I’m trying to see what the pros and cons are to buying a car in cash vs. financing it. I’ve read a lot of old posts here, and the one pro for financing that keeps coming up is that “if you finance it, you can take the money you would’ve spent upfront on the car and invest it instead”. But what does that actually look like?
Say I want to buy a car for $20k. If I decide to finance it instead of buying it all in cash, what exactly am I supposed to invest that $20k in? And would I just sell some of that investment every month to pay the monthly payments? As my employer handles my pension, my only investing experience is the ~$1k/year I put in an index fund in my IRA, and I’ve never sold or taken any of that money out, so I’m kind of lost here.
The benefits are usually:
1. More cash in your bank/wallet for immediate use rather than a big lump sum payment
2. Since you’re holding the money for longer you can potentially put it to work.
If you don’t have a confident strategy to out-earn your interest rate and don’t think that you’ll need the extra liquid funds with any sort of urgency anytime soon, then just write the full check and get your car.
People loved to bring up “the time value of money” when rates were lower. Its a finance term that, when applied to borrowing money, basically says the money you borrow today ($20k), will be worth less in the future. This is caused by many factors but the common one referenced is inflation. Its technically better to let the bank front the $20k to the dealership, and have you pay it back over time because you are getting a better “deal” by making de-valued payments. This is not really applicable now due to quantitative tightening and rates being so high, but in lower rate times it holds true.
>But what does that actually look like?
It looks like debt plus investments. Not the best plan now that rates are increasing
>Say I want to buy a car for $20k. If I decide to finance it instead of buying it all in cash, what exactly am I supposed to invest that $20k in?
> And would I just sell some of that investment every month to pay the monthly payments?
No, you pay that out of cash flow and leave the investments
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