Once my 3 is ordered, what about financing / car loans?

[eisbock]

Waitasec... Are you guys saying there is a Money Market, SPDR ETF, REIT, trust fund, Stock, Bond, or other investment vehicle that pays a guaranteed 8% amortized compound interest rate over time? Awesome! What's it's name, and how do I get in...?

Because really? If you are talking about flat rate interest, it just ain't the same thing. Amortization be da DEBiL! Yes, even at 'low interest rates' -- especially over longer loan periods.

Let's say I want to buy a brand new $50000 Model 3. I happen to have $50000 cash sitting in my bank account and I'm debating taking a loan and investing the cash or just paying cash.

If I take a 5 year loan at 5% APR, I'm looking at roughly $6614 in interest.

If I invest that $50k cash into something with a 5% APR return, I'm looking at $14168 in interest, which means after 5 years, I walk away with $7554, which also means I just reduced my $50k Model 3 to the modest sum of $42.5k. Not a bad deal. So how low can my investment rate go until I break even with my loan? Roughly 2.5%.

So if you can guarantee a return of 3% or better on your $50k cash, it makes sense to take a loan out on the car and invest the cash. Plus, this gives you a nice chunk of change to keep earning money on, as opposed to slowly building up that $50k nest egg again over several years after buying your Model 3. You'd be losing out on thousands of dollars by doing that even if your investments just broke even over your loan, because now you have those few thousand more to earn compound interest later on after the car is payed off.

Now, if I can get a sweet amortized loan at 3%, I only need a 1.5% return on my investments. All of a sudden, that's looking pretty doable without a lot of effort or risk. Online 5-year CDs can get you up to 2%.

The only upside to forking over the $50k cash in full is if you don't want to deal with the hassle of monthly payments or worrying about ensuring that your investments pay off. For some people, this is worth the few thousand dollars they could save.

What is the best approach?

Please, somebody correct me if I'm way off base here. My new year's resolution is to be more proactive in learning about investments, loans, and financing for what will surely be the largest purchase of my life so far.

 

[Red Sage]

What is the best approach?

The best approach is to spend your own money the way you personally prefer.

 

[ricardocabesa]

Let's say I want to buy a brand new $50000 Model 3. I happen to have $50000 cash sitting in my bank account and I'm debating taking a loan and investing the cash or just paying cash.

If I take a 5 year loan at 5% APR, I'm looking at roughly $6614 in interest.

If I invest that $50k cash into something with a 5% APR return, I'm looking at $14168 in interest, which means after 5 years, I walk away with $7554, which also means I just reduced my $50k Model 3 to the modest sum of $42.5k. Not a bad deal. So how low can my investment rate go until I break even with my loan? Roughly 2.5%.

So if you can guarantee a return of 3% or better on your $50k cash, it makes sense to take a loan out on the car and invest the cash. Plus, this gives you a nice chunk of change to keep earning money on, as opposed to slowly building up that $50k nest egg again over several years after buying your Model 3. You'd be losing out on thousands of dollars by doing that even if your investments just broke even over your loan, because now you have those few thousand more to earn compound interest later on after the car is payed off.

Now, if I can get a sweet amortized loan at 3%, I only need a 1.5% return on my investments. All of a sudden, that's looking pretty doable without a lot of effort or risk. Online 5-year CDs can get you up to 2%.

The only upside to forking over the $50k cash in full is if you don't want to deal with the hassle of monthly payments or worrying about ensuring that your investments pay off. For some people, this is worth the few thousand dollars they could save.

What is the best approach?

Please, somebody correct me if I'm way off base here. My new year's resolution is to be more proactive in learning about investments, loans, and financing for what will surely be the largest purchase of my life so far.

What is the "hassle of monthly payments"? I'm sure you've heard of ACH. Maybe not.

 

[jsanford]

My credit union has financed a Tesla. We had to modify the list of vehicles in our loan software to include the make and model when the S was new.

 

[eisbock]

What is the "hassle of monthly payments"? I'm sure you've heard of ACH. Maybe not.

Believe it or not, this is an actual quote from people I talk to about car payments. I personally don't understand it either but it's a very real thing that people apparently care about. Maybe it's not so much the hassle of actually issuing funds to the loaning agency, but rather having a good chunk of your paycheck taken out every week.

The money is gone either way, be it cash or installments, but I can see the allure of not having to deal with only making x% of your salary for the next five years. Gives you more flexibility I guess and makes the car less of a burden when things start going wrong and now you have to shell out cash to fix a car you're still paying off.

