I was recently doing some research for a car purchase and naturally went to check out what my financial blogging friends had to say about the topic.
I, of course, am aware of the typical advice when it comes to buying a car. A car is a depreciating asset, so why would anyone get into debt over it? The obvious choice seems to be to always buy a car in cash - and a used car at that!
But I came across this blog post that got me thinking twice about the whole thing. The question posed was whether you should take out a loan for the car and then use that cash toward an investment – like an index fund or a mortgage.
Now, I should mention that the blog was talking about paying off a mortgage on an investment property. The idea is that the property makes her money and the mortgage is cash flow positive. However, even if the mortgage isn't for an investment property it's still an interesting question simply because car loan interest rates can be lower than those on your mortgage.
Can it Make You More Money?
Sometimes you can find auto loan rates below four percent. While they are projected to go up in 2015, you can still find some pretty sweet deals – especially if you have a good credit history.
You'll have to compare interest rates from both the car loan and the mortgage to determine which is a better deal for you. If the mortgage interest rate is higher then you may want to put the cash toward paying it off since the idea is that it's costing you more money. Additionally, you're just paying off the debt on your investment so it can make you more money later on.
It would almost be like refinancing the mortgage. You've paid off a certain amount and replaced the debt with a low interest car loan instead.
What are Your Feelings on Consumer Debt?
I am personally very anti-consumer debt. The only way I can even justify a credit card is because I've used it as capital for my business and I get travel points. It makes me money and it saves me money on travel.
While I totally understand the investment argument in this case (I am a personal finance nerd, after all), to me a car is just a thing like a phone or an iPad. If it's not going to make me money, then I don't see the point in taking on debt. Personally, I just wouldn't feel comfortable taking on consumer debt if I didn't have to.
However, this is just my opinion about consumer debt. Everyone feels differently about debt so you would need to see where you stand. Everyone also has a different tolerance for risk (mine clearly isn't very high).
Are the Savings Really Worth it to You?
This is really what it comes down to at the end of the day. Let's put aside the potential money that can be made from property and just focus on savings.
Do you really end up saving more money by taking out a loan for a car and using the cash for a mortgage? The answer is it depends.
For example, depending on which state you live in, owning your car could bring down your insurance coverage requirements and therefore your payment. There may also be other fees involved with a car loan. In this case you end up saving money by paying cash for the car.
However, the fees and interest on a car loan are still cheaper than all the money you're shelling out for your property, then you may want to take out the loan anyway.
You may also want to consider if the amount of time it will take to figure all of this out is worth it to you. Time is money after all. In the time you spend crunching all of these numbers you could probably just go find a way to make more money.
Obviously, there is no clear-cut right or wrong answer here. Both options are incredibly viable if you crunch the numbers and may just depend on your personal money habits. Perhaps this is why personal finance is so personal – because much of it will depend on how you feel about it.
Check out our reviews for more information on auto loans.