Quote:
Originally Posted by carbuff
You're going to have to educate me on this...
If I choose to keep the car forever, then how does the depreciation factor into the investment equation?
But even if I don't, let's say I sell it in 3 years, I don't get any more or less money for the car at that point (all else being equal) whether I financed it or not.
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Don't mistake me for a pro! I should say that it isn't so much how much it's depreciating, but that it does depreciate is why I (philosophically) hesitate to finance. You're borrowing money that loses value.
And more specifically depreciation rate does matter if/when you decide to sell your car while owing more than it's worth.
Quote:
Originally Posted by carbuff
But if I invested the $25k for those 3 years, then I've made money on that, and hopefully more than the 1.9% that the money cost me. If I put all $25k into the car, I have no possibility to make any return on that $25k.
So how does the depreciation factor into how you want to pay for it?
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I am assuming that you have a monthly income stream besides this $25k. So with the income stream, you can either
1) Finance the car/Invest $25k for 3 years.
$714 per month pays down the loan in 36 months. Total payments = $25,704
Earn 5% per year on $25k. Account Balance = $28,941
Car value = $18225
Balance Sheet: 28941 + 18225 = $47166
2) Cash for the Car/Invest Mo. Payment for 3 years
$714 invested per month at 5%/year for 36 months. Account Balance = $27785
Car value = $18225
Balance Sheet: 27785 + 18225 = $46010
So in this case, yes if you pay down the loan in 3 years, you will come out ahead under option 1). But you can also see that if you play with the rates, duration etc. that you can lose money by financing a car vs paying cash. When rates are low and the time duration is short, the results are no fun and don't explain much. Drag out the loan longer and that's when you feel it in your pocketbook.