Auto loan as % of income

[Dadhawk]

In the end it comes down to personal comfort levels and financial philosophy, so all that follows is personal opinion, but the advice I'd give my sons.

Best option is always cash, but having a car be a double digit portion of your available cash/income is not good. Even a house payment should not be more than about 25% of your family's income.

I put down about a 1/3 down on the FR-S, and have a low interest (2%) loan on the rest, but also have enough money set aside in the bank I could pay it off tomorrow. The last 4 vehicles I've purchased I purposely saved and paid cash for, and bought used if necessary to do so.

In the end a car is a depreciating "asset" and you will not get back most of the money you put into it. Putting yourself in a potential financial bind for it is not fiscally smart.

[Spaceywilly]

I make $66k/year and my loan worked out to $500/month. If I wanted to I could pay off the car but I am saving that money for a down payment on a house. I'm hoping to have the car paid off in 2 or 3 years.

[Rossman]

Originally Posted by Nepenthe

Traded in my Si, wrote a check for the rest. Should get the title soon. Did the same thing on my Si. Only thing I've ever bought on credit is my house and I plan to have that paid off 24 years early.

Kudos! Sadly, more people should be doing this...but apparently no-one knows how to save anymore

[Gen]

Originally Posted by Rossman

Kudos! Sadly, more people should be doing this...but apparently no-one knows how to save anymore

Most people see it making more sense to take a loan at 1.75% than plunk down 27 grand. I understand the idea, but debt isn't necessarily 'bad' depending on how the numbers work out. I paid cash for my house (greater ability to haggle and reduced price outweighed the benefits of mortgage interest deduction) and get small loans for my cars.

[deucethemoose]

Having debt is perfectly fine - provided you can manage it. Having no debt will actually work against your credit (like you guys don't already know), so for those who are younger and looking for a car would benefit from putting ~25% down and the rest on a loan so long as their finances make sense with the addition of a car payment + insurance.

[Rossman]

Originally Posted by deucethemoose

Having debt is perfectly fine - provided you can manage it. Having no debt will actually work against your credit (like you guys don't already know), so for those who are younger and looking for a car would benefit from putting ~25% down and the rest on a loan so long as their finances make sense with the addition of a car payment + insurance.

This is crazy logic that I often hear repeated and it just makes no sense. You've been conditioned by the banks if you actually believe this.

Debt is NEVER good (though largely unavoidable when buying a house) and should never be used if at all possible. If you want to get played by the banks, have fun with your "manageable debt" (this really just means the banks are "managing" to make a living off of you!).

One of the primary reasons North America is still in recession (in case you hadn't noticed!) is because of people taking on debt, instead of saving like the old days!

[Gen]

Originally Posted by Rossman

This is crazy logic that I often hear repeated and it just makes no sense. You've been conditioned by the banks if you actually believe this.

Debt is NEVER good (though largely unavoidable when buying a house) and should never be used if at all possible. If you want to get played by the banks, have fun with your "manageable debt" (this really just means the banks are "managing" to make a living off of you!).

One of the primary reasons North America is still in recession (in case you hadn't noticed!) is because of people taking on debt, instead of saving like the old days!

I think what he's getting at is rates are so low right now that you can receive greater return on your capital by investing it rather than buying a depreciating asset outright. Different strokes. I'm paying something like $400 in interest over the life of my loan--it's practically nothing.

[Rossman]

Originally Posted by Gen

I think what he's getting at is rates are so low right now that you can receive greater return on your capital by investing it rather than buying a depreciating asset outright. Different strokes. I'm paying something like $400 in interest over the life of my loan--it's practically nothing.

Yeah, "practically nothing". That's how they get you. Anyway to each our own I certainly don't expect to change any minds but the facts are what they are - that $400 would be better off in your pocket than the banks!

You can justify it any way you want, it's not my money you are losing

[Gen]

Originally Posted by Rossman

Yeah, "practically nothing". That's how they get you. Anyway to each our own I certainly don't expect to change any minds but the facts are what they are - that $400 would be better off in your pocket than the banks!

You can justify it any way you want, it's not my money you are losing

Unless you are getting a 7% return on that money and you're paying 1.75%. You're 5.25% better off. You also have to consider liquidity, with a vehicle lacking in that aspect.

[Rossman]

No, actually you aren't. If you paid cash for the car, you would pay no interest.

If you finance it, you pay your "only $400".

One of these results in you being $400 richer in the end, and it doesn't take a genius to figure out which it is.

[Gen]

Originally Posted by Rossman

No, actually you aren't. If you paid cash for the car, you would pay no interest.

If you finance it, you pay your "only $400".

One of these results in you being $400 richer in the end, and it doesn't take a genius to figure out which it is.

I don't think you understand. That's alright though, like I said, different strokes.

Let's say you have 27,000 grand that you can either invest or use to purchase a car. Assuming a 7% return, in five years your lump sum is worth 37,868, which is substantially less than you are paying the bank on a loan. Does that make sense? There is always an element of risk, as 7% is not guaranteed, however.

[Rossman]

Originally Posted by Gen

I don't think you understand. That's alright though, like I said, different strokes.

Let's say you have 27,000 grand that you can either invest or use to purchase a car. Assuming a 7% return, in five years your lump sum is worth 37,868, which is substantially less than you are paying the bank on a loan. Does that make sense?

The math isn't actually that simple, and you certainly won't get 7% guaranteed anywhere these days that's for sure.

Anyway you spend your money as you see fit and I will do the same.

[Spaceywilly]

Originally Posted by Rossman

Debt is NEVER good (though largely unavoidable when buying a house) and should never be used if at all possible.

Wow... so tell me, if a bank will loan me money for 2.9%, and I can then take my income and invest it in stocks that return 20%, how is debt not good?

[veuxx]

Originally Posted by Spaceywilly

Wow... so tell me, if a bank will loan me money for 2.9%, and I can then take my income and invest it in stocks that return 20%, how is debt not good?

Might as well just invest on margin if you are capable of risk.