Interest rates

[jmill012]

This right here.

An asset appreciates in value and/or provides a stream of cash flows.

Vehicles are almost always a liability.

Have to disagree here a little...

Depending on rates, market performance, savings, etc. a loan may be the best option. It is never wise to "always pay cash" even if you CAN.

Example, rates at/below 3% with a market that performs on average at 7% annually over 6 years... why in the world would you even pay cash?

Car $50,000
Loan interest over 6 years (3%) - $4697
Total cost - $54,697

value of $50,000 investment after 6 years with an average annual return of 7% - $75,037

GAIN BY NOT SPENDING CASH TO BUY A CAR! - $20,340

Now you can argue with me that the market won't return 7%... fine, even if it returns 3% compounded annually, you are looking at a future value of $59,702... so that loan you refuse to take cost you $5,100....

Paying cash NEVER makes sense unless the interest rate is above the average market return. Debt if used properly can be your friend. Why do you think businesses are so leveraged....

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[Heimkehr]

...and when cash flow becomes compromised, making debt service difficult or impossible, the investor working from a position of strength (hint: it's not the over-leveraged business owner) will see and likely move on the opportunity that's been presented to him. To deny this is to deny the reality that's been with us since March 2020.

Be careful when using the word "Never".

 

[jmill012]

...and when cash flow becomes compromised, making debt service difficult or impossible, the investor working from a position of strength (hint: it's not the over-leveraged business owner) will see and likely move on the opportunity that's been presented to him. To deny this is to deny the reality that's been with us since March 2020.

Be careful when using the word "Never".

If you have the $50k in cash to buy the car, how would cash flow become comprised? You have 65 car payments in the bank (ignoring market fluctuation for now). If you are suggesting other issues, like loss of job, I would much rather be in a position that has $50k in the bank as opposed to holding a depreciating asset that is now worth a fraction of what I paid for it in cash.

$50k cash gone.... lose job... holding an asset worth $40k. I now have less cash (maybe no cash) and lost $10k on my asset. So if I sell it, I don't have a car and I have less cash.

Took out a loan... have a $760 car payment... $50k in the bank while I search for another job....

Other than interest rates higher than the market is returning, I am not sure of a good reason to pay cash... but, I am open to other reasons if one can be found.

 

[JSFoster75]

Just curious,,are the ever rising interest rates causing you to have to cancel your Jeep orders?? It is getting to that point with me but will keep trying to find a better deal on those as adviced by one of our fellow Jeepers here on the forum You'd think with my 800+ credit score it wouldn't be such a hassle and I am from Sweden originally and my husband was in the Swedish Airforce which makes me a veteran spouse only not in the US... LOL so can't go thru USAA or NFCU or such that still have good rates (I think)

You can always make lenders compete at www.lendingtree.com you'll likely get a really good rate there... My local credit union is now at 3.79% for 72 months or 4.14% for 84 months. (I got 2.79% for 84 months last summer).

 

[Jeepalady17]

You can always make lenders compete at www.lendingtree.com you'll likely get a really good rate there... My local credit union is now at 3.79% for 72 months or 4.14% for 84 months. (I got 2.79% for 84 months last summer).

 

[Jeepalady17]

latest rate for my credit union is 4,99 for 60 months

 

[Xcoaste]

Depending on how much you plan to finance could dictate the rate as well. When I picked up my newest Jeep, the dealership was offering an additional 1% off if I financed. I ended up wanting to only finance $10k but they were having a hard time finding an institution that wanted to do $10k on a 36 month new car loan.

I had to do the math to make sure the 1% extra off wasn't going to be eating up in interest during the loan. I agreed to make payments for 6 months. Nothing official, but I figured in order for them to be able to keep making these kinds of offers in the future, it was best to let them get their kickback during the 6 months. I made large enough payments that the interest didn't mount up hardly at all.

Times are different now, but I would suggest on having as much done in advance as you can if you go through with the purchase.

 

[LSU_Illini]

Have to disagree here a little...

Depending on rates, market performance, savings, etc. a loan may be the best option. It is never wise to "always pay cash" even if you CAN.

Example, rates at/below 3% with a market that performs on average at 7% annually over 6 years... why in the world would you even pay cash?

Car $50,000
Loan interest over 6 years (3%) - $4697
Total cost - $54,697

value of $50,000 investment after 6 years with an average annual return of 7% - $75,037

GAIN BY NOT SPENDING CASH TO BUY A CAR! - $20,340

Now you can argue with me that the market won't return 7%... fine, even if it returns 3% compounded annually, you are looking at a future value of $59,702... so that loan you refuse to take cost you $5,100....

Paying cash NEVER makes sense unless the interest rate is above the average market return. Debt if used properly can be your friend. Why do you think businesses are so leveraged....

Question-you seem to be basing your calculations on a 50k investment over a 6 year term, but aren't you using those funds to pay down the loan at 700ish/month? Assuming that's the case, what's the delta after 6 years?

 

[jmill012]

Question-you seem to be basing your calculations on a 50k investment over a 6 year term, but aren't you using those funds to pay down the loan at 700ish/month? Assuming that's the case, what's the delta after 6 years?

