Auto loan as % of income

[deucethemoose]

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

While we're at it why don't we all just start wearing tin foil hats and living underground? It's all a conspiracy and the banks and government are all out to get us!

If you've got the money to buy the car outright then super. With Scion's target demographic being the 18-25 year olds I doubt anyone in that age range just has 27K just kicking around burning a hole in their pockets.

The fact of the matter is that you can't build credit without being in some sort of debt - and paying it back. 18-25 year olds NEED to build credit. What better way to do that than with an auto loan?

[Dadhawk]

Originally Posted by Gen

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.

As mentioned, the math isn't that simple as you are leaving out factors such as inflation, taxes, etc. Also there is an element of risk involved.

In addition, if you pay cash for the car, you can always sell it as a relatively liquid asset should you need the cash. Yes, it will be at a loss (below market) but if you have a loan you cannot offload that debt as quickly unless you have cash on hand.

(I say that as someone who does have a car loan on my FR-S as I describe above that I plan on paying off in 6 months. It was a short-term decision not based strictly on fiscal reasons)

[Dadhawk]

Originally Posted by deucethemoose

The fact of the matter is that you can't build credit without being in some sort of debt - and paying it back. 18-25 year olds NEED to build credit. What better way to do that than with an auto loan?

Actually, you don't NEED to build credit but it requires you to be willing to always pay cash. Again, its a different philosophy that has been argued on this forum dozens of time.

It's basically the religion of "Rich Dad" vs "Dave Ramsey". You aren't going to be able to convince zealots on either side to jump the fence.

[brewksy]

TDS and GDS are what you're referring to?

TDS is the total monthly cost of your House costs (Mortgage Payment + Property Taxes + Heating) added to all of your other debt costs (pretend your credit cards/lines of credit are maxed out), then divided by your GROSS (pre-tax) income. This number should not exceed 40 percent.

Your GDS is house debt only (Pmt+Prop Tax+Heat) divided by Gross Income. This number should not exceed 32 percent.

[MTeator]

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?

If it was that simple everyone would be doing it. You could gain 20%, or lose 100%. If you've never had a loss, you just haven't been doing it long enough.

The right answer depends on the person and how they deal with risk.

If I could get a consistent 20% year after year I could retire right now... wouldn't that be nice.

[pyro530]

Originally Posted by Rossman

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.

True, But you can still get a good 3-4% on the dividends for quite a few companies stocks. In this case you would be better off financing at 1.75% and using the cash for the stock ... :happy0180:

[phattyduck]

Originally Posted by pyro530

True, But you can still get a good 3-4% on the dividends for quite a few companies stocks. In this case you would be better off financing at 1.75% and using the cash for the stock ... :happy0180:

This is the more reasonable scenario in today's market.

Debt is bad, but sometimes slightly less bad than other options.

Oh, and there is no reason to think that there are no 18-25 year olds with $25k+ in the bank. All you have to do is make a decent living and save, instead of spend, your money.

-Charlie

PS. It is good this discussion hasn't gotten in to credit cards...

[4U-GSE]

I had the money to pay off my FR-S completely but didn't do it for a number of reasons:

I received a finance rate of 1.8% on a 60 month loan provided my loan was at least $9000. So I ended up financing $9000.

I can make my monthly payment with my credit card where I earn 1% cash back on all purchases. As long as I pay off my credit card bill in full each month (which I have always done) there is no additional interest or charges. The 1% cash back essentially, reduces the amount of interest I would be paying.

Now, that $9000 is available for investment. I could put that money in a 5 year CD and earn 1.5 - 1.8% interest guaranteed (but not have access to that cash for 5 years). I could put a portion of that $9000 in my IRA each year. I could let it sit in a normal bank account and earn .025% interest.

What I ended up doing was keeping that money in my brokerage account where the money was already invested in a particular stock. Between the purchase date of the FR-S and today I have already sold that stock for more than the total interest I will pay over the 60 months of my $9000 loan. So, if I don't invest that $9000 anymore, I will already be ahead of someone who paid for their car in full. In fact, the money is sitting in my brokerage account earning .04% interest while I wait for a stock I want to buy. Of course, I could take that $9000 and make a bad trade and end up losing more money than the person who paid in full. That's a risk. However, for me, having that money available for investment was more important than paying 1.8% interest on a $9000 loan because I anticipate (not a guarantee) that over the 5 year loan, I will make more money than the total interest I will pay on that loan.

There is absolutely no bright line rule for when to pay for something in full or take out a loan. Fiscal responsibility doesn't necessarily mean never being in debt. This is also coming from someone who enjoys listening to Dave Ramsey!

[ayau]

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'm going to assume you're of the older generation that don't believe on the benefits of debt.

debt is neither good or bad. it depends on how you make use of it. would you say taking on a college debt is bad? have you looked at the financial statements of large companies. (rhetorical questions)

you cannot just blame the economy on debt alone. it isn't that simple. why do you think we have phds writing about the 07/08 financial crisis? for fun?

please do your research before just making statements on the internet.

[ayau]

Originally Posted by deucethemoose

The fact of the matter is that you can't build credit without being in some sort of debt - and paying it back. 18-25 year olds NEED to build credit. What better way to do that than with an auto loan?

actually the best way to build one's credit is with an entry level credit card and paying it off each month.

[Hanakuso]

Originally Posted by ayau

i'm going to assume you're of the older generation that don't believe on the benefits of debt.

debt is neither good or bad. it depends on how you make use of it. would you say taking on a college debt is bad? have you looked at the financial statements of large companies. (rhetorical questions)

you cannot just blame the economy on debt alone. it isn't that simple. why do you think we have phds writing about the 07/08 financial crisis? for fun?

please do your research before just making statements on the internet.

IMO education debt and luxury debt like a car are 2 totally different categories. $100k debt from med school is acceptable to me while $100k car debt isn't.

Then again i'm new to all this credit stuff and i'm basically only using a credit card right now to build credit

[ayau]

Originally Posted by Hanakuso

IMO education debt and luxury debt like a car are 2 totally different categories. $100k debt from med school is acceptable to me while $100k car debt isn't.

Then again i'm new to all this credit stuff and i'm basically only using a credit card right now to build credit

you're right, but the poster was saying debt in general was bad.

if you actually think about it though, the two debts aren't that different after all.

with an educational debt, you can quantify how much your reward is with your future job's salary.

when you buy a car, your reward is 'happiness'. it is difficult to quantify this, but the concept is still the same.

everyone takes on debt in order to gain some type of 'reward'.

[MTeator]

It seems most in this thread have a plan for their money, and the various amounts of risk they're willing to take. Saving to investing to anywhere in between.

The only people that are on the bad end of things are the ones with crap credit and paying minimum payments every month on all their various lines of credit. Those are the ones that have no business taking out new debt.

[harajukukei]

Does anyone know how much insurance coverage TFS requires ?

My last car was financed through a normal bank and they required me to have full coverage, it was about $200 more per month than the minimum.

This is a huge deciding factor for me in terms of financing now or buying outright later.