On the other hand, if you are paying a thousand dollar a month loan cost, you could instead spend a lot on taxi fares and Uber charges and still spend less.
But in that case, you’d never have a paid-off car.
True. But a hell of a lot of people never have a paid off car. It’s sold, traded in, or wrecked before it’s paid off.
The last time I had a paid off car was at least a decade ago, maybe 2.
As to the underlying logic the OP is looking for, I’ll repeat a cite I dug up this morning for another thread. Very clearly a LOT of Americans have no business buying new or even high cost used cars.
If you read the cited article, do go to my quoted comment in the other thread and see the subsequent posts for some discussion of the shortcomings in that article.
For many people like me, the car is used for only a very few hours during the week. The rest of the time, it sits in the garage or the driveway. In addition to that thousand-dollar car payment, you’re paying perhaps hundreds each month for insurance and property taxes. If you’re in a city, you may be paying more for parking fees. Rationally, the cheapest option may be not to own a car at all.
In that case, you’ve got to look at interest rates vs. expected rates of return. If you owe $10k and are paying 6% annually, but could make 8% annually investing that 10k, it makes sense to invest the 10k and pocket that extra 2%. But the reverse is true; if the interest is more than the rate of return, then you want to pay that off as fast as humanly possible.
Too many people I’ve known have this “Debt is bad” mentality that’s way too black and white. They’ll do stuff like pay off their low interest student loans early, when the interest rate on them is such that investing that extra money in nearly ANYTHING would net them money over the long haul.
This is exactly what I was getting at upthread. Vehicles are insanely expensive relative to what they used to be.
What’s got me confounded is that according to the “Vehicle Affordability Index”, they’re actually getting more affordable over time. Supposedly it compares the price of new vehicles with the median household income and interest rates, etc. and then describes affordability in terms of weeks of income to buy a new car. My intuition tells me there’s something there that is distorting things; even back 20 years ago when I had a lower salary relative to everything else, buying a new car didn’t seem quite so colossally expensive as it did last year when I actually did buy a new vehicle.
I’ve bought a few cars over the years (five?), and I’ve never financed through a dealership. I always get a pre-approved load from my credit union.
It turned out that this time, the dealership did indeed have the best deal on financing, as unusual as that is.
Pays to check it out!
Yep. But like you said, the best path is going to depend on the numbers in question and could vary from year to year and person to person.
The place I worked at was acquired & the new parent company paid us once a month. That first Friday happy hour drinks were flowing!
I, OTOH, was the type that thought this pile of money has to last me all month, I can’t go out & blow it on booze on the first night. I was the type who wanted to go out on the last Friday because I still had funds & was about to get a new infusion of moolah. Of course, if we went out, that meant my cheap financially conservative ass was buying all those broke asses all of their drinks.
To summarize, being paid once a month was beneficial for my liver as it meant I never went to happy hour.
Seven of eight of the past weekends have been multi-hundred miles each, including at least four of at least 300 miles & two greater than 500 miles. Sept is an exceptionally busy month for me, I’m sure it was ±4000 miles last month, alone; thankfully, that slows down some now.
Thank God I didn’t say that everyone only uses their car a small amount of time each week.
It does take all kinds. But truth be told, a LOT of cars spend a vast percentage of their time sitting, not going.
Which suggests that their true purpose is two-fold. To provide transportation reliably on demand. Uber is great until you can’t get one*.
I’m down to maybe 8K miles a year, and it’ll be more like 5K once GF moves into my zip code if not my residence. The vast majority of the money it costs to own that car is / will be fixed costs, not cost of operation. And all of it goes directly to the reliably on demand part, not the “transportation” part.
To tie this back into the OP subject, plus for many cars & many owners, a dollop of self-congratulatory ego boost and / or Jones’s keeping up with. Some folks can’t see that, while others can’t think of anything else.
It truly does take all kinds.
*A while ago GF had pre-arranged an Uber for an early morning ride to the airport, ~30 miles. Not cheap, but cheaper than airport parking would’ve been. On the morning, nobody shows & efforts to get a short-notice pickup fail until she’s almost out of wait time. Then give up and mad flail to load her own car & drive into the rapidly thickening morning rush hour to then struggle to find a parking place. Reliable on demand.
