That’s fine if that’s what you want to do, but when car loans are less than 2% and bank interest rates can be 3-4%, you can literally make money by taking out a loan.
On top of that, if you are in an industry that gives regular raises, having a 5 year loan means you’re paying less of your paycheck every year towards the car.
Obviously most people aren’t thinking this far ahead, but even if you have the cash, sometimes it actually makes sense to take out a loan.
Obviously most people aren’t thinking this far ahead, but even if you have the cash, sometimes it actually makes sense to take out a loan.
Here’s where the “makes sense” becomes subjective. If your definition is absolute most cash value extracted, then yes.
However there’s a certain mental cost that you don’t escape by having to make sure you don’t get screwed on the initial loan terms, have the cash for the pay the installments, make sure the payments get to the lender, follow up on any customer services issues that occur over the life of the loan, navigate any life events which can restrict or restrain your cash flow being able to make payments (like layoff or illness), possibly liquidate holdings to free up cash to make the payment, keep track of the cash you would have spent on the car in an external account earning the best return you can get (with varying interest rates or market conditions).
…or you can pay for the car outright one time, and never think about those things again for that car possible for a decade or more. Today’s life is filled with many such mental burdens. The value in being able to simply never have this worry is very underrated in my opinion. This is one component to approach a care-free lifestyle while still maintaining your responsibilities and freedoms.
You are 100% correct, EXCEPT for the emergency cash flow thing is backwards.
Let’s say you have $20,000 for a car. If you put that whole $20,000 to buy a car, and an emergency comes up where you need $5,000, it will be much harder to get a loan to pay for that on the same terms as a car loan.
On the other hand, if you put $2,000 towards the car and borrow $18,000 at 3% for 5 years, that’s $325 a month, give or take depends on fees. Now you still have $18,000 free for emergencies, and you’re theoretically still making money at your job, so you can keep building that neat egg with interest. If that same $5,000 emergency comes up, you still have $13,000, which is more than 3 years of payments to cover the rest of that $5,000.
Obviously emotions come into it. Obviously some folks can’t just leave that $18,000 in the bank. But there are real tangible benefits to just taking out a loan.
You are 100% correct, EXCEPT for the emergency cash flow thing is backwards. Let’s say you have $20,000 for a car. If you put that whole $20,000 to buy a car, and an emergency comes up where you need $5,000, it will be much harder to get a loan to pay for that on the same terms as a car loan.
What you’re describing there to me is an anti-pattern. If you have to spend $20k to buy a car and you blow through your entire emergency fund to do it bringing your emergency fund to $0, you’ve already made a mistake. To use your numbers, if you have $20k and you need a car. You buy a $15k car. You have a fully paid off car, and an extra $5k in the bank for emergencies. Further, I still make a car payment, but to myself, every month that goes into savings to buy the next car outright. Its easy to do because I don’t have a real car payment to a bank. If money is ever tight, I can choose to not make my “car payment” to myself giving me more flexibility, liquidity, and less overall worry. A year after this purchase and even after the $5k emergency, I have $3900 positive in savings from my “car payment to myself” and still have a paid off car.
On the other hand, if you put $2,000 towards the car and borrow $18,000 at 3% for 5 years, that’s $325 a month, give or take depends on fees. Now you still have $18,000 free for emergencies, and you’re theoretically still making money at your job, so you can keep building that neat egg with interest.
Continue to play that out with a more likely bad case scenario. You start with $18k in the bank, and you’ve now leveraged your emergency fund to also cover car. You have your theoretical $5k emergency dip into it leaving you with $13k in the bank. A year later, you lose your job. Your car payment is still due, you have the remainder of the real car payments to make at $325/month to the bank. So now you’re drawing down your savings (and the money you would have paid off the car with) just to live on. You can try to sell the car, but its depreciated and you’re not going to get even enough money to pay off the bank note. You took on the worry of this and this risk everyday for five years to try to make about a measly ~$1k profit.
I’m not saying this is exactly how its going to happen, but in your scenario the possibility exists for this. In my “buy the car outright” it doesn’t. How often in life does everything go perfectly for you? My experience says, not often.
That’s fine if that’s what you want to do, but when car loans are less than 2% and bank interest rates can be 3-4%, you can literally make money by taking out a loan.
On top of that, if you are in an industry that gives regular raises, having a 5 year loan means you’re paying less of your paycheck every year towards the car.
Obviously most people aren’t thinking this far ahead, but even if you have the cash, sometimes it actually makes sense to take out a loan.
Here’s where the “makes sense” becomes subjective. If your definition is absolute most cash value extracted, then yes.
However there’s a certain mental cost that you don’t escape by having to make sure you don’t get screwed on the initial loan terms, have the cash for the pay the installments, make sure the payments get to the lender, follow up on any customer services issues that occur over the life of the loan, navigate any life events which can restrict or restrain your cash flow being able to make payments (like layoff or illness), possibly liquidate holdings to free up cash to make the payment, keep track of the cash you would have spent on the car in an external account earning the best return you can get (with varying interest rates or market conditions).
…or you can pay for the car outright one time, and never think about those things again for that car possible for a decade or more. Today’s life is filled with many such mental burdens. The value in being able to simply never have this worry is very underrated in my opinion. This is one component to approach a care-free lifestyle while still maintaining your responsibilities and freedoms.
You are 100% correct, EXCEPT for the emergency cash flow thing is backwards.
Let’s say you have $20,000 for a car. If you put that whole $20,000 to buy a car, and an emergency comes up where you need $5,000, it will be much harder to get a loan to pay for that on the same terms as a car loan.
On the other hand, if you put $2,000 towards the car and borrow $18,000 at 3% for 5 years, that’s $325 a month, give or take depends on fees. Now you still have $18,000 free for emergencies, and you’re theoretically still making money at your job, so you can keep building that neat egg with interest. If that same $5,000 emergency comes up, you still have $13,000, which is more than 3 years of payments to cover the rest of that $5,000.
Obviously emotions come into it. Obviously some folks can’t just leave that $18,000 in the bank. But there are real tangible benefits to just taking out a loan.
What you’re describing there to me is an anti-pattern. If you have to spend $20k to buy a car and you blow through your entire emergency fund to do it bringing your emergency fund to $0, you’ve already made a mistake. To use your numbers, if you have $20k and you need a car. You buy a $15k car. You have a fully paid off car, and an extra $5k in the bank for emergencies. Further, I still make a car payment, but to myself, every month that goes into savings to buy the next car outright. Its easy to do because I don’t have a real car payment to a bank. If money is ever tight, I can choose to not make my “car payment” to myself giving me more flexibility, liquidity, and less overall worry. A year after this purchase and even after the $5k emergency, I have $3900 positive in savings from my “car payment to myself” and still have a paid off car.
Continue to play that out with a more likely bad case scenario. You start with $18k in the bank, and you’ve now leveraged your emergency fund to also cover car. You have your theoretical $5k emergency dip into it leaving you with $13k in the bank. A year later, you lose your job. Your car payment is still due, you have the remainder of the real car payments to make at $325/month to the bank. So now you’re drawing down your savings (and the money you would have paid off the car with) just to live on. You can try to sell the car, but its depreciated and you’re not going to get even enough money to pay off the bank note. You took on the worry of this and this risk everyday for five years to try to make about a measly ~$1k profit.
I’m not saying this is exactly how its going to happen, but in your scenario the possibility exists for this. In my “buy the car outright” it doesn’t. How often in life does everything go perfectly for you? My experience says, not often.