# Paying cash vs. taking out a loan **URL:** \ **Category:** In My Humble Opinion\ **Created:** [July 23, 2017, 12:08pm UTC](https://boards.straightdope.com/t/paying-cash-vs-taking-out-a-loan/791930 "2017-07-23T12:08:49Z")\ **Posts on this page:** 20\ **Page:** 2
**Author:** ![Ruken](https://avatars.discourse-cdn.com/v4/letter/r/f475e1/32.png) [@Ruken](https://boards.straightdope.com/u/Ruken)\ **Post date:** [July 24, 2017, 1:25pm UTC](https://boards.straightdope.com/t/paying-cash-vs-taking-out-a-loan/791930/21 "2017-07-24T13:25:03Z")
> [@RealityChuck](#): > > Much as I hate to dip into savings, that’s what it’s there for, **and it always costs less.** Certainly not always, unless your personal discount rate is unusual. ---
**Author:** ![Anny\_Middon](https://avatars.discourse-cdn.com/v4/letter/a/bc79bd/32.png) [@Anny\_Middon](https://boards.straightdope.com/u/Anny_Middon)\ **Post date:** [July 24, 2017, 1:25pm UTC](https://boards.straightdope.com/t/paying-cash-vs-taking-out-a-loan/791930/22 "2017-07-24T13:25:06Z")
> [@campp](#): > > You have to run ALL the numbers to see what works for your situation. I paid my house off quite early because we: 1) Had plenty of available cash beyond the payoff, and 2) The tax incentive was lower than the Fed standard deduction. So in my case, why service a 5% debt? Paying that off is akin to making 5% on the money. > > We are retired, and pretty much purchase for cash now. Recently we bought new phones, and instead of paying them off $10 per month or whatever, I just paid them off. Why? I can’t stand owing anyone anything. > > YMMV, and good luck! Yes, you do need to run all the numbers. We paid off our mortgage almost 25 years ago. Our interest rate was 9.75% (and we had already refinanced once from the original rate of 13.5% – which was considered such a great rate in 1982 that we bragged about it to just about everyone). Our choice was to refi again or to just pay it off. I ran the numbers every way to Sunday and it seemed to make the most sense to pay it off. OTOH, figuring into our decision was that I had recently gone into business for myself, meaning our income wasn’t as steady as it had been. It was a great relief to not have to worry about paying the mortgage each month. At about the same time, we began tracking our expenses. We still do that. When our new financial advisers asked how much money we thought we’d need in retirement, we were able to give them a very good estimate. In our lifetimes, we’ve had only 2 car loans. One was for the only car we’ve ever bought new, and we didn’t pay it off early. The other we paid off after 2 months – we took the loan only because we wanted to buy the car then and the money we were going to use for the purchase was in a CD that didn’t mature for another couple of months. We charge almost all of our expenditures, but we pay all our cards off in full each month. Our biggest single expense right now is our real estate tax, which is approaching $10,000 for the year. My husband is planning on retiring this year and we’ll go on COBRA so our health premiums will then be our biggest expense – about $18,000 for a year of a high-deductible plan. We have been very fortunate in very many ways, financially being one of them. ---
**Author:** ![FairyChatMom](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/fairychatmom/32/21906_2.png) [@FairyChatMom](https://boards.straightdope.com/u/FairyChatMom)\ **Post date:** [July 24, 2017, 1:58pm UTC](https://boards.straightdope.com/t/paying-cash-vs-taking-out-a-loan/791930/23 "2017-07-24T13:58:43Z")
Risk-averse - I think that sums us up nicely. Early in our careers, we opted for the riskier, high-return funds for our 401k/TSP funds. Now, we’ve much more conservative because we haven’t got enough time to recuperate what we could lose. Theoretically, of course. ---
**Author:** ![DSeid](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/dseid/32/20194_2.png) [@DSeid](https://boards.straightdope.com/u/DSeid)\ **Post date:** [July 24, 2017, 2:38pm UTC](https://boards.straightdope.com/t/paying-cash-vs-taking-out-a-loan/791930/24 "2017-07-24T14:38:00Z")
Another voice to say that it depends not only on the numbers but on your income relative to your baseline expenses, your income security, what you anticipate as your probable future needs on what time scale, and your risk tolerance. Related to all is _stage of life_: a young adult hypothetical person may benefit from making car loan payments to build their credit history for example. “Savings” in this case seems to be liquid savings? Is the hypothetical individual appropriately funded in the retirement accounts (appreciating the current much longer life expectancy than in past years), IRAs and/or otherwise? Do they have kids and are funding 529s? And is the liquid buffer enough _relative to_ their expenses? Barring some other specific circumstance advantage I’d avoid a car loan and buy a car I can afford to buy outright, possibly having saved for it as **FairyChatMom** has (putting “payments” aside ahead of time). ---