 

[JCLeonard]

So if you have $40k cash to buy a new car you're telling me it makes more sense to pay cash rather than to finance at under 3%? Given the average rate of return in the US stock market is let's say 8% over time I would argue that I would actually be losing 5% by paying cash vs. financing. Assuming of course I have that money properly invested.

My answer to this is actually, yes. If I have the cash to pay for something I would use the cash. I understand not everyone will agree with this or be able to pull it off. And that's OK, we're all in different spots in our lives.

My logic, which fits MY situation, YMMV and that's OK: Life is full of uncertainties. In 2007/2008 I would have lost 50% of my stock market investments over 18 months. Had I used a loan to finance a car (or couch, or whatever) and lost my job like so many others did I may have been unable to pay loan payments. While I would love to be able to tell the future, I can't. I don't fancy myself an investment expert so I choose to save/invest money and spend cash rather than finance. If the market takes a dump again at least I feel good knowing that I own everything I bought, not a lender. Another benefit I see in using cash is that it really makes me think about what I want to spend money on.. cold weather package for $1,000? In monthly payments that seems like a no-brainer right?. When I am writing a check I have to think about it more and be honest with myself if I really want to spend that money on that thing.
In terms of housing, it's really the only kind of loan that I can personally get behind. As long as the plan is a short term loan (15 years) and an aggressive (as reasonable) plan of of extra principal payments.

FWIW, I am married with two kids under 6 years old so it's not just single or DINKs that can pull this off.

To the OP: since we have such a long delay to the Model 3 arrival I encourage you to set up a separate savings account and make a monthly payment into it that equals what you think your loan payment will be when the car comes along. This will server two purposes. 1. You will save up a ton of cash and increase your down payment. This will reduce your ultimate loan amount. 2. You will get used to that payment missing from your monthly income and be able to determine if that's comfortable for you or not. And a third benefit is that your REAL monthly payment will be less when it comes time to buy.

 

[ModelNforNerd]

Believe it or not, this is an actual quote from people I talk to about car payments. I personally don't understand it either but it's a very real thing that people apparently care about. Maybe it's not so much the hassle of actually issuing funds to the loaning agency, but rather having a good chunk of your paycheck taken out every week.

The money is gone either way, be it cash or installments, but I can see the allure of not having to deal with only making x% of your salary for the next five years. Gives you more flexibility I guess and makes the car less of a burden when things start going wrong and now you have to shell out cash to fix a car you're still paying off.

Because I like to "check boxes" when ordering, I will likely have to finance a small portion of my purchase, less than $15,000.

But even if I do have to, the monthly payment on that loan (which I'd be able to turn around and pay off as soon as I sell my Audi) would be less than what I'm currently putting away every month in savings anyway.

The only incentive I'd have to immediately pay the loan off is a big one though: the interest.

If I have the cash on-hand, I'm not going to give the bank and extra $50-$75 per month for 3 to 5 years.

 

[eisbock]

Because I like to "check boxes" when ordering, I will likely have to finance a small portion of my purchase, less than $15,000.

But even if I do have to, the monthly payment on that loan (which I'd be able to turn around and pay off as soon as I sell my Audi) would be less than what I'm currently putting away every month in savings anyway.

The only incentive I'd have to immediately pay the loan off is a big one though: the interest.

If I have the cash on-hand, I'm not going to give the bank and extra $50-$75 per month for 3 to 5 years.

Ah ha, but squirrel that cash away into something that returns $100 per month and that changes things! Decisions decisions...

 

[ModelNforNerd]

Ah ha, but squirrel that cash away into something that returns $100 per month and that changes things! Decisions decisions...

I'm in a good position though.

I'll have enough to get the car delivered with a < $15,000 car note.....

and then I should be able to immediately turn around and sell the Audi for ~$25,000.

My goal is to immediately pay off the car note, get the title to the Model 3, and then squirrel away what's left.

It's a better situation to have the vehicle paid off and any other money available for investment or savings.

Now that the interest rate will budge, I might be able to find a favorable CD.

 

[eisbock]

It's a better situation to have the vehicle paid off and any other money available for investment or savings.

This is really probably the safest advice. Interest rates can change and investments can crap out. I think I would also feel better about having the car paid off (or at least mostly paid off) just from a stress and well-being point of view. I don't want to have to worry about not being able to make payments or having to dip into my CD or investments if I lose my job, have a medical emergency, whatever. Having to worry about that for 5 years probably isn't worth the extra couple thousand dollars I'd save when all is said and done.

I'm looking to be in a good position too, and am hoping to at least have the option to buy the car with cash when the time comes. I'm already well past the base model, it's just a matter of options at this point! Might have to take out a small loan like you to stave off the buyer's remorse.

