Financing a car purchase

[jstigga]

(long time lurker, first time poster)

My last 5 years were quite productive income wise, thanks to a series of salary raises, timely investments decisions and controlled spending. So, I decided to reward myself with buying a new car for my family of four.

I currently own a german 9 y.o. station wagon (9kE trade-in value), I will change it to a SUV of a same brand (1-2 y.o. model, in 50-55kEur range) and keep it for 5-7 years.

To finance the purchase, I have two options:

• pay cash outright and commit to investing in ETFs a monthly amount equal to estimated depreciation
• get a loan at ~4.2% and invest outright the equivalent amount

I have a (very) stable job, a 25y mortgage at 1.81% (insurance included), no personal loans and I am not particularly concerned with taking on debt.

This boils down to DCA vs lump sum debate, but I wonder what would be the better approach in current market conditions.

 

[janetmal]

@jstigga I'm sure you're expecting this question and have probably already thought about it, but still: do you really need such an expensive car?

There's a Ben Felix video for everything:

 

[anthony28]

@janetmal OP said s/he will reward s/him self not that s/he needs a new car.

 

[janetmal]

@anthony28 Let me rephrase for the pedants: "Is an expensive car a good way to reward yourself?"

And maybe the answer is "yes" for OP, even though for most people it probably isn't. That's fine, it's just good to make sure that you have thought about it.

 

[anthony28]

@janetmal It's not a pedantry - there is an essential conceptual difference living life meaninglessly frugal dying with a loaded bank account or having some mundane pleasure once in a while without putting important things into danger.

 

[janetmal]

@anthony28 Whether you need to reward yourself and how is part of the same question: do you really need it? If yes, by all means go ahead, but stop for a moment to think about it. That is all I meant.

 

[jstigga]

@janetmal definitely not an unexpected question in this sub

the cost difference between the car i need and the car i want is well within the range that will not affect my lifestyle and will not significantly affect my net worth.

there is always the debate on alternative (more satisfying) ways to spend the this money, but that's not the point of my post.

 

[janetmal]

@jstigga Right then, have fun with the car

For what it's worth, for my own planning I currently assume a 6.1% nominal return for global equities (in euros) in the next 10 years, based on this tool from Research Affiliates. This is higher than the interest rate on your loan, so if you have a 100% global equity portfolio and since you don't mind taking on debt, it could make sense to go for the loan and invest everything now. Of course the realized returns could be massively different from this estimate.

 

[radon]

@jstigga Use cash. Put the money aside every month that the loan would cost you to finance the depreciation so that in 7 years time you can buy another one for cash. Essentially, loan the money to yourself.

 

[bethlehem57]

@jstigga The math is this and you know it: if your investments will earn more then 4,2% - you win, if less - you loose. The next step is to calculate by how much you can win and loose and to evaluate if these sums are worth the hassle. For more information you could reads these threads from bogleheads, I hope you will get your answer.

https://www.bogleheads.org/forum/viewtopic.php?t=371283

https://www.bogleheads.org/forum/viewtopic.php?t=342840

https://www.bogleheads.org/forum/viewtopic.php?t=328657

https://www.bogleheads.org/forum/viewtopic.php?t=318065

https://www.bogleheads.org/forum/viewtopic.php?t=317231

 

[jstigga]

@bethlehem57 thank you for the links, this is the debate I was looking for.

indeed the math may be in favor of the loan, however the hassle and potential risks may not be worth marginal gains...

 

[janiesdad]

@jstigga so what if you put down 50% of the car's price in cash and invest the rest, it'll lower the potential loss but the potential benefit as well, lowering the amount of risk.

 

[sarahjeanne]

@jstigga As others have said, you can do the math and make it work. But..

You will pay the interest on the loan, you might get higher returns.

I think the important point is this. If you are spending your own hard cash, you might come in closer to 50k. If it's someone elses cash, maybe you spend 55k.

My point is that I feel paying cash makes us think harder about a purchase.

 

[jesushockeyandfriends]

@jstigga Whenever you're financing a purchase of a liability and/or a depreciating "asset", you can't afford it.

"But what about the low interest on the car loan and earning more money by keeping it invested?!"

No. If you feel there's an opportunity cost to paying cash, you're spending more than you can afford. Luxury items shouldn't affect you financially in any way.

Bottom line: don't spend more than 2 % of your net worth on a fucking car.

 

[jstigga]

@jesushockeyandfriends Thanks for the reality check, much appreciated!

In my case, this spent is about 10% of my net worth which is spread between ETFs, real estate, shares of my employer, a bit of crypto and cash savings account (will be used for the purchase).

The difference between the car I need and the car I want is ~20k, for which i don't really feel there is an opportunity cost or any impact on budget and my day-to-day habits.

My dilemma lays in utilization of cash vs credit. however I see your point.