**Author:** ![Pabitel](https://avatars.discourse-cdn.com/v4/letter/p/bbce88/32.png) [@Pabitel](https://boards.straightdope.com/u/Pabitel)\ **Post date:** [July 24, 2017, 2:49pm UTC](https://boards.straightdope.com/t/paying-cash-vs-taking-out-a-loan/791930/25 "2017-07-24T14:49:24Z")
> [@FairyChatMom](#): > > Scenario #1 - you want to buy a car that costs $25K. You have $50K in savings, so it’s doable in cash, and you won’t leave yourself without reserves. Pay cash. You will almost certainly get a better deal on the car on a cash basis. This also removes future monthly obligation due to one less payments to make. Also the car will end up costing much less because you pay no interest, just the real cost of the car. > [@](#): > > Scenario #2 - you want to buy the $25K car but you only have $30K in savings. As long as I can make my bills, the same as above. > [@](#): > > Scenario #3 - you have no savings and you inherit $30K and you want to buy the $25K car. Same as above. The source of the money doesn’t matter. > [@](#): > > Scenario #4 - you have 3 months of living expenses in savings and you inherit enough to pay off your mortgage - do you pay it off or invest/save the money? What if you were living paycheck-to-paycheck, but by paying off the mortgage, you effectively get a “raise” in the amount of your monthly mortgage payment? Pay off the mortgage. This will have far better returns than any investment as you will be spared all future interest. Paying down/off a mortgage is probably the best investment you can make. > [@](#): > > Do you have a rule of thumb about when to pay and when to go into debt? What points do you consider when making the decision? In the long-term view, do you factor in possible inheritances or the sale of current assets? Always remove debt ASAP. Paying down debt is the best investment you can make. Paying just a small amount extra on your mortgage can save thousands or even tens of thousands over the life of the loan. Paying off any loan ahead of time will be a greater return on investment than any actual investment. ---
**Author:** ![Quercus](https://avatars.discourse-cdn.com/v4/letter/q/7ab992/32.png) [@Quercus](https://boards.straightdope.com/u/Quercus)\ **Post date:** [July 24, 2017, 4:31pm UTC](https://boards.straightdope.com/t/paying-cash-vs-taking-out-a-loan/791930/26 "2017-07-24T16:31:40Z")
> [@LSLGuy](#): > > Back to the OP’s car examples I say thisThis. > > It happens I just bought a car last month. And checked with my finance guy on the “pay cash or finance?” question. I told him my car loan APR was 2.99%. He said I’d be an idiot to pay cash. Why? What kind of alternative investment does he have for you right now that’s 100% safe and pays better than 3%? ---
**Author:** ![RickJay](https://avatars.discourse-cdn.com/v4/letter/r/bb73d2/32.png) [@RickJay](https://boards.straightdope.com/u/RickJay)\ **Post date:** [July 24, 2017, 4:54pm UTC](https://boards.straightdope.com/t/paying-cash-vs-taking-out-a-loan/791930/27 "2017-07-24T16:54:07Z")
The last car I bought new had zero percent interest. I borrowed every penny. Why on earth would I pay up front? Most new car loans aren’t 0 percent, but they can be VERY cheap - 0.9 percent, 1.9 percent. At such rates, paying cash could be basically the equivalent of giving interest to the car dealership. If I had $25,000 lying around I could secure $10,000 in tax refunds just by putting it into an RRSP, and I’m sure most Americans could do the same with their 401(k.) I don’t want to give $25,000 to Hyundai\*\* if I can realize a better return than the interest rate\*\* with my cash. ---
