Own or Loan

[Huz-Z]

Originally Posted by The__J__Factor

Most car loans here are about 10-15%

And I thought Canadian banks were bad - that amounts to loan sharking.

[The HACK]

Anyone dumb enough to pay cash or take out a loan for a depreciating asset should be shot.

[Twisted Six]

Originally Posted by The HACK

Anyone dumb enough to pay cash or take out a loan for a depreciating asset should be shot.

Errrrm, then what does that leave ? Steal it ??

[The__J__Factor]

Originally Posted by Huz-Z

And I thought Canadian banks were bad - that amounts to loan sharking.

Pretty much.
Its crazy how much we pay for land, houses, cars, rent and loans yet some how we manage to do pretty well.

[z4mcoupe]

Originally Posted by The HACK

Anyone dumb enough to pay cash or take out a loan for a depreciating asset should be shot.

I hope your SO doesn't frequent this forum.

[Hawkeye]

Originally Posted by The HACK

Anyone dumb enough to pay cash or take out a loan for a depreciating asset should be shot.

I don't think any of our cars are depreciating assets. I at least know that mine is appreciated every day.

I can easily say buying this car new was the most financially irresponsible thing I have done to date, yet I still don't regret it.

[esqu1re]

I don't think the Hack was serious. 99.9% of the things we buy will depreciate. You wouldn't have anything if all you bought were things that appreciated. In fact, you wouldn't eat.

[Jbs]

I paid cash and got my car for a steal.... I don't plan on selling this car until I can afford a GT3 to replace it, so I am not too concerned about depreciation lol

[Huz-Z]

Originally Posted by Hawkeye

I don't think any of our cars are depreciating assets. I at least know that mine is appreciated every day.

I can easily say buying this car new was the most financially irresponsible thing I have done to date, yet I still don't regret it.

I absolutely agree.

[Foxland]

Originally Posted by FerRrari

I had a 0 down mortgage, I then refinanced my home, took the money, put down 3 down payments on expensive property, rented them out and took out a refinancing loan on two of those, the third one I sold as a time share. I then used the money to create a new social networking startup, got some angels and VCs to invest, we IPO'd and I short saled everything.

That's some funny s**t...sounds like everyone in my neighborhood!

[Foxland]

Originally Posted by The HACK

Anyone dumb enough to pay cash or take out a loan for a depreciating asset should be shot.

Actually if you buy used, letting the first owner take the biggest "hit" you are usually not so bad off. I think it was JP Morgan who said you don't want to own depreciating assets, like boats, planes (although some of them appreciate these days) you lease them. Leasing is not a bad thing, it may also work if you buy at the end of the lease. But shooting the person is a little extