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chan | Buy car with or without loan? |
Bare with me here, assuming:
-I have 10k in my savings account.
-I want to buy a car worth 10k.
-I can take out a car loan worth 10k and pay 7 percent interest per year.
-I can invest my 10k savings and make that same 7 percent per year.
-Assuming everything else equal and no drastic changes in my life for the 5 years of the loan.
-Assuming I can control my spending and never touch this 10k investments for the 5 year period.
Would it be better to buy the car without the loan and just use my savings or to take the loan and use my savings to invest making me 7 percent per year (same as loan). Is my understanding correct to assume I will get a "free" car after 5 years assuming my loan rate and investment rate stays the same each month for 5 years.
What should I do? Buy the car with my 10k in savings or take out a loan? |
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Robdog
 |
I would buy the car out right with the 10k you have. Then use the money you would have used to make the car payment with and invest it on a monthly basis. You aren't going to get a free car if you just invest the 10k. Assuming you make 7% each year, you should end up with about 14k at the end of the 5 year period. If you buy the car out right you avoid paying the interest and with investing the "car payment" you would have had, you will end up ahead in the long run. |
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gatzap
|
Good points made so far. Don't forget to factor in your tax rate on interest earned, the inflation when you have to replace the car, and the fact that cars are simply depreciating assets that come with added expenses such as fuel and insurance that vary for each car . |
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bettyboopgirl
|
I would take out the loan, because if an emergency arises you will need money to repair or whatever comes up.
And just pay more monthly to the loan as you can spare for each payment. For instance our car loan is $189 monthly but my husband and I put $100 each monthly so that knocks $200 off the principal. Always state the extra amount towards the principal. It will reduce you loan faster than the term of the loan. Remember you need money for the car insurance too. that is why you shouldn't put all your savings in one basket.
Hope I was helpful. |
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zyberianwarrior
|
A car cash sale of 10k (or more 10k is the cutoff) is reported directly to the IRS and better have one helluva good reason and well explained in how you got that much money for doing this. |
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needabuck
 |
While I agree with the other poster to use the 10k to buy the car with cash. My suggestion would be to buy a $4-5k car, keep $5-6k in savings. Drive the $5k car for a few years, build up your savings again, then you can sell your $5k for $5k, and add the new $5k from savings and get the $10k car and still have $5k in savings plus your 10k car. This way you avoid debt, don't have a car that is going to depreciate (the beauty of beater cars). Then drive the 10k car until it dies, and continue to save and invest. I would stay away from the debt though! Cash is King!
"Live Like no one else, so one day you can Live Like no one else" -Dave Ramsey.
Best of Luck |
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muncie birder
 |
No. The car will not be free. At the end of 7 years, assuming the car is 5 years old when you buy it, it will be worth next to nothing in 7 years.
Now for investing verses outright purchase. There are a couple of things that you might not have considered. First you may not make 7% annually. You may make more or you may make less. Second, the type of investment may mean more to your return than you might imagine. If you were to invest in bonds paying 7% for example, your after tax return would be much less, maybe only 5% not considering inflation.
If however you were to invest in a growth stock expected to growth 7% annually, and do not sell the stock during the 5 years, then your total return would be 40.2% with a very low capital gains tax rate when you do decide to sell.
Unfortunately, there is not tax advantage to the interest on the car loan.
Now there is another consideration. If you pay cash for the car and then take the money that you would have used to make the monthly payment and instead invested it, then you do not have the interest on the car loan to worry about. If you invested the monthly amount in a good mutual fund, you might do very well indeed. |
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Showbizzz
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Never finance a depreciating asset if you can help it. You'll end up leveraging your negative return by adding an interest expense to it.
Don't blow the wad on a car either. If you can afford the payment, you should invest it like the other guy said.
Watch the rich---they never ever finance anything that goes down in value.
simple rule, hard to live by. |
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