**Author:** ![Broomstick](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/broomstick/32/246_2.png) [@Broomstick](https://boards.straightdope.com/u/Broomstick)\ **Post date:** [July 24, 2017, 5:12pm UTC](https://boards.straightdope.com/t/paying-cash-vs-taking-out-a-loan/791930/28 "2017-07-24T17:12:15Z")
> [@FairyChatMom](#): > > Scenario #1 - you want to buy a car that costs $25K. You have $50K in savings, so it’s doable in cash, and you won’t leave yourself without reserves. I would probably pay cash for the car, because I like truly owning my vehicles. Also, I can drop the insurance to _just_ liability, thereby saving myself significant money each year (I have a very good driving history, with exactly 1 accident in that entire span, and for years I’ve been paying up front for repairs so that has worked out for me) Plan B: put a lot down to get a smaller monthly payment, and when doable double-up on monthly payments to pay it off sooner. > [@](#): > > Scenario #2 - you want to buy the $25K car but you only have $30K in savings. Put a bunch down and opt for smaller monthly payments, and double-up on the payments when possible. > [@](#): > > Scenario #3 - you have no savings and you inherit $30K and you want to buy the $25K car. Put a bunch down and opt for smaller monthly payments, and double-up on the payments when possible. > [@](#): > > Scenario #4 - you have 3 months of living expenses in savings and you inherit enough to pay off your mortgage - do you pay it off or invest/save the money? What if you were living paycheck-to-paycheck, but by paying off the mortgage, you effectively get a “raise” in the amount of your monthly mortgage payment? _For me personally_ in both instances I pay off the mortgage. I can always invest what would otherwise be the mortgage payment, or build up my emergency cushion. Yes, yes, I realize that I could potentially do much better investing the money and carrying the mortgage BUT _I know I’m not a particularly savvy investor_ and could easily blow it. Nor do I have the resources to hire a financial adviser to help me. At least with the mortgage paid off I have a place to live that I own free and clear, the annual taxes should be lower than the mortgage payment, and I could re-mortgage the house if an emergency can up and I needed the money. I am trying to educate myself on investing so I can make better choices - ask me again in 10 years my answer might be different. > [@](#): > > Do you have a rule of thumb about when to pay and when to go into debt? What points do you consider when making the decision? In the long-term view, do you factor in possible inheritances or the sale of current assets? I do not factor in inheritances because I have damn few relatives left alive and don’t expect any of them to leave me money. Frankly, I was pleasantly shocked that there was anything left in my dad’s bank accounts when he died. I will take on debt to: 1. Purchase a residence (although I have never done so, as I have never been in a situation where I bought a home) [multi-year loan, 10+ years] 2. Education [multi-year loan, up to 10 years] 3. A vehicle [multi-year loan, 5 or less] 4. Durable goods - something that will last considerably longer than it takes to pay off the debt. [one year or less] 5. Repair of a vehicle, business trip, medical co-pay, or similar largish expense (4 months or less) Whenever possible I will pay up front without loan because I’d rather put money in savings than pay interest. I recently made an exception for several expenses (mostly but not entirely vehicle repairs) totaling $1200 which I’ve paid over two months because I know I should use my credit card at least once a year to keep my credit rating healthy. However, now that I have a comfortable nest egg (10 months living expenses in the bank) I am seeking a way to make a small investment of $2-5k over the short term. (Yes, suggestions are welcome). > [@glee](#): > > If you buy a car, its value will depreciate. > If you buy a house, it will increase in value. After I bought my Toyota Echo for $14k I have several serious offers for $20k 3-5 years after I rolled it off the lot. A month ago I had an asshat who was really badgering me to sell him my car, to the point I told him that if it turned up missing his would be the first name I gave to the police as a suspect. Also, there is a value in having a paid for and reliable car that goes beyond its blue book value, especially for someone with a low income. As recent history shows, no, your house will not _always_ increase in value, as shown by many upside-down mortgages and houses located in depressed neighborhoods. So while your statements are generally true there are exceptions. I certainly didn’t expect my Echo to retain its value to the extent it did. And people I know underwater with their homes certainly didn’t expect that, either. > [@](#): > > If you borrow money from a bank, you will pay less interest than borrowing on a credit card. Generally yes - IF you can get a bank to give you a loan. You can always get money from your credit card (assuming