4 ms·

Why do you think a car loan is unwise? If I can borrow $10k, that's $10k I can do other things with, such as invest, or go on a vacation. Even a not-great rate

by coldpie 11y ago

Why do you think a car loan is unwise? If I can borrow $10k, that's $10k I can do other things with, such as invest, or go on a vacation. Even a not-great rate of 5% over 3-years, that's less than a thousand bucks more expensive than paying cash, and it's spread out over three years. I don't mean to imply that getting a loan is always the right idea for everyone, but I think categorizing it as always "less financially wise" is wrong as well.

CaptSpify 11y ago
IMO, it seems like a waste of money, even if it's not very much. I'm far from a financial expert, but I don't see a benefit to getting a loan, if you don't need it, other than credit-building. Then we're back to the "honor society" problem: https://xkcd.com/703/ https://xkcd.com/703/ Can someone enlighten me to the benefits? as I'm sure there are people more knowledgeable than I. My personal preference: I'd much rather be broke, with no debt, than have a ton of cash and debt.
- coldpie 11y ago
  Sure. Imagine I have $20k in the bank and want to buy a $15k car. Scenario A: I pay $5k down and get a $10k loan, leaving me with $15k in the bank. I can use that $15k to go on vacations, invest in the market and try to earn more than the interest rate on the loan, or anything else you can think of to do with $15k. Over the course of three years, I pay about $300 per year in interest on the loan. Scenario B: I pay $15k in cash on the car and have $5k left. This is no longer enough to invest. Since I want to have a cushion, it may cut my vacation plans short or cut a vacation out of the equation entirely. But, three years later, I have $900 more than in Scenario B. Now I can go on my vacation, and maybe even upgrade to first class, but three years have passed. It's a trade-off thing, for sure. But if you're smart about managing debt, then it can be a worthwhile way to spend your $900 given what it allows you to do with the loaned money in the interim.
  - CaptSpify 11y ago
    soo.... correct me if I'm misunderstanding, but it sounds like it's encouraging bad behavior. Your basically paying for a vacation you really shouldn't be affording, you just "think" you can now afford it. The same goes for the investments. I guess to me, I don't see any way that Scenario A makes sense.
    - coldpie 11y ago
      What doesn't make sense about it? I'm spending an extra $900 to be able to afford a vacation I otherwise couldn't. Suppose some friends are going on a trip and I'd like to go along; suppose the Olympics are happening; suppose I want to do a trip while I'm still in my 20s; there's plenty of time-sensitive situations in which an extra $900 is worth spending to allow things to happen sooner.
      - CaptSpify 11y ago
        Well, the $900 is a big assumption. You could have just as easily lost all that money. To be clear: I'm not saying your wrong, I'm saying I don't understand. It seems like there's just an assumption that you'll end up with more money, despite there being a risk that you won't?
        coldpie 11y ago
        Well, you have a job, right? That's where the money comes from. Lenders use your credit rating, income, length of employment, age, and other factors in determining a loan's risk. You budget $X per month for your loan repayment, and you repay it. Three years later, you have repaid the entire loan, plus the $900 interest, and everything is square.
    - dinkumthinkum 11y ago
      I think you misunderstand what money is in a more real sense. It is a tool we use in our lives. I think parent describing the scenarios is making good a explanation if you leave the premise that all debt is necessarily bad.
mahyarm 11y ago
It makes the money too cheap and people buy more car than they would of if they had to pay it all cash. It also leads to trade in habits as people get used to a perpetual $400/month car payment. It makes people buy new cars at $35k when an equivalent used one at $12k would of done the same thing. Loans also create an income dependency if you do not have reserves to pay the loan payment while you have no job. While a cheaper fully purchased car is significantly cheaper as far as the monthly payment goes. In the USA a car is pretty mandatory, so that can create a bad situation to be in.
- coldpie 11y ago
  Yes, it's possible to be stupid with debt. I suspect the poster to whom I was responding won't fall prey to that.
soylentcola 11y ago
Because we don't need a second car ;) Sorry if I worded that wrong and implied it was generally a bad idea. I don't make any claims for anyone else's financial policies. It's just an example I used for my case since we've got one car and we work about 3 miles from home in the city so I can ride my motorcycle during the nice 3/4 of the year (free parking at work!) and carpool during the nasty 1/4 of the year. I've considered getting a second car and I guess I could take out a loan instead of just buying it but it would cost me more in the long run due to interest and we don't really need the second car so either way it's money spent unnecessarily. Either way, needing to establish credit is not enough reason to sway me at the moment.

