Reply to Example of how not to borrow for a car

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[quote=Anonymous][quote=Anonymous]I wonder how many people would actually buy a $30K car if it had to be paid for in cash...[/quote]

This is the key issue. This thread is actually two conversations. One about whether or not people are buying too much car because cheap loans are available. And another one on interest rate arbitrage (borrow cheap, invest at a higher rate).

Here is the rule to live by for car purchase:

IF:

1) you can afford to pay cash up front, no problem

and

2) you invest the money that you are not spending to pay cash for the car

THEN:

it is rational and sensible to borrow money at near-zero interest rates to borrow the car.

The problem is that in most cases, people use cheap car loans to buy cars that they could not afford to buy with cash. In these cases, the rational thing is to buy a cheaper car. A "reliable" safe car can be bought used for $8,000 or less. If you spend anything more on a car, it should be because you can easily afford it with cash.

Finally, another good rule of thumb is try to avoid spending more than one month gross salary, max two months, on a car.

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