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Comment by bitmasher9 | Hacker News Reader

Let’s say you finance $40,000 in auto debt over 5 years. With a low interest rate of 6% paying $6,300 in interest. That’s over 15% of the amount borrowed! Many people have lager rates over longer periods.

Now consider what would happen if you invested that $6,300 for 30 years instead of spent it on interest. You’re losing out on tens of thousands of dollars in total lifetime wealth.

When you borrow money to “enjoy life” it can quickly end up costing 2x what it would if you spent the money outright, even if you borrowed at low rates.

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The trick is to borrow $40,000 to buy the car at 6% and keep your $40,000 invested making more than 6%. Even at 7% annually, you’d make $16,102 over five years (1.07⁵ × $40,000). For that matter, at 6.1% annually, you’d make $13,782 (1.061⁵ × $40,000). Heck, even at 5.9%, you’d make $13,277! The reason why you make more even with a lower rate is that you pay less interest each month with the amortising loan!

The trouble is if one borrows that $40,000 to buy a brand-new car (which will lose $16,000 over five years), or if one borrows that $40,000 and doesn’t have or doesn’t invest $40,000, or both. Life’s a lot easier if you already have the money.

Personally borrow and invest over shorter periods of time (less than 10 years) has too high of a risk portfolio for me, especially with a depreciating asset.

What if there is a market downturn, and you’re out not only the decrease in value of your assets but also the interest in your loan. I admit this is down to personal preference and risk tolerance.

Well if you can't survive a downturn and the risk then no you shouldn't do it. But if you can then you should and in the long run you will end up ahead.

While that is fine in the abstract:

Current 5 year CD APYs are 4.2-4.7%, while current new car auto loan APRs are 5.2-6.7%.

There is usually no magic spread to be captured unless you’re willing to take more risk (say, money in equities instead of CDs). Financing a depreciating asset against one that is volatile in the short term (and has seen drawdowns of 20% several times in the last 10 years) is a duration to risk mismatch.

That spread capture argument often is just justification for a bad decision - people don’t in practice use credit as liquidity backed by an investment, they use it as a cash advance to buy more car than they would absent financing.

So now instead of buying a $20k car cash, people will buy a $40k car, increasing their debt load against a depreciating asset.

In general, my theory is… if that small spread from borrowing to buy a depreciating asset makes a significant difference to you financially, you can’t afford that car anyway, and you’re better off buying cheaper.

Sorry to unload a bit… that wasn’t about you, that was about me being triggered by seeing this advice a lot :)

> There is usually no magic spread to be captured unless you’re willing to take more risk (say, money in equities instead of CDs).

Which is what one should do, provided one believes that the long-term result will be positive.

> Financing a depreciating asset against one that is volatile in the short term (and has seen drawdowns of 20% several times in the last 10 years) is a duration to risk mismatch.

Financing an asset and the value of an asset are independent. If one believes that one will get a better yield by investing than one could by avoiding financing, then one should finance. I believe that over time my investment returns will be higher than the current car loan rate.

> people don’t in practice use credit as liquidity backed by an investment, they use it as a cash advance to buy more car than they would absent financing … So now instead of buying a $20k car cash, people will buy a $40k car, increasing their debt load against a depreciating asset.

Yes, fools are foolish. A wise man makes educated predictions of the future. If his current total portfolio debt load can support financing a purchase, and if the rate to finance it is less than what he predicts his yield will be, then he’ll finance it.

> if that small spread from borrowing to buy a depreciating asset makes a significant difference to you

Hey, an extra 1% a year for the duration of one’s working life adds up quite significantly! The key is to carefully manage one’s expenses and balance sheet, maintaining a healthy debt ratio, only incurring debt when it makes sense, and refinancing or paying it down when that makes sense.

All totally valid points. If used responsibly across all those elements, within someone’s budget, with the ability to tolerate the risk… I can see the case for financing. I just think most people don’t quite use car loans that way… hence the proliferation of 72 month+ loans. (But then, they’re adults who can make their own decisions, so fair enough. They would probably say I’m risk averse, anyway.)

> Hey, an extra 1% a year for the duration of one’s working life adds up quite significantly!

I agree - but in this case, you’re not really netting an extra 1% per year forever… in that example, you’re saying you’d have a car payment for your entire working life! And a long period of buying depreciating assets I think is going to hurt a lot more in the long run than the 1% spread :)

That being said, I get that purchases are not always spreadsheet math. So maybe someone is willing to spend a little more over time to drive newer cars, and that’s up to them.

Well seeing that you need a car to go to work to have money to invest in the first place…

And before you say “buy an old beater”, then you have to contend with an unreliable car that may cause you to be late to work and get fired. It’s also much easier and cheaper to get a car loan for a newish car than to borrow money to fix a car.

Im just encouraging people to do the math, and to consider borrowing smaller amounts of money over shorter periods of time.

As a young person, I was in the “own an old beater” category for many years. That said, I knew how to maintain and repair most of what could go wrong. That stick shift 1995 Accord had over 300,000 miles when a school bus finally totaled it while parked.

But for most people, maybe not the right answer. There’s a middle ground. There are some very affordable vehicles out there with good warranties. Buy one and for a few hundred a month, you get five years free of worry.

Of course, who does that? What I see are mostly SUVs and other “image” vehicles that cost more to buy and more to run. Frugality just hasn’t been an American trait in recent years, though it seems to be changing in some groups.

I don’t think you need to know a lot about cars to get good value out of them. I had an old ford ranger and all I did was get new tires when they tread wore off, get new brake pads when they started squeaking, and get the oil changed when the little sticker said to. I put 350k miles on that truck.

And if you are already living check to check, buying an old beater they you don’t know the condition of is more risky and harder to come up with the cash as things go wrong like the engine and the transmission.

It’s completely different than buying a slightly used car and keeping it forever where you know the wear and tear patterns on it and you know how you treat it.

Its kind of funny how the people who don’t want to work with “lazy,” mangly, poor people with bad teeth are the first ones to tell poor people how they could’ve made interest on 6300 dollars over 30 years.

It’s pretty rude to make personal assumptions based on a comment on the internet. My entire focus on the comment is providing education about the opportunity cost of borrowing money.

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