Or start camming with my girlfriend.

 

[Tummy]

I just bought an inventory Model S 60 a couple days ago (Dec 31) and was able to get 1.74% for 72 months. To get that rate, Tesla requires a 10% down payment plus all taxes due by your state (7% in my case). So be prepared for that. For the previous BMWs and Mercedes we've bought, we were able to roll all the fees into the loan/lease and not bring any money at closing. If we only wanted to put 5% down (plus 7% tax), I was offered 3.xx%.

On the Tesla loan, I could take the money out of my savings/investments to pay for it, but for fixed 1.74%, it doesn't make any sense. Tesla found the financing for me and it was through TD Bank. The financing also included GAP coverage at no extra cost so if the car is totaled and the insurance payout doesn't cover the remaining balance, I won't be on the hook for that amount. I tried shopping for my own finance, but the lowest I could find advertised was 1.99%.

 

[gregincal]

Let's say I want to buy a brand new $50000 Model 3. I happen to have $50000 cash sitting in my bank account and I'm debating taking a loan and investing the cash or just paying cash.

If I take a 5 year loan at 5% APR, I'm looking at roughly $6614 in interest.

If I invest that $50k cash into something with a 5% APR return, I'm looking at $14168 in interest, which means after 5 years, I walk away with $7554, which also means I just reduced my $50k Model 3 to the modest sum of $42.5k. Not a bad deal. So how low can my investment rate go until I break even with my loan? Roughly 2.5%.

So if you can guarantee a return of 3% or better on your $50k cash, it makes sense to take a loan out on the car and invest the cash. Plus, this gives you a nice chunk of change to keep earning money on, as opposed to slowly building up that $50k nest egg again over several years after buying your Model 3. You'd be losing out on thousands of dollars by doing that even if your investments just broke even over your loan, because now you have those few thousand more to earn compound interest later on after the car is payed off.

Now, if I can get a sweet amortized loan at 3%, I only need a 1.5% return on my investments. All of a sudden, that's looking pretty doable without a lot of effort or risk. Online 5-year CDs can get you up to 2%.

The only upside to forking over the $50k cash in full is if you don't want to deal with the hassle of monthly payments or worrying about ensuring that your investments pay off. For some people, this is worth the few thousand dollars they could save.

What is the best approach?

Please, somebody correct me if I'm way off base here. My new year's resolution is to be more proactive in learning about investments, loans, and financing for what will surely be the largest purchase of my life so far.

There's a huge flaw in your reasoning. You need to subtract the monthly payments from your investment, otherwise you are using additional money not accounted for (or alternatively in the cash purchase scenario you could invest the monthly amount you are saving by not making car payments).

 

[ricardocabesa]

My credit union has financed a Tesla. We had to modify the list of vehicles in our loan software to include the make and model when the S was new.

My CU will be financing mine too.

 

[JoeCoolMan24]

No. If you need to take loan you are doing something wrong. The loan is the indicator that you should put more effort to increase your income and stop spending money you do not have. If you have family and you need to take loan to buy a new car, you have done something wrong, probably you have spent too much time making babies and too little time increasing your income. Plain and simple. The only time it is ok to take a loan is if you want to increase your income by reinvesting the loan. If you take a loan to consume the money, game over, you have lost, sorry. "Yes majority people take loans" - This sentence alone should make you curious..... because there is also a sentence "Majority of people do not have money"... I am 26, I earned all my money, I am not super rich, I never take loans, I am not in majority, thanksgodforthat

Did you go to college? Hope you paid for it all up front.

 

[eisbock]

There's a huge flaw in your reasoning. You need to subtract the monthly payments from your investment, otherwise you are using additional money not accounted for (or alternatively in the cash purchase scenario you could invest the monthly amount you are saving by not making car payments).

Well the theory would be those monthly car payments would come from my income and the cash would become "savings". This assumes of course I am able to retain a steady job during the loan repayment period. Sure, this is another gamble, but if things go awry, I always have my savings to fall back on.

The hardest part about securing passive income is building a big enough nest egg in the first place and paying cash would put a huge dent in that because it would take the same number of years to build that amount up again, which would hurt me even further down the road because I lose out on the compounded interest.

 

[ModelNforNerd]

The hardest part about securing passive income is building a big enough nest egg in the first place and paying cash would put a huge dent in that because it would take the same number of years to build that amount up again, which would hurt me even further down the road because I lose out on the compounded interest.

on the bright side, the interest rates will start climbing from near-zero now. You'll be better positioned to recoup that nest egg through compound interest than you would have been in the previous 7-8 years.