Quick Q, Money now vs money later?

[fanmail]

Without making this too complicated, I just wanted to know which method is better. I plan on buying a new car within a year, and let's say I have 40K sitting around. If I can afford it, is it better to pay for the car in full or just put a payment down, and then pay off a loan on the rest? Would this theory be the same for other major purchases?

[PokerFox]

It depends on the interest rate you can get for the loan, what interest rate you can make on the 40k, and your risk level.

If you can get a low interest rate, invest the 40k (only if it's at a higher rate than the loan interest rate AND YOU ARE WILLING TO TAKE THE RISK) and pay off the loan.

If not, pay it in full. If you don't need the 40k there's no reason to pay interest (unless you are making more on your investments, like I said.)

[Preem]

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It depends on the interest rate you can get for the loan, what interest rate you can make on the 40k, and your risk level.

If you can get a low interest rate, invest the 40k (only if it's at a higher rate than the loan interest rate AND YOU ARE WILLING TO TAKE THE RISK) and pay off the loan.

If not, pay it in full. If you don't need the 40k there's no reason to pay interest (unless you are making more on your investments, like I said.)

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You also have to factor in taxes. Your return on investment, after taxes, must be greater than the interest on the car loan.

This same principle can also applies to people who pay off their mortgage early. They might be better off investing the money rather than paying off the mortgage.

[BradleyT]

You can always take out a loan (will help your credit) and pay twice a month if you can't find somewhere else for your money.

[fanmail]

Thanks for all the responses guys. So if I am confident that my after-tax investment rate exceeds the loan rate, then I stand to make a profit by taking the loan. And my credit rate would benefit. Sounds like good advice to me.

[prohornblower]

[ QUOTE ]
Thanks for all the responses guys. So if I am confident that my after-tax investment rate exceeds the loan rate, then I stand to make a profit by taking the loan. And my credit rate would benefit. Sounds like good advice to me.

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Better advice would be to not spend 40K on something that depreciates as much as a car does. Spend far less, and keep extra to do what you want with.

Of course, if you are a millionaire, 40K for a car isn't a big deal. But I'm assuming you aren't a millionaire, or you'd already have a pretty firm grasp on leverage and risk/reward.

I'm just thinking aloud really [img]/images/graemlins/cool.gif[/img]