by coldpie 11y ago

CaptSpify 11y ago

IMO, it seems like a waste of money, even if it's not very much. I'm far from a financial expert, but I don't see a benefit to getting a loan, if you don't need it, other than credit-building. Then we're back to the "honor society" problem: https://xkcd.com/703/ https://xkcd.com/703/ Can someone enlighten me to the benefits? as I'm sure there are people more knowledgeable than I. My personal preference: I'd much rather be broke, with no debt, than have a ton of cash and debt.

coldpie 11y ago
Sure. Imagine I have $20k in the bank and want to buy a $15k car. Scenario A: I pay $5k down and get a $10k loan, leaving me with $15k in the bank. I can use that $15k to go on vacations, invest in the market and try to earn more than the interest rate on the loan, or anything else you can think of to do with $15k. Over the course of three years, I pay about $300 per year in interest on the loan. Scenario B: I pay $15k in cash on the car and have $5k left. This is no longer enough to invest. Since I want to have a cushion, it may cut my vacation plans short or cut a vacation out of the equation entirely. But, three years later, I have $900 more than in Scenario B. Now I can go on my vacation, and maybe even upgrade to first class, but three years have passed. It's a trade-off thing, for sure. But if you're smart about managing debt, then it can be a worthwhile way to spend your $900 given what it allows you to do with the loaned money in the interim.
- CaptSpify 11y ago
  soo.... correct me if I'm misunderstanding, but it sounds like it's encouraging bad behavior. Your basically paying for a vacation you really shouldn't be affording, you just "think" you can now afford it. The same goes for the investments. I guess to me, I don't see any way that Scenario A makes sense.
  - coldpie 11y ago
    What doesn't make sense about it? I'm spending an extra $900 to be able to afford a vacation I otherwise couldn't. Suppose some friends are going on a trip and I'd like to go along; suppose the Olympics are happening; suppose I want to do a trip while I'm still in my 20s; there's plenty of time-sensitive situations in which an extra $900 is worth spending to allow things to happen sooner.
    - CaptSpify 11y ago
      Well, the $900 is a big assumption. You could have just as easily lost all that money. To be clear: I'm not saying your wrong, I'm saying I don't understand. It seems like there's just an assumption that you'll end up with more money, despite there being a risk that you won't?
      - coldpie 11y ago
        Well, you have a job, right? That's where the money comes from. Lenders use your credit rating, income, length of employment, age, and other factors in determining a loan's risk. You budget $X per month for your loan repayment, and you repay it. Three years later, you have repaid the entire loan, plus the $900 interest, and everything is square.
  - dinkumthinkum 11y ago
    I think you misunderstand what money is in a more real sense. It is a tool we use in our lives. I think parent describing the scenarios is making good a explanation if you leave the premise that all debt is necessarily bad.

mahyarm 11y ago

It makes the money too cheap and people buy more car than they would of if they had to pay it all cash. It also leads to trade in habits as people get used to a perpetual $400/month car payment. It makes people buy new cars at $35k when an equivalent used one at $12k would of done the same thing. Loans also create an income dependency if you do not have reserves to pay the loan payment while you have no job. While a cheaper fully purchased car is significantly cheaper as far as the monthly payment goes. In the USA a car is pretty mandatory, so that can create a bad situation to be in.

coldpie 11y ago
Yes, it's possible to be stupid with debt. I suspect the poster to whom I was responding won't fall prey to that.

soylentcola 11y ago

Because we don't need a second car ;) Sorry if I worded that wrong and implied it was generally a bad idea. I don't make any claims for anyone else's financial policies. It's just an example I used for my case since we've got one car and we work about 3 miles from home in the city so I can ride my motorcycle during the nice 3/4 of the year (free parking at work!) and carpool during the nasty 1/4 of the year. I've considered getting a second car and I guess I could take out a loan instead of just buying it but it would cost me more in the long run due to interest and we don't really need the second car so either way it's money spent unnecessarily. Either way, needing to establish credit is not enough reason to sway me at the moment.