you haven’t already reached your limit) without having to justify it. A bank makes you explain yourself in detail and can still say “no”. > [@](#): > > If you can afford to wait for your purchase and save up, you pay no interest. Yes, but some purchases may be too great for you to pay up front. Also, what you do with the money you’d otherwise pay in interest is also important. If you put it into savings or investments that’s one thing, spending it on hookers and blow maybe not so smart. I’ll also point out that at my income level a “mortgage deduction on Federal income tax” means little because I’m not paying a significant amount in Federal income tax anyway. Also, in my state, renters are allowed to take a deduction on their state income tax for renting costs so renting is not as much a disadvantage tax-wise than owning. ---
**Author:** ![Chronos](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/chronos/32/134_2.png) [@Chronos](https://boards.straightdope.com/u/Chronos)\ **Post date:** [July 24, 2017, 5:45pm UTC](https://boards.straightdope.com/t/paying-cash-vs-taking-out-a-loan/791930/29 "2017-07-24T17:45:30Z")
Yes, the stock market (or any other given investment) _might_ beat the rate on your mortgage. But consider: The bank is choosing to give you a mortgage at that rate. They don’t have to do that. The bank could instead invest the money in the stock market, too. And they have a much larger bankroll than you, and so can afford more risk (especially short-term risk), and if there’s such a thing as people better at picking the stocks, they’re working for the bank, and they also pay lower transaction costs for their investments, because they’re buying in bulk. And yet, despite all of that, they still consider offering you that mortgage a worthwhile investment. Do you think you know something that the bank doesn’t know? On another note, it’s true that a home is a good investment, but that’s not just based on the assumption that you’ll be able to sell it for more than you bought it for. Maybe you will, maybe you won’t, but in the meantime, you’ll have a roof over your head for all of the years that you own it, and that’s certainly worth something. Or, if you bought a house and aren’t actually living in it yourself, then you’re getting rent in from it while you own it, and that’s worth something, too. ---
**Author:** ![Corry\_El](https://avatars.discourse-cdn.com/v4/letter/c/ecae2f/32.png) [@Corry\_El](https://boards.straightdope.com/u/Corry_El)\ **Post date:** [July 24, 2017, 5:46pm UTC](https://boards.straightdope.com/t/paying-cash-vs-taking-out-a-loan/791930/30 "2017-07-24T17:46:29Z")
> [@RickJay](#): > > The last car I bought new had zero percent interest. I borrowed every penny. Why on earth would I pay up front? > > Most new car loans aren’t 0 percent, but they can be VERY cheap - 0.9 percent, 1.9 percent. There is a rate where that’s true, but it tends to be closer to zero than some people estimate. As Quercus said, the baseline question is what safe investment, and of the same term it’s important to add, delivers a higher return after tax than the car loan interest. At zero % it’s just about any non-zero return investment, obviously. At 1.99% it’s a lot less obvious. Say the car loan is nominally 5yrs. That means average life between 2.5 and 3 yrs (close to 2.5 if the rate is close to zero). The best published rate right now on an FDIC insured 3yr CD is 2.17% but that’s state and federal taxable, car loan isn’t deductible. Assuming 25% tax rate the CD is 1.62% after tax. So .99 and zero are arbitrages against where you can put the money to work risklessly, or at least basically so\*. 1.99% is not, though it still sounds low. [https://www.depositaccounts.com/cd/3-year-cd-rates.html](https://www.depositaccounts.com/cd/3-year-cd-rates.html) Of course if one _assumes_ a higher return on a risky asset, it’s whatever they assume and could be higher than 1.99%, 2.99% or higher still. But that’s not free money, and requires one to answer why they aren’t just taking more risk right now with more (stock, say) investment, including why they aren’t using another form of borrowing to leverage their stock position already if they don’t happen to be buying a car or house. For example taking a long position in equity index futures rather than actually buying stocks in the index, was equivalent to buying stocks and borrowing, as of the middle of last month, at 1.64% (first link) subject to constant variation though. Borrowing outright with stocks as collateral, a so called margin loan, is around 2.66% minimum right