Sunday, June 2, 2024

Paying Cash vs. Borrowing to Buy a Car

My natural inclination is to not take on debt if you can afford to pay cash.  But is this financially prudent?

Let's say you want to buy the Cadillac CT5 AWD withe twin turbo V6.  Figure about $65,000 with tax and license.  

Assume 8.45% APR (the current new car loan rate at First Tech Federal Credit Union).  That is $869/month.

My one year pre-tax rate of growth on my brokerage account is 30.87%.  Most of that return is taxed as either long-term capital gains, qualified dividend income, or not taxed at all (Idaho municipal bond divdends), so approximately a 20% tax rate.  (IRA distributions are taxed at full income tax rate; withdrawals from the already taxed brokerage account are not taxed.)  Figure that the net tax gain is 24.7%.  That 65,000 left alone will grow16,055/year or $1338/month.

Clearly, taking out the car loan, assuming you have enough cash flow to make the loan payments, and you have a credit score good enough to get that interest rate, makes more sense.

Caveats: Some of that net taxable gain is inflation.  If the economy goes into a serious depression, that net tax gain will fall, perhaps precipitously.  Of course, interest rates will also fall.  If you can refinance thar car loan at 5% the car payment falls to $777/month.   (Used car loan rates are typically higher than new car rates but a serious depression will likely drop new car rates to 3% as it has in the past.)  Civil War likely causes stock market collapse and higher interst rates as the government's ability to make bond dividend payments delines.  Yet another reason to put off civil war as long as is possible.

The same analysis applies to existing car loans, especially those taken out before the current Interest rate spike.

1 comment:

  1. There is an undefined benefit in sleeping at night, without a monthly payment that has to be made.

    OTOH, there are benefits, I've discovered, to take on such loans for a brief period (six months?) and then paying it off, in terms of supporting your credit score. The next time I buy a vehicle (this year or next) that's what I'll be doing - 50% down, 36 month loan, paid off in full in six months