[jackblack73]

[ QUOTE ]
Ok, assume $20,000 car.

Option 1:

Purchase $20,000 car in cash. Invest $70,000 @ 5% compounded yearly for 5 years. After 5 years you have $89,340.

Option 2:

Purchase $20,000 car with financing. Invest $90,000 @ 5% compounded yearly for 5 years. Pay 6% compounded yearly over 5 years on $20,000 of that (Pay $4,000 principal + interest per year).

Worth by year via option 2 below...

After 0 years: $90,000 savings - $20,000 debt = $70,000
After 1 year: $89,300 savings - $16,000 debt = $73,800 ($4,500 earned & $5,200 paid)
After 2 years: $88,805 savings - $12,000 debt = $76,805 ($4,465 earned & $4,960 paid)
After 3 years: $88,525 savings - $8,000 debt = $80,525 ($4,440 earned & $4,720 paid)
After 4 years: $88,471 savings - $4,000 debt = $84,471 ($4,426 earned & $4,480 paid)
After 5 years: $88,488 savings - $0 debt = $88,488 ($4,423 earned & $4,240 debt)


Option 2 leaves you with $88,488 at the end of 5 years while Option 1 leaves you with $89,340. Inflation is the winner as your $90,000 in 2007 dollars now requires $104,842 in 2012 dollars to get the same purchase power.

Edit: I assumed you'd pay off the interest every year and it was only compounded yearly. If you made your payments an equal size for 5 years, you'd end up with even less money via option 2. Also, I assumed yearly compounding which is not entirely accurate but good enough for demonstration purposes.

[/ QUOTE ]Your interest paid on the car loan is incorrect, as you only pay on the balance, which is lower every month. A $20,000 loan at 6% will result in $3199.36 of interest after 5 years, not $3600.

Anyway, I think he should finance even if it is a slightly -EV move. Invest your money with the intention of not touching it for 30+ years. Add to it every year, but never withdraw anything. The car payment should come from your budget, which you determine based on your income.

BTW, if you shop around you can beat 6% interest on a car loan, assuming you have decent credit. I got 4.99% from Justice Federal Credit Union.