Why You Should Finance Your Car (And Not Pay Cash)
video description
So you can either pay the full price for the car or you can automatically pay a 2% higher cost with the added bonus maybe getting rich or losing a bunch of money on stocks if you suck at it. Yeah, hard choice.
Date: 2021-06-13
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Comments and reviews: 9
VisualJazz
Good points overall. I would add that financing almost always requires mandatory insurance. Auto insurance has highly negative expected returns for the buyer the loss ratio, which is the insurance equivalent to a slot machine's payout percentage, is about 80 percent, far worse than nearly any machine in Vegas. For good drivers, that ratio can be dramatically lower still. I've calculated mine as being well into the single or even fractional digits, which is why I don't buy auto insurance. For some, insurance costs will be a deal killer and must be taken into account.
More generally, debt tends to expand and is what in game theoretic terms is called a dominant strategy, scissors to the cash-only purist's paper. Debt is a tool that can give the Carl Icahn acolyte a decisive advantage over the Dave Ramseyite. But debt also necessarily increases risk and thereby complexity. Saying that plowing money into the stock market at historic blowout PE ratios was the right play because look how much you would have made is what poker players refer to as results oriented thinking. What's important was whether or not it was actually a good decision given all available information at the time. Maybe it was. But there are strong arguments against plowing money into a passive-money saturated market with blowout valuations vs historic numbers.
That said, each situation is different. And someone with access to near-free money would be nuts not to wield it.
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Good points overall. I would add that financing almost always requires mandatory insurance. Auto insurance has highly negative expected returns for the buyer the loss ratio, which is the insurance equivalent to a slot machine's payout percentage, is about 80 percent, far worse than nearly any machine in Vegas. For good drivers, that ratio can be dramatically lower still. I've calculated mine as being well into the single or even fractional digits, which is why I don't buy auto insurance. For some, insurance costs will be a deal killer and must be taken into account.
More generally, debt tends to expand and is what in game theoretic terms is called a dominant strategy, scissors to the cash-only purist's paper. Debt is a tool that can give the Carl Icahn acolyte a decisive advantage over the Dave Ramseyite. But debt also necessarily increases risk and thereby complexity. Saying that plowing money into the stock market at historic blowout PE ratios was the right play because look how much you would have made is what poker players refer to as results oriented thinking. What's important was whether or not it was actually a good decision given all available information at the time. Maybe it was. But there are strong arguments against plowing money into a passive-money saturated market with blowout valuations vs historic numbers.
That said, each situation is different. And someone with access to near-free money would be nuts not to wield it.
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A320Pilots
Another thing to notice is that the people who usually advocate buying everything in cash and like to boast about not having any debt are usually older people. I m 29 and both my parents were born in the mid to late 50s. Back then a normal family income was sufficient to buy yourself a family home and a decent car. My dad had a regular office job but that was enough to buy himself a brand new decent sized family car every 3-4 years back then. Things were just cheaper in those days.
Today you d be lucky to be able to afford a supermini every 5 years on normal wages. Especially housing here has gone insane, nowadays to buy a decent sized family home in my city would cost the equivalent of 15 years salary, back when my parents were young that was simply not the case.
So I feel that those people were used to things being more affordable and hence see debt as being something thats bad and needs to be avoided at all cost.
I do agree with the point that you should only ever go into debt if you can afford to spend the money (ie have savings. If you re broke on your ass, getting into debt is the worst thing you can do and will send you down a vicious spiral.
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Another thing to notice is that the people who usually advocate buying everything in cash and like to boast about not having any debt are usually older people. I m 29 and both my parents were born in the mid to late 50s. Back then a normal family income was sufficient to buy yourself a family home and a decent car. My dad had a regular office job but that was enough to buy himself a brand new decent sized family car every 3-4 years back then. Things were just cheaper in those days.
Today you d be lucky to be able to afford a supermini every 5 years on normal wages. Especially housing here has gone insane, nowadays to buy a decent sized family home in my city would cost the equivalent of 15 years salary, back when my parents were young that was simply not the case.
So I feel that those people were used to things being more affordable and hence see debt as being something thats bad and needs to be avoided at all cost.
I do agree with the point that you should only ever go into debt if you can afford to spend the money (ie have savings. If you re broke on your ass, getting into debt is the worst thing you can do and will send you down a vicious spiral.