now (second link). People don’t typically view the existence of the futures or of margin loans as a font of free money (nor should they in either case) but will sometimes view consumer borrowing rates as high or higher as if they are, for some reason. But again at actually zero, or a rate that’s really is lower than you can borrow using futures or margin, then it’s arguably money machine, though a pretty small one at the size of a car loan, maybe couple-few $100 over the life, then back to whether one could squeeze that much more out of the deal without the loan. > **[Equity Quarterly Roll Analyzer - CME Group](https://www.cmegroup.com/trading/equity-index/paceofroll/main.html)** > > A customizable equity analyzer tool for quarterly roll strategies. > **[Interest Rates | Interactive Brokers LLC](https://www.interactivebrokers.com/en/accounts/fees/pricing-interest-rates.php)** > > With an Interactive Brokers account you'll earn market rate interest on your instantly available cash balances. \*whether the price would really be the same with/without loan, and separately you have to carry more insurance on a car with a loan than some people would want to otherwise, especially later in the life of the loan. ---
**Author:** ![Ruken](https://avatars.discourse-cdn.com/v4/letter/r/f475e1/32.png) [@Ruken](https://boards.straightdope.com/u/Ruken)\ **Post date:** [July 24, 2017, 6:04pm UTC](https://boards.straightdope.com/t/paying-cash-vs-taking-out-a-loan/791930/31 "2017-07-24T18:04:13Z")
> [@Chronos](#): > > Yes, the stock market (or any other given investment) _might_ beat the rate on your mortgage. But consider: The bank is choosing to give you a mortgage at that rate. They don’t have to do that. The bank could instead invest the money in the stock market, too. And they have a much larger bankroll than you, and so can afford more risk (especially short-term risk), and if there’s such a thing as people better at picking the stocks, they’re working for the bank, and they also pay lower transaction costs for their investments, because they’re buying in bulk. And yet, despite all of that, they still consider offering you that mortgage a worthwhile investment. Do you think you know something that the bank doesn’t know? I know that I am not highly leveraged and subject to FDIC and FRB rules. So no, they couldn’t just plow all that mortgage money into the stock market. ---
**Author:** ![RealityChuck](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/realitychuck/32/195_2.png) [@RealityChuck](https://boards.straightdope.com/u/RealityChuck)\ **Post date:** [July 24, 2017, 6:40pm UTC](https://boards.straightdope.com/t/paying-cash-vs-taking-out-a-loan/791930/32 "2017-07-24T18:40:13Z")
> [@Ruken](#): > > Certainly not always, unless your personal discount rate is unusual. You’re not paying interest on a loan and the amount of interest you’re earning these days is minimal (and interest rates are always far lower than loan rates). If you have the money, it’s always best to avoid taking out a loan. ---
**Author:** ![Ruken](https://avatars.discourse-cdn.com/v4/letter/r/f475e1/32.png) [@Ruken](https://boards.straightdope.com/u/Ruken)\ **Post date:** [July 24, 2017, 6:49pm UTC](https://boards.straightdope.com/t/paying-cash-vs-taking-out-a-loan/791930/33 "2017-07-24T18:49:32Z")
> [@RealityChuck](#): > > You’re not paying interest on a loan and the amount of interest you’re earning these days is minimal (and interest rates are always far lower than loan rates). If you have the money, it’s always best to avoid taking out a loan. I’m not using money I won’t need for decades to earn _interest_. ---
**Author:** ![rbroome](https://avatars.discourse-cdn.com/v4/letter/r/838e76/32.png) [@rbroome](https://boards.straightdope.com/u/rbroome)\ **Post date:** [July 24, 2017, 7:35pm UTC](https://boards.straightdope.com/t/paying-cash-vs-taking-out-a-loan/791930/34 "2017-07-24T19:35:09Z")
In today’s low interest rate environment, I almost always choose to borrow rather than pay cash. It is a matter of paying for convenience. If I pay in cash and later need cash for something-say a medical problem or an accident or even a vacation-then my options have been restricted by not having a large cash reserve. The cost of the loan is simply the cost of the flexibility I retain by keeping my cash reserve. With today’s low interest rates, that cost is quite low. Being in debt doesn’t bother me-only not being sure I can pay off my debts would bother me. Since the OP is assuming the debt is equal to or less than my cash reserves, I know I will be able to pay it off if I need to so I don’t have a problem with the debt. It is all about the cost. Increase the cost and my conclusion will change. ---