Under this assumption, you don't have the cash flow to make the payments which means you shouldn't buy the car for cash or take a loan.

But to answer your question... If you had to make a $760 a month payment ($50k loan, 3%, 72 months) on the loan and were averaging a 6% return in the market compounded monthly, you would be left with $4,900 in the bank at the end of the loan. That is why I said if your rate is lower than the return in the market you take the loan. If the market returned 3%, you would be at break even at the end of the loan.

 

[jmill012]

Under this assumption, you don't have the cash flow to make the payments which means you shouldn't buy the car for cash or take a loan.

But to answer your question... If you had to make a $760 a month payment ($50k loan, 3%, 72 months) on the loan and were averaging a 6% return in the market compounded monthly, you would be left with $4,900 in the bank at the end of the loan. That is why I said if your rate is lower than the return in the market you take the loan. If the market returned 3%, you would be at break even at the end of the loan.

Which btw is why many people who are in retirement still take out loans as opposed to using their savings... a good FA would ensure your money works for you and you are maximizing your wealth.

 

[LSU_Illini]

Under this assumption, you don't have the cash flow to make the payments which means you shouldn't buy the car for cash or take a loan.

But to answer your question... If you had to make a $760 a month payment ($50k loan, 3%, 72 months) on the loan and were averaging a 6% return in the market compounded monthly, you would be left with $4,900 in the bank at the end of the loan. That is why I said if your rate is lower than the return in the market you take the loan. If the market returned 3%, you would be at break even at the end of the loan.

That's helpful, thanks

 

[JDub11]

I thought this thread was about ditching a purchase because a few interest points was the diff between being able to afford it or not. I saw nothing having enough money to pay cash. Since we're on the topic though what if you purchased the market in December of 2021. Today you lost your job. You don't have an emergency fund. That would be dumb the market is gonna pay me 7 percent why let it sit in a savings account. Now my car payment is due. My house payment is due. The electric payment is due. Oh yea the water bill is due also. My 50 g is tied up in the market. Gonna have to cash that in to make the payments. I'm pretty sure you didn't make your 7 percent. If you did make anything don't forget you have to pay the tax man first. There is more to investing then simple numbers. There I also value to know the bank isn't going to come take your house car ect no matter what happens. Your also kidding yourself if you think all these business are being ran on credit. I'm not saying there aren't any and some are successful, but the majority end up bankrupt.

 

[Chris1985]

@Jeepalady17
The Interest rates are higher but if you have good credit it's still not THAT bad.

I too am financing through the dealership for the better discount. My out the door cost is $62,000. I'm financing $59,000. My loan from Chase after dealer bumped the interest is 72 mo @ 6.79%. Now this is much higher then who I normally go with which is Navy Federal (72 mo @ 4.29%). So they are getting me for an additional 2.5% on the loan.

I plan on paying the Jeep off in 6 months. I can put 75% down on the 1st payment and I plan on paying the bulk of what's left on the 2nd payment but leave enough on the loan to complete 6 payments. If your wondering what the difference is
Between Chase (dealer) and Navy Federal (self) financing its....

6 months of payments:
Chase (dealer): $497.00 paid in interest for 6 months.

Navy Federal (self): $311.00 paid in interest for 6 months.

$186.00 difference between dealer and my own interest. I am saving more even though they are higher percentage. Now I could pay cash but then I lose $2,500 for financing with them. Small price to pay for a significant amount of money off of a very expensive vehicle. I hope this helps. As always I am not a financial expert just a personal consumer.

Last thought, if I HAD to keep financing for 72 months I would still go dealer and after 6 payments refi with Navy Federal. This is also a good option to get the most discount on your vehicle. Keep in mind that if I couldn't put the amount of money down that I am; it would cost $1,946.00 in interest over 6 months.

 

[UniqueUserName]

For those wondering, i just picked up my Rubi today and got a 6.34 rate with a 785 score. Absolutely terrible but i will seek to refinance after the 3 required months or just pay it off in 2 years.

by end of october they will likely be in the 7+ range

Make sure that 3 months is actually in the finance contract that you signed. In all likelihood that's the window in which the finance agent who sold you the high interest loan locks in his/her commission. If it's not in the contract you signed, it doesn't exist and you can refi at will. Rates are only headed one-way in the meantime.

You should look out for your own best financial interest, I promise that the dealer finance agent was looking out for someone other than you...

 

[UniqueUserName]

Under this assumption, you don't have the cash flow to make the payments which means you shouldn't buy the car for cash or take a loan.

But to answer your question... If you had to make a $760 a month payment ($50k loan, 3%, 72 months) on the loan and were averaging a 6% return in the market compounded monthly, you would be left with $4,900 in the bank at the end of the loan. That is why I said if your rate is lower than the return in the market you take the loan. If the market returned 3%, you would be at break even at the end of the loan.

You're forgetting to include the return produced by reinvesting the P&I that you won't be paying each month on the loan. If I'm going to leverage debt, it's going to be on an appreciating asset, not compounding a depreciating asset/liability.

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