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Leechburg
Let me start out with this. Other than my car loan, I'm debt free. I paid off my student loan, the mortgage, and every single piece of credit card debt. Last summer I purchased my first new car, a 2020 Toyota 4Runner (one that Doug gave a not-so-terrific review of, but I digress. I put down 5000 on the 39, 500 negotiated price. My interests rate is 2. 23%. I believe at the end of the loan this makes the out-the-door price around 42k (around 2k less than the MSRP.
Now, 10 months later, I work with a company who offers a monthly vehicle expense per diem that is 2 times the monthly payment. I'm thrilled with this because I've found a way to have my new vehicle financed AND paid for me. Not only that, this is a huge tax break for the employer as well. Sure I could have made that extra per diem as income from the employer, however it would have been taxed at a higher rate.
That said, I'm investing the additional car payment into mutual funds for my future. I'm still budgeting my monthly income, and I'm keeping pace for my retirement #WINNING: ) But I don't understand how having peace of mind in being debt free is a hard concept for Doug to understand?
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Let me start out with this. Other than my car loan, I'm debt free. I paid off my student loan, the mortgage, and every single piece of credit card debt. Last summer I purchased my first new car, a 2020 Toyota 4Runner (one that Doug gave a not-so-terrific review of, but I digress. I put down 5000 on the 39, 500 negotiated price. My interests rate is 2. 23%. I believe at the end of the loan this makes the out-the-door price around 42k (around 2k less than the MSRP.
Now, 10 months later, I work with a company who offers a monthly vehicle expense per diem that is 2 times the monthly payment. I'm thrilled with this because I've found a way to have my new vehicle financed AND paid for me. Not only that, this is a huge tax break for the employer as well. Sure I could have made that extra per diem as income from the employer, however it would have been taxed at a higher rate.
That said, I'm investing the additional car payment into mutual funds for my future. I'm still budgeting my monthly income, and I'm keeping pace for my retirement #WINNING: ) But I don't understand how having peace of mind in being debt free is a hard concept for Doug to understand?
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IwillBwaiting
All of this is correct, yet all of this is only at certain times.
Since we all want to make sure we can do what we want at all times, one should not (or never) finance (anything. Not even a cell phone.
One does not need a 1200 dollar phone just to text buddies or besties or to check out instagram models, but one would need a good, multifunctional 1200 dollar phone when one makes about 5k a month, doing deals or closing deals all the time.
1200 dollar will also get you that run down 1990 BMW or Toyota, but its fine, since you only need it to drive to work or school, back and forth for 5 miles a day. People who make money by meeting up with other people all over the country, 5 times a day and who do 60k miles a year, do need something a bit more substantional, so they can and should opt for a car 10x the amount or even 100x the amount. Both the phone and car will however be (partially) financed through the company they work for and.
Save up, buy within your limits.
Finance stuff and someone else will set the limits for you, when it suits them, not you.
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All of this is correct, yet all of this is only at certain times.
Since we all want to make sure we can do what we want at all times, one should not (or never) finance (anything. Not even a cell phone.
One does not need a 1200 dollar phone just to text buddies or besties or to check out instagram models, but one would need a good, multifunctional 1200 dollar phone when one makes about 5k a month, doing deals or closing deals all the time.
1200 dollar will also get you that run down 1990 BMW or Toyota, but its fine, since you only need it to drive to work or school, back and forth for 5 miles a day. People who make money by meeting up with other people all over the country, 5 times a day and who do 60k miles a year, do need something a bit more substantional, so they can and should opt for a car 10x the amount or even 100x the amount. Both the phone and car will however be (partially) financed through the company they work for and.
Save up, buy within your limits.
Finance stuff and someone else will set the limits for you, when it suits them, not you.
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Ryan
The thing with the cash only types is not that they're advocating living the same life us debted folks live, but with cash. They're advocating for using the spectre of spending 40, 000 from your own bank account to spend less.
Which is actually an excellent way to save money: you'd have to put a ton of money into the stock market to make back the 20, 000 that you were only willing to spend through financing. (That is, the equation is a 20, 000 with cash versus a 40, 000 car with financing. The cash option naturally causes people to spend less.
Another thing you mentioned is the debt free lifestyle. I know a few of those people, and they are aware they're not making rational financial decisions: you say peace of mind isn't worth the money you're giving up by living debt free, but that arithmetic is different for everybody. For those I know, being debt free is a reward unto itself that's worth the opportunity cost.
reply
The thing with the cash only types is not that they're advocating living the same life us debted folks live, but with cash. They're advocating for using the spectre of spending 40, 000 from your own bank account to spend less.