Yeah, when I was working, I drove around 28k-30k miles a year. Now? I hardly drive at all. I have to go down to the garage and start my car and run it a while just to keep the battery charged.
But the reliability on demand is a big thing for me. I’ve had a few health scares over the last few years, and I don’t want to pay thousands for an ambulance if my car is SOL.
Very true - of course, are you guaranteed to earn more than what you’re paying on the car?
We got ours 5 years ago now - 2.9% interest rate. Rates went up after that - it would have been silly to pay it off early. That’s not always the case.
That was our logic when our older cars were starting to think up new and expensive ways to break down. We could rent, if we needed to go on a long trip. That, plus the occasional Lyft. If that began to average more than 400/month, we figured that would be the time to make a change.
One might also live in an area which has limited alternate transportation. My daughter lives in a town with weekday buses only, no evening buses, and very spotty taxi service.
I financed my 2019 Jaguar because they were offering 0% financing. I still paid it off early, because I hate debt. (but I probably took 2.5 years, certainly didn’t rush it)
I just recently realized that my parents probably got this attitude because they came of age during a time when inflation and interest rates were very high (I’m pretty sure the interest rate on their first mortgage was over 10%). So the lesson they learned was that debts should be paid off as quickly as possible, and should be avoided altogether if at all possible. And they taught that lesson to me. And even though I completely understand that it can be advantageous to take on debt if the interest rate is lower than the rate of return one can make investing that money, it is still hard to unlearn that lesson my parents taught me.
You also need to take into account the risk on the money invested, based on where you’re investing it.
High-interest CDs? Safe as can be.
Money market accounts? Pretty close to the same.
Blue-chip stocks? Hope you don’t hit a downturn.
Uncle Fred’s trout fur farm that he says will return 20% dividends? Don’t count your car payments before you receive them, Fred might just opt to withhold those dividents because of an outbreak of mange.
… that doesn’t recover before you’re forced to sell for some other reason.
That’s a big part of what the “debt is bad” crowd doesn’t include in their logic.
I don’t care if the investments I don’t need for the next 20 years are underwater for the next 3 years. Ask me again in 20 years & then we’ll talk about how well they did or didn’t.
I bought a new truck in 2024.
I had the money to pay cash, but it was invested in a total market stock mutual fund. So I decided take a loan for 36 months at 2.9% and keep the money invested. Right now after 16 payments I am ahead about $9400 after deducting the interest paid and the long term capital gains tax on the growth to date. At the end of the loan, I expect to be about $15k ahead, but I am fully aware that I may well end up actually losing money if things go bad.
Risk? I have had the money invested in the mutual fund since 2017. It’s been at risk the entire time. The loan doesn’t change that.
True, but deciding whether an investment was actually any good or not means comparing the value of two scenarios.
In scenario 1, you pay the full price for the car without debt, and invest [ETA: each month] the money you would have been paying in interest that month on the loan.
In scenario 2, you take out the loan and invest the lump sum of the value of the loan, pulling out of that investment each month to make the car payment.
If the investments in both cases are in stocks, the number of shares you have to buy (scenario #1) or liquidate (scenario #2) each month varies based on the share price (the value of the shares you’re liquidating is constant, based on the monthly payment, but the dollar amount of purchases starts high and gradually goes to zero, based on the interest paid that month).
The right way to judge between the two scenarios is to see who ends the loan term with the most shares of their investment. If there’s a sudden market downturn, say 30% or so, in years 3 & 4 of a six-year loan, you may end up having to liquidate all your shares before the end of the loan period, which means you would have done better to have done scenario 1, which is buying during the downturn and pulling in more shares in the process. Of course, if your investment is returning a steady 400 basis points over the interest rate, congratulations! You win that interest.
This all relies on both scenarios being followed to the letter, which is where an investor’s evaluation of their own self-discipline and appetite for risk comes in. If taking out the loan means that you’re going to keep your money in your long-term investments and just let it sit there, that’s probably easier than having to dump money into your stocks every month for the next six years, with an amount based on a line in your car loan statement.