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Comment by djao | Hacker News Reader

These are stupid games. Yes, if you have the cash to buy the car, you might consider playing stupid games. (But watch out for income taxes on that "5.0% yield". You might be playing for nothing.)

If you don't have the cash, which is the case for the vast majority of people who take out auto loans, there is no possibility of playing the game anyway. Don't buy a car you can't afford.

This isn't elitism or gatekeeping. Nobody needs a new car. We are on Hacker News. Compound interest is the ultimate financial life hack. Either you use it to your advantage, or other people use it to take advantage of you.

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I like the idea of having enough cash to pay off the loan immediately but having the loan (and interest arbitrage, however small) to keep myself liquid + make the monthly cashflow of My Personal Self, LLC, work for me in more optimized ways.

The credit score boosting as a result is also attractive.

But I recognize this requires me to have that much liquid cash anyways. Which a lot of people don’t so they get unfortunately put on the losing side.

Even pre-tax interest arbitrage opportunities are rare, never mind after-tax arbitrage. Think about it. If you can get 5% by depositing money in a bank, so can the dealer. If the dealer can get 5% by depositing money in a bank, why would they lend to you at a lower rate? The only possible reason is if they've made enough money on the car sale (or indirect money such as future service profits) to subsidize the arbitrage loss. It's fundamentally wrong to think that you can somehow beat the system. What's really happening is that you just aren't aware of how you are ultimately the one paying for your so-called profit.

I agree. There is only one situation where this arb truly exists: rate hikes that occur after you secure the loan.

Any other arb requires you to take non-risk free investments which, has obvious drawbacks.

That being said, I still dislike all cash upfront

I mean, out of college a while ago, I literally got a 0.5% APY car loan that my accountant told me I should, under no circumstances, pay down early. I bought a new car that I've essentially done nothing but do oil changes on for 10 years and I can essentially sell it for about what I paid for it 10 years ago and got compound interest on money I didn't have at the time, to buy a car that was essentially as cheap of a new car as I could get.

It's not that it's likely, but you can do the math on if the rate offered is worthwhile. It's probably not the case now that rates aren't in the 0-1% ranges and there's a chance they'll go down in the future, but "getting a loan for 1% and then investing in something that gets 4%" is essentially the underpinning of the fractional reserve banking system that's making a lot of money. You may as well see if they'll let you get it.

> These are stupid games. Yes, if you have the cash to buy the car, you might consider playing stupid games.

Huh? You were the one advocating paying cash.

It's a stupid game because it's really really rare for this kind of arbitrage to exist in the system, especially if you do the computation correctly and count after-tax income rather than pre-tax income.

In the rare instances where you profit, congratulations, I guess? I haven't ever heard of a single person who got rich off of car loan arbitrage. None. But I know tons of people who got rich off of never borrowing a car loan. A $700 per month payment stream invested at 5% over 30 years is half a million dollars. I'd rather have $500000 than a permanent car loan.

I see your point, but I don’t know if people in the financial position to do this do it to get rich. I always saw it as creating small bits of edge in the game.

Also, to this point, the interest arb doesn’t work out the way most people use it because they don’t account for the principle. You’re still going negative into a depreciating liability if you only invest the value of the car. It’s just you’re not going negative with interest.

To go fully not negative requires a lot more cash to generate the interest income to cover the entire payment.

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