Which is actually an excellent way to save money: you'd have to put a ton of money into the stock market to make back the 20, 000 that you were only willing to spend through financing. (That is, the equation is a 20, 000 with cash versus a 40, 000 car with financing. The cash option naturally causes people to spend less.
Another thing you mentioned is the debt free lifestyle. I know a few of those people, and they are aware they're not making rational financial decisions: you say peace of mind isn't worth the money you're giving up by living debt free, but that arithmetic is different for everybody. For those I know, being debt free is a reward unto itself that's worth the opportunity cost.
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Consciousness
Excellent advice, Doug. I've been a longtime viewer of yours. Funny to see you living in my hometown, San Diego.
I give the same advice to my girlfriend. She bought a 2007 corolla CE, with 2000 cash from our military friend, no side air bags, the bare minimum. It has over 200k miles, but it runs like it's brand new, and gives us no issues. However, safety is my main concern. We make good money now, and are in a really good living situation. I want her to get a safer car that is more modern with more safety features, especially since we live in Phoenix now, and she drives a lot for her job.
The debt just feels weird. But i am always concerned for her safety. The worst thing I fear is getting a phone call that she was in a bad accident and didn't make it.
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Excellent advice, Doug. I've been a longtime viewer of yours. Funny to see you living in my hometown, San Diego.
I give the same advice to my girlfriend. She bought a 2007 corolla CE, with 2000 cash from our military friend, no side air bags, the bare minimum. It has over 200k miles, but it runs like it's brand new, and gives us no issues. However, safety is my main concern. We make good money now, and are in a really good living situation. I want her to get a safer car that is more modern with more safety features, especially since we live in Phoenix now, and she drives a lot for her job.
The debt just feels weird. But i am always concerned for her safety. The worst thing I fear is getting a phone call that she was in a bad accident and didn't make it.
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Shane
In December I bought a 2017 BMW 4 series. I traded in my Vauxhall Insignia and paid for the rest in cash so I own my car entirely. Totally agree with everything said in this video but of course it all comes down to everyone s financial status, lifestyle etc the last two cars I owned I got loans for but now I own a modern BMW and I m not financial tied to it, I never like owing money. My view is and this is just me, if I can t afford to buy a car straight, I can t afford that car so I won t go down the road of borrowing and financing.
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In December I bought a 2017 BMW 4 series. I traded in my Vauxhall Insignia and paid for the rest in cash so I own my car entirely. Totally agree with everything said in this video but of course it all comes down to everyone s financial status, lifestyle etc the last two cars I owned I got loans for but now I own a modern BMW and I m not financial tied to it, I never like owing money. My view is and this is just me, if I can t afford to buy a car straight, I can t afford that car so I won t go down the road of borrowing and financing.
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Cole
Honestly, I feel like if you're paying cash for a car, you should consider buying a three or two-year-old model with everything on it. You aren't financing or leasing, you get all the benefits, but you don't have to worry too much about maintenance since it's only two years old. It will be cheaper than new and you can actually own it. This of course relies on the car brand that you purchase from and their reliability record but it's a smart move I feel like.
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Honestly, I feel like if you're paying cash for a car, you should consider buying a three or two-year-old model with everything on it. You aren't financing or leasing, you get all the benefits, but you don't have to worry too much about maintenance since it's only two years old. It will be cheaper than new and you can actually own it. This of course relies on the car brand that you purchase from and their reliability record but it's a smart move I feel like.
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mickeyt107
Doug makes a common error that most humans are prone to - he assumes that the market will go up, and that his investments will always make a profit. This is only true in the long term, and I'm guessing Doug isn't keeping his cars for years. Lets think about the worst case scenario: the vehicle depreciates, the market goes down, and now he needs to sell the car for whatever reason. He has a 50k car, owes 60k on it, and has less money in his investments.
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Doug makes a common error that most humans are prone to - he assumes that the market will go up, and that his investments will always make a profit. This is only true in the long term, and I'm guessing Doug isn't keeping his cars for years. Lets think about the worst case scenario: the vehicle depreciates, the market goes down, and now he needs to sell the car for whatever reason. He has a 50k car, owes 60k on it, and has less money in his investments.
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