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Comment by aetherson | Hacker News Reader

I don't know that there is much in the way of good debt practically available to most people, but your example is bad. If your choices are:

1. Buy a car with cash up front.

2. Buy the same car with financing at 2% APR.

Then you should exercise option #2, and take the money you don't immediately spend and invest it aiming to get 4% return on investment (which should be achievable), then pay off your loan and realize a net 2% return.

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The problem with option 2 is that it doesn't take into account risk. You need a much higher and more secure place for a return to alleviate risk. Similar to what others said most people are taking out loans for things that they don't have the cash for. They aren't taking out the loan at a low interest rate so they can invest their cash somewhere else. But they are told, take the cheap money and invest elsewhere. They just forget to do that last part.

This may well be true, but the takeaway there is not "2% APR is bad debt," it's leading into the confluence of issues about how to get people to invest.

You're right.

But in general when people take out loans to buy cars they do so because it is a big purchase for them and human psychology may favor spending more if it comes out of an account in little chunks than all at once. So the "debt is okay" attitude is not good for those who do not know and cannot properly correct for their inherent biases towards spending more in small ways than in one large purchase.

I follow a slightly less aggressive, but similar strategy to the OP. I save about 30% of my income in most months. It leads to some fun financial benefits like a much higher interest rate on your savings and checking accounts and easy financing terms. Sometimes you can have your cake and eat it too. I saved up all the money for my car and they gladly gave me 0% financing (having almost no debt and a perfect credit record doesn't hurt either). I took that and kept the money in a stable investment.

Sometimes the trite saying of "Money makes money" is spot on. For most people though, you're right, that 2% deal would be a steal.

The advice is only sound if you can find some investment that will consistently generate over 2% for you over the life of the car loan.

Getting more than 2% annualized return isn't terribly difficult. Getting 10% annualized return like the OP says is super-hard.

There are lots of pretty safe investments that get you 3-4% real return. Now, are they zero risk? No. But I'm not suggesting that anyone bet their life savings on this, I'm talking about buying a car, something that people will generally do a bunch of times in their life and won't be spending their retirement on. If you can get 2% APR on your car purchase, and you invest the money you save, you should more than cover that APR the strong majority of all times.

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