- Joined
- Jul 14, 2020
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- 727
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- Location
- Alexandria, VA
- Vehicle(s)
- 2021 Bronco
- Your Bronco Model
- Badlands
That's a big whoosh. I said if you can't afford to pay off a vehicle in 48 then it's beyond your means. I didn't say that 48 months is better or worse in any particular situation.This is the type of blanket statement that makes no sense without context...let's look at an example: My bank as of this morning is offering 2.29% rates on new car loans for up to 72 months. So, I can either write a check directly from my brokerage account and pay for a Bronco in cash....or I can finance it at a super low rate and extend it for a long time and leave that $60k in the account to grow (historically, it will grow at a much, much faster rate than the 2.29% I am paying the bank). So, am I buying beyond my means? I could buy a whole bunch of Broncos for cash if I wanted, but it just doesn't make any sense financially to buy with your own money, when you can buy with someone else's and put my own money to work making more (typically much more).
Example: I finance 100% for 72 months, and leave the $60k I could have used invested: My $60k grows to $102k using average market returns (9% compounded monthly); A $60k car loan costs me $64,273 total over 6 years. I net $37,727. Maybe the PV on that money today is $30k or so....I'll still take it...and I have that cash available whenever I want it if needed.
Bottom line: I may chose to finance longer than 48 months, and it is not "beyond my means", by any means. It is just smart to use OPM when money is so cheap, and to not pay it off one day early at these rates. Of course, it requires financial discipline....
Also, average market returns even with dividend reinvestment is 9% annually NOT compounded monthly. Furthermore, given the shiller p/e ratio's near record highs (only 1999 was higher) the odds of getting 9% over the next 72 months are close zero.
If we were in or just out of a bear market (e.g. 2009/2010), I would 100% agree with you and recommend everyone finance as much of the vehicle as they can so that they can put the rest into the market. However, it's 2021, Yeller just said that interest rates need to rise, and the odds of a significant market correction during that 72 months is extremely high.
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