and choose to invest it at 1.25%, but by doing this, it requires you to borrow $25,000 at 2.9%, your investment is yielding less than the cost of borrowing the money. The depreciation of the car doesn't factor in, since it's a constant in both equations.
To put it another way, here are the equations.
Rate of return for borrowing = ($25,000 @ 1.25%) - ($25,000 @ 2.9%).
Rate of return for paying cash = ($0 @ 1.25%) - ($0 @ 2.9%).
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The depreciation of the car is constant in both equations, but where your money is tied up in (losing money) and how much it earns for you is different. With a car you are always losing money on it (unless you have a classic car). In other words that money you 'invest' will always lose money, and it is best to you somebody else's money to pay for it when you only have to pay a small amount of interest on the loan. Then use your money to work for you. I'm not saying that this is the way that anybody should be buying their cars (I could personally care less what anybody does), but that it is the smartest way to use your money (if that is your only concern). Invest in appreciating assets, borrow for depreciating assets.
Now if you want to get technical you could run something that shows takes out the car payment every month from that amount. Basically put 25k in some sort of savings, and pull the payment out of that bit by bit. You would still end out on top, by doing that. That would be far too long and boring that it would turn everybody off on the subject (it would be the ramblings of a mad accountant). So the basic theory is above, nobody really has to subscribe to it if they don't want to. I know from life experience that this sort of thing works, and works very well.