[hurricanetc]

It's not that simple. If you plan on keeping the car and the interest rate is low enough you are likely better off taking the longest term loan possible.

Consider a $30,000 vehicle. I can finance it at 1.9% for 48 months or 84 months. The payment on the 48 month loan is $650/month (scenario 1) and the payment on the 84 month loan is $380/month (scenario 2).

In scenario 1 I invest $0/month for 48 months and then $650/month for 36 months. After 7 years I paid $31,178 for the car and earned ~$26,000 from investing (at 8%).

In scenario 2 I invest $270/month for 84 months. After 7 years I paid $32,062 for the car and earned ~$30,000 from investing (at 8%).

In scenario 2 I paid $884 more in interest but earned an extra $4,000 from investing.

There is a lot more that goes into this type of calculation but it is not nearly as cut and dry as "you're an idiot if you financed a car for 84 months."

[pwinnski]

That there is a scenario that, effected perfectly if you stand on one leg and squint and get super-favorable rates at just the right times, makes an 84-month loan not the worst economic choice possible does not mean that it's not the worst economic choice possible. Because it is the worst economic choice possible.

[SilasX]

This. Plus, the typical 7-year loans we're seeing are not the 1.9% loans but subprime rates.

[hurricanetc]

The people who understand money and finance will end up ahead of those who don’t.

Denying this reality will lower your risk profile but also lower your potential rewards. If you can’t control your spending and investing then don’t finance a car for 7 years.

But don’t pretend that economics and math are wrong.

[SilasX]

But also don't pretend that your prime rate example is the typical case for the 7-year loans, which are mostly subprime borrowers who don't plan on perfectly maintaining and keeping the car forever.

[hurricanetc]

I’m not. The premise here is that financing a car for 7 years makes you an idiot. That’s only true if you are already bad at personal finance.

[SilasX]

Assume some charity here. Everyone was speaking in generalities about the trend. You can always find non-central, imperspicuous examples, but that's not really responsive. (Scott Adams has made the acronym BOCTAOE, but of course there are obvious exceptions, to head off such replies.)

The recognition that something -- like your case -- is an extreme exception proves the general validity of the rule. (Yes, I know there's a frequently misused version of the quote, but I use this modified, correct version.)

>That’s only true if you are already bad at personal finance.

That's kind of the point: you can't just assume away the case of "people making bad financial decisions", and that might be -- and probably is here -- the reason for the trend.

[atombender]

> After 7 years I paid $32,062 for the car and earned ~$30,000 from investing (at 8%).

Nitpicking, but you didn't earn $30k from investing. You contributed $22,680, and ended up with $28,910, assuming dollar-cost averaging contributions monthly (bulk contributions at the beginning of the year would get you $31,223). So your total return, assuming 8% annual growth, is $6,230.

[hurricanetc]

Yeah that’s true. I was just keeping it more simple. Rounded a fair bit and assumed monthly dollar cost averaging.

I didn’t even get into down payment or cash opportunity cost because just generally don’t even believe the basic examples.

[dirktheman]

I'd be willing to bet that MOST people who take out 7 year car loans don't invest half of their interest rates in stocks that average at 8% or higher...

[VBprogrammer]

While a long term average for mutual funds at 8% is pretty reasonable, I'd argue that 3-7 years is short enough that you have a reasonable chance of ending up with less money than you put in, never mind out performing the 2% interest.

Besides, as I've mentioned elsewhere, anyone offering a loan at 1.9% is aware that they are subsidising your purchase. You should be able to negotiate most of the difference into a decent cash deal.

Not to mention the non-trivial risk of being involved in an accident in a car which is worth less than is outstanding on it (which for a 7 year loan is probably 6+ years).

[hurricanetc]

The last 3-7 years the average is over 20%.

Your financing argument is actually flipped. You will get a better cash price if you finance because that is where dealers make money. Your best strategy if you want to pay cash is to finance the car and then pay off the loan immediately.

As far as being underwater is concerned... most dealers throw in GAP insurance these days. Removing GAP to lower the cost is counterproductive because the banks buying your loan want you to have GAP.

There really are just very few scenarios where paying cash at the dealer makes the most financial sense.

[scarface74]

I’ve never had a loan where the bank required Gap insurance. I usually get it anyway through my insurance company.

[hurricanetc]

Over the last 10 years it’s been closer to 15-24% but that isn’t normal. 8% is about the historical average.

But yes most people don’t treat money this way.

[scarface74]

If you listen to Freakonomics, they often say that we aren’t “Homo Economicus”. While what you say may make sense economically, that’s not how most people operate.

[hurricanetc]

Right. Which is why most people are better off not financing anything at all.

But financing doesn’t make you an idiot.