casey225

You have failed to mention that you will have to pay taxes on your interest income. Secondly, you will not make the same amount of interest (3K in your example) each year, as you will have less money invested than the year before.

With regards to your example, start with your 40K, you pay 8K + 2K interest + 1K taxes on investment income (I estimated 33% tax rate), but only gain 2K from investment (after taxes). So, the second year you only have 31K invested. Therefore, your interest income (and the resultant taxes) will go down each year (unless you have one h*ll of a broker ). The loan payment is fixed and the interest will probably exceed your post tax interest income after the first year.

My financial advisor told me today that if we are getting 8-9% on investments, that unless I could finance under 4% (yeah right) it would be better to pay cash. Take if fwiw.

S L I C K

For all the people who got their 2IS's as presents, who were the presents from?

I'll be getting a 2007 GS 350 AWD as a graduation present from my parents. I got a new 1999 Honda Accord EX V-6 as a present when I got my license, a new 2001 Lexus IS 300 as a high school graduation present, and a new 2005 Acura TL A-Spec as a present because I needed a "beater" for college. Got to love the parents. My sister is getting a 2007 IS 350 this fall from my parents, but she's away at college ( New York University ) six days a week so the IS 350 will be mine during that time.

imaputz

iTrader: (2)

ahhhhhhhh! nice gifts you've been getting.

i got a "roof over my head" when i was in high school as a gift(i graduated in 1999)

after highschool graduation...i got a "goto college OR get out of the house" gift.

after college graduation... i got a "go get a job AND get out of the house house" gift.

now I will soon be a proud owner of a is350. i worked very very very hard ... i am sure i will APPRECIATE this car a lot.... as i have sweated it out for her =x.

edit: the latest gift i am getting is ... "go find a nice girl...marry her... and make us grandparents"

slowandlow

i am throwing 10k down and financeing the rest want to keep my payments in the aforadable

kensteele

...and i didn't even get half of those, i was out the door at age 17, never looked back. Wow, how times have changed lol.

diablo1

Ya, there's something to be said for this too. When you pay cash upfront, there is no uncertainty about investment returns, taxes, etc. However, according to your logic, companies should not take out any debt either, and should "wait until they've saved enough money" before spending money on capital projects. In reality, companies think about debt the same way I do - if your rate of return is greater than your interest rate, take out the debt and do the project. If a company is considering taking out debt that they will have to pay $15 million in debt on, but the project will pay out $20 million, they will do it. If they only expect $10 million from the project and debt s $15 million, they won't do it.

You all are right about taxes too - you do have to pay taxes on investment returns. Of course, you could invest in a triple tax-free bond fund, and pay no taxes....

diablo1

The difference with a lease is that you only pay for the value of the car you "use up" during the time you have the vehicle. But, at the end of the leaes, you generally have the option to buy the car anyway, so it's really not that different from taking out a loan and paying interest.

One difference is that you usually get a higher interest rate on the lease. Another difference is that, since you're only making payments on the amount the car will appreciate during the time you have it, rather than the entire value of the car, you pay a lot less in sales taxes (if you have them in your state).

A lease is a good way to get a nice car with low monthly payments and no money down. At the end of the lease, you will have the option to buy the car. The total cost of doing this is higher than the total cost of paying cash, but your upfront payments and monthly payments for the first few years are lower. So, if you think you might need the money for something else during the first few years of ownership, I think it make sense to lease. Also, if you don't want to keep the car after 3 years (or whatever the term of your lease is), you don't have to go through the hassle of finding a buyer. You just drop it off at the dealership, and that is that.

Lets Drive

iTrader: (3)

You have a "cheaper" car overall. If you're looking to invest your money in other areas, then by all means do so, but I consider it something independent of my vehicle budget.

diablo1

So if I said, you can either pay $40k for this vehicle, or you can pay $50k for the car and get $15k from other investments, you would still choose the first option?

kensteele

Yes he would because his car budget is "independent" of all his other finances lol.

Scooter24

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And what percentage is that yielding? You may want to go back and give a number lower than 15K if that is your investment choice.

Dr C

When you pay cash for a car, instead of leasing it, you have some value in it that you can realize when you sell it or trade it in on another car. There is no residual value with a lease. Also, you can sell it anytime you want because you own it. Case in point: I purchased a used Lexus SC 300 several years ago. I quickly figured out that it was not the car for me. Five months later, I traded it back to the Lexus dealer for my Ferrari -- best trade I ever made!

Lets Drive

iTrader: (3)

Yep, or consider the purchase of a cheaper car if investing 10k were so critical. Cumulative loss as a combination of depreciation and interest dictate that you lose more in the larger picture. Different methods for different people.

You wouldn't have 'made' $15k , because 10k of it would've been spent on the car over the course of that 5 year period. Add tax, and your final profit is minimal, with the bank getting the most out of the deal. This is why I'd go with the scenario above- however many people don't have either option (we're operating under the hypothetical that 40k so happens to be sitting), which is why loan options exist. There is nothing wrong with your example, but alternatives are just as effective.

diablo1

People are free to choose whatever financing they wish, but from an economic perspective, the rule about taking out a loan if you can invest the money somewhere and make better returns is the "right answer". In an economy composed of rational investors, everyone would do this. The only reason people would not take out loans would be if interest rates were very high, or returns from other sources were very low.

I never said that your net profit was $15k. The whole point of that example is that you come out $5k ahead, before taxes. You could do it with different numbers if you wanted to. It was just an example.

Yes but my point here was that when you lease, you don't pay for the value of the car that you don't "use up" while you have it. When you buy, you pay for the whole car, "use up" a lot of the value as the car depreciates, and then you sell it and "get back" whatever value you didn't use up. With a lease, you just pay for the value you "use up" as you are driving it. Whether you pay the residual up front and then get it back when you sell (ie you buy the car), or you just never pay the residual in the first place (ie you lease the car), doesn't make any difference at the end of the day. The only real difference is that leases have higher interest rates. Of course, the residual on a lease may be too high or too low, and that may also change things.

$15k was an arbitrary number used as an example, not really based on any actual investment. However, NY triple-tax-free muni funds seem to be yielding around 4%, which is probably less than you would pay on a loan, so with that particular investment, you'd be better off paying cash.

I'm glad you see what I'm saying at least.

diablo1

What if, a year and a half ago, you were either going to pay cash for a car, or take out a loan and place the rest in Google stock? Your $40k would have turned into $160k, enough for 4 IS350's. Surely in this case you would take out a loan???