car loan

[DrSues02]

I'm in the exact same situation...have had a credit card for hte past 5 years and have paid it off in full every month. However, my credit score was only 720 or so and I couldn't qualify for the best rates...although I did manage 9%.

The only way to build up that credit score is to have varying types of credit including a car loan. Although it sucks, im basically forced to pay the interest in order to build up the credit for future purchases.

I'm planning on paying the loan off in 2 years anyways.

[wrschultz]

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I also do feel like it is a little disingenuous to drive a car that isn't paid for in full but that isn't relevant here.

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Do you think it's acceptable to live in a home you haven't fully paid off, or to start a career when your student loans are still outstanding?

[Henry17]

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Do you think it's acceptable to live in a home you haven't fully paid off, or to start a career when your student loans are still outstanding?

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Homes appreciate in value (generally) so they are more of an investment then a consumer good. Using credit for investments is fine. It is only using credit for consumer goods that I disagree with.

Starting a career is one of the few times I believe it is acceptable to use credit for consumer goods. Going from student to professional you need a new wardrobe.

[Jimbo]

I could easily payoff my business car in cash but have a 6% loan that is fully deductible making my interest rate effectivly 3.6%. I can easily own a fairly safe stock with a 6% of higher dividend that is only taxed at my cap gains rate.

In other words dealing in absolutes is limiting your thinking to your persoanl situation and failing to take a larger view of other possible circumstances.

My advice to the OP is to determine if the increase in his credit score will enable him to get a home loan at a rate that will generating interest savings that either come close to or exceed the costs involved in financing vs paying cash. I shouldn't even need to address the added intrinsic value of additional savings available for energency funds, on hand cash availability for a quick investment opportunity, so on and so forth.

Owning an assset outright whether it appreciates or depreciates has little to no relevance on the decision. If relevant at all you should always owe money on depreciating assets and not owe money on ones that appreciate. Think about why.

Jimbo

[soko]

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I'm in the exact same situation...have had a credit card for hte past 5 years and have paid it off in full every month. However, my credit score was only 720 or so and I couldn't qualify for the best rates...although I did manage 9%.

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I think this is very misleading. Owning one credit card is not a very good idea to build credit. If you want to build credit you should have at least 3 or 4 cards. I've never had a car loan and have 760 credit score. Combined I doubt if I've charged more than a dozen things in my life, I still have $50,000 in available credit.

Anyways, for what it's worth to get the best interest rate on a home 680 credit score is good enough as long as you can meet the other requirements, money down, etc.

[soko]

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Owning an assset outright whether it appreciates or depreciates has little to no relevance on the decision. If relevant at all you should always owe money on depreciating assets and not owe money on ones that appreciate. Think about why.

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Isn't that backwards? I'd rather owe money on a home that is appreciating to "get back" the money I'm losing on interest. I have no idea why I'd want to finance a car for 20K and lose 10% of it's value in the first year so that if I sell it I take a loss.

[Maulik]

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no your reasoning is not wrong, its just they charge alot so its hard to beat guaranteed over the timeframe of the loan ~ 5 years

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Just to expand on this, your car loan will likely be in the 10-15% APR range. Buying the car upfront and avoiding the loan is like investing at a guaranteed 10-15%. That's tax free, too, so it's like a taxable income of 13-20%. There's no way your investments will make you more than 5% guaranteed.

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This is a pretty good illustration of the facts.

OP,

Also take into account the fact that you are financing something that depreciates, which is pretty silly.

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[Henry17]

Wouldn't there also be higher insurance costs? I was under the impression that when you lease or finance a car part of the conditions are that you get comprehensive insurance.

[Jimbo]

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Wouldn't there also be higher insurance costs? I was under the impression that when you lease or finance a car part of the conditions are that you get comprehensive insurance.

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This is true but if you want to self insure a $25K (or more expensive) car you have a great deal more money than I do.

Jimbo

[Jimbo]

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Owning an assset outright whether it appreciates or depreciates has little to no relevance on the decision. If relevant at all you should always owe money on depreciating assets and not owe money on ones that appreciate. Think about why.

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Isn't that backwards? I'd rather owe money on a home that is appreciating to "get back" the money I'm losing on interest. I have no idea why I'd want to finance a car for 20K and lose 10% of it's value in the first year so that if I sell it I take a loss.

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Why? Never can anyone answer this question by anything other than "I just would".

Look at it like this;
Best case circumstance: You continue to earn money, get raises that keep up with inflation and able to both pay all your bills and your current lifestyle.

Worst case: You get laid off, file banktruptcy, are allowed to keep your home since it is in the homestead laws but lose your car to compensate your other debtors. Would you rather own your home outright or your car?

Now I will address a bit of what you wrote: How in the world does a car losing 10% of it's value the first year magically change because you wrote a check for it compared to financing it? If you sell it you still lost 10% of $20,000 in your example.

Jimbo