**Author:** ![FoieGrasIsEvil](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/foiegrasisevil/32/16638_2.png) [@FoieGrasIsEvil](https://boards.straightdope.com/u/FoieGrasIsEvil)\ **Post date:** [July 24, 2017, 8:12pm UTC](https://boards.straightdope.com/t/paying-cash-vs-taking-out-a-loan/791930/35 "2017-07-24T20:12:39Z")
> [@PunditLisa](#): > > Investment models normally indicate that a realist LONG-TERM return on a well-balanced portfolio is 6-8%, but, yes, of course future returns are never guaranteed. > > However, note that I said that if you’re not exceeding 3.875% RIGHT NOW, you should get a new advisor, because the stock market has been soaring since Trump took office. (S&P is up 9% and NASDAQ is up 15%.) > > That being said, while most people are in “protection” mode in their 60s, it’s hard to know what’s good advice for people who have very little retirement savings because they’ve missed 3 decades of growth. Invest now and you may experience a bubble and have no time to recover. Stick it in your mattress and you may miss a really good rally (that doesn’t seem to be shaking loose, even though the press is really skewering Trump.) Or you could blow it all on a Cincinnati fine dining extravaganza, hitting Boca, Sotto, Jean Robert’s Table, Orchids At Palm Court, Salazar’s, The Palace, Primavista, etc etc. 🙂 ---
**Author:** ![LSLGuy](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/lslguy/32/5813_2.png) [@LSLGuy](https://boards.straightdope.com/u/LSLGuy)\ **Post date:** [July 24, 2017, 8:47pm UTC](https://boards.straightdope.com/t/paying-cash-vs-taking-out-a-loan/791930/36 "2017-07-24T20:47:41Z")
> [@Ruken](#): > > Not if your state taxes are high enough. There are plenty of renters in DC itemizing off of income tax alone. What is this “state income taxes” of which you speak? 😃 I keed. I keed! I paid 'em to a fairly low-tax state for 20-some years. Yeah, one or more high earners can get themselves right into itemizing territory in the heaviest taxing states… ---
**Author:** ![pullin](https://avatars.discourse-cdn.com/v4/letter/p/c57346/32.png) [@pullin](https://boards.straightdope.com/u/pullin)\ **Post date:** [July 25, 2017, 9:50am UTC](https://boards.straightdope.com/t/paying-cash-vs-taking-out-a-loan/791930/37 "2017-07-25T09:50:03Z")
Almost every aspect of the cash vs loan question has been covered in this thread, but I’d like to offer another viewpoint. The decision should also include the utility and necessity of the purchased object. To the extent possible, we prefer to borrow only for luxuries, and to pay off (or pay cash for) necessities. Our house and our cars are owned outright. But we have a loan for our RV. If a serious (economic) black-swan event happens, the bank has a used RV, and I have a place to live and transportation. This doesn’t always line up with squeezing the maximum percentage out of money and investments, but sometimes security is worth losing a percent or so. Ymmv of course. ---
**Author:** ![Corry\_El](https://avatars.discourse-cdn.com/v4/letter/c/ecae2f/32.png) [@Corry\_El](https://boards.straightdope.com/u/Corry_El)\ **Post date:** [July 25, 2017, 2:06pm UTC](https://boards.straightdope.com/t/paying-cash-vs-taking-out-a-loan/791930/38 "2017-07-25T14:06:59Z")
> [@Ruken](#): > > I know that I am not highly leveraged and subject to FDIC and FRB rules. So no, they couldn’t just plow all that mortgage money into the stock market. That’s true but it actually reinforces the point about why it’s not some kind of perpetual motion machine that consumers can borrow at less than 4% but ‘everybody knows’ stocks earn more than that. The reason regulators strictly limit banks issuing deposits (at way below 4%) and then investing the money in the stock market, rather than much safer but lower yielding assets like mortgages, is that it isn’t certain that will pay off. Of course the risk depends how much leverage. Even safe banks are highly leveraged compared to what most individuals would ever consider. And as already mentioned, individuals borrowing money long term with a mortgage to invest any of it in long term relatively safe bonds almost never works. It’s usually an outright mistake, rather than difference in preference or opinion, to not pay down a mortgage if you’re going to put that extra money in safe bonds (assuming you otherwise already have enough emergency reserves). Banks borrow generally shorter term to fund assets which are longer term, taking the additional risk of being able to roll over the borrowings. That’s besides banks being safer and more transparent credits than individuals for a given level of leverage, and that individuals don’t have ‘deposit insurance’ to protect any of their creditors either. ---
