Yup. Anyone that signs up, of their own free will, for a seven year loan on a depreciating asset has rocks in their head. For fucks sake.
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."
But financing doesn’t make you an idiot.
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).
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.
But yes most people don’t treat money this way.
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.
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.
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.
I didn’t even get into down payment or cash opportunity cost because just generally don’t even believe the basic examples.
I bought the cheapest house within commuting distance of where I work (in London) and am still trying to figure out how the hell to get out of that mortgage sooner than the final term. My car was bought outright as was my campervan.
I don't know how the people who drop half a million on a house and 50k on a Chelsea tractor, earning the same wage as me, sleep at night.
You are still losing maybe 50% in the first year in depreciation. If you are paying it over 7 years then you are under water on the car from the minute you pick it up until it's paid off in full.
If you can finance at an interest rate below what you are earning in the market then you are better off financing. People who pay in cash are leaving money on the table for non-financial reasons.
I'm saying that financing can easily make sense with low interest rates. Nothing in my comment nor criklis has anything to do with buying a used vs new car as the same logic applies to both.
Mathematically, it makes a lot more sense for us to refinance to another 30 year loan (to get rid of PMI) and invest the difference but I am planning on refinancing to a 15 year.
Whether this is good or not is completely dependent on the loan interest rate, a person's cash flow situation, and what they will do with the free cash flow otherwise..
$50-100/mo saved due to lower 7y payments reinvested elsewhere could quite feasibly offset the higher cost associated with the (assumed) higher interest rate of the 7y loan.
And, according to the assumptions in financial/economic theory anyway, if you can get a loan at or below inflation rates, you're getting a 'discount' on the total price w/r/t paying 100% cash now
But yes, this should be made as a 'financing' decision, not an 'affordability' decision - if you can only afford the vehicle with 7y loan at all, and aren't taking the longer loan as an savings/investment decision among weighing the TCO you probably should be buying a cheaper one.
This doesn't mean they are rock-headed. Like all of us, they could have a blind-spot where a decisions made may not be in our long term economic interests.
It’s much easier to get a car with a $350/month car note where you won’t have unexpected repair expenses than getting a $200/month car note on a car without a warranty and then have an unexpected expense.
Now we have a credit card with the car shop we used that has a six months/no interest program. I use that even if I do have the money. But if we had bad credit, we could get a car loan much easier than an unsecured credit card.
I am at a point in life now where I can afford an expensive car repair bill and it just stings a little bit. When I was first starting out decades ago working at night as a computer operator while I was in graduate school during the day, any unexpected expense meant a call to my parents. Many people don’t have that luxury.
It can be rationalized with emotions, but not financial sense.
As far as four vs seven years. You’re hoping that you can figure something out in four years.
At least with T-mobile. Even if you have horrible credit as long as you pay your bill on time with them for 12 months, you are eligible for a no interest phone loan.