Quote:
Originally Posted by kilrb
Hey, I'm not trying to beat you up here (sometimes it's hard to not come off as rude when rebutting), but...
In both situations, you own the depreciating asset. The car is going to drop say $15,000 over the next 5 years, regardless of whether you borrowed on it or not. If you borrow the money, you'll pay $1,886 in interest on the loan, and your $25,000 will earn you $1,612. Can you explain precisely where you're picking up the $274 difference, plus whatever additional return that makes borrowing the money the smart thing to do? Granted, the difference isn't all that great, but I still don't follow your math...
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It is all in time value of money. A 3% inflation rate (slightly below average historically) makes your money worth less and less as time goes on. So in effect, a ~3% interest rate is offset by the fact that the present value of the car payment is nearly 16% lower 5 years in the future. Investing that money protects against the inflationary drop (CDs are ripoffs, there are better ways to invest your money that are extremely safe, liquid, and can still get a 4-6% return).
Don't get stuck on CDs here. That is the wrong way to look at the issue. The issue is sticking your money in something that loses 10% a year or putting your money in something that gains __% a year and pay off a loan that costs $X in interest per year. There is a crossover point where one is more advantageous than the other. It can vary greatly through the percentages and the years involved. So one person that gets a 1% interest rate on the loan for the car and can get 4% return on investment has a different answer than a person who gets a 6% interest rate on a loans, but can only get a return of 2%.
This is getting pretty far off topic here, I have thread jacked enough. I will quit discussing this publicly for the sake of this thread and OP. The theory is out there, if people want to absorb it and use it that is their choice. If they want to ignore it that is there choice. I don't care either way, not my life. If any of you want to continue discussing this with me, PM me.