**Author:** ![Mama\_Zappa](https://avatars.discourse-cdn.com/v4/letter/m/71e660/32.png) [@Mama\_Zappa](https://boards.straightdope.com/u/Mama_Zappa)\ **Post date:** [July 28, 2017, 2:34am UTC](https://boards.straightdope.com/t/paying-cash-vs-taking-out-a-loan/791930/40 "2017-07-28T02:34:04Z")
> [@LSLGuy](#): > > … > Clearly the OP’s hypothetical couple talking about buying a car equal to 80% of their net worth are doing it wrong. As I would be if I bought a car equal to 80% of my net worth. > … I didn’t quite read it as “80% of their net worth” - it’s not clear whether the person in question has other assets for example. Assuming you’ve got all your other finances sorted out and you’re not living from payday loan to payday loan, a 25,000 car is not at all out of line _especially_ if you have the cash to back it up. For me, the concept of “pay cash” versus “take a loan” has to be weighed against how self-disciplined I think I can be. If the car carries a 400 a month payment for 5 years, that adds (roughly) up to 25,000 dollars. If I had no car payment, would I be disciplined enough to put that 400 a month into savings, or would I spend it on other stuff? If I put it into savings, after 5 years I’ve got a car and 25,000 in the bank. If I make the payment for those 5 years and leave the 25,000 intact, then at the end of the 5 years, I’ve got a car and 25,000 in the bank. If I pay cash, and behave as if “free car, I have extra money ever month!”, then in 5 years I have a car and no cash. We actually did something like this once when we bought a computer. It was 2,000 dollars, which we had in the bank. We took a loan secured by the bank deposit. We paid 200 a month (or whatever) for a year. At the end of the year we had the computer and the money. ---
**Author:** ![LSLGuy](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/lslguy/32/5813_2.png) [@LSLGuy](https://boards.straightdope.com/u/LSLGuy)\ **Post date:** [July 28, 2017, 12:01pm UTC](https://boards.straightdope.com/t/paying-cash-vs-taking-out-a-loan/791930/41 "2017-07-28T12:01:31Z")
> [@Mama\_Zappa](#): > > … > If I put it into savings, after 5 years I’ve got a car and 25,000 in the bank. > > If I make the payment for those 5 years and leave the 25,000 intact, then at the end of the 5 years, I’ve got a car and 25,000 in the bank. > > If I pay cash, and behave as if “free car, I have extra money ever month!”, then in 5 years I have a car and no cash. > … IMO this is really the center of “consumer finance”. The people who can think either of the first two ways end up financially OK in their old age. Or more accurately, roughly where they were in their working lives, net of black swans. The folks who think the third way are the ones coming up on retirement age with $0 of savings / investments. In many ways, the childhood lessons of saving money in a piggy bank for a big (child-sized) purchase like a bike or Christmas presents or whatever is kinda harmful. It conditions the idea that the very purpose of saving is for biggish near-termish purchases = gifts to self. As an adult, OTOH the main reason to save is for your post-working years. Saving for purchases is secondary. I say “post-working” rather than “retirement” because most of us will outlive our economic usefulness whether we want to or not. “Retirement” is a treat powered by enough previously-saved money; being post-working can be a misery absent enough previously-saved money. Proper money management priorities for a working stiff each and every month are: 1. Pay taxes. 2. From what’s left over, save / invest for retirement. 3. From what’s left over, save / invest for future purchases. 4. From what’s left over, spend for current consumption. The Feds through withholding and the states through mortgage escrow & point-of-sale taxes do a good job of ensuring #1 stays #1 for most of us. The people who invert 2, 3, 4 into 4, 3, 2 are screwing themselves. Sadly, a heck of a lot of people at the lower end of the income scale find they simply can’t live cheap enough to do anything other than 4 with a smidgen of 3. That’s a real problem for society. [Previous page](https://boards.straightdope.com/t/paying-cash-vs-taking-out-a-loan/791930.md?page=1) [Next page](https://boards.straightdope.com/t/paying-cash-vs-taking-out-a-loan/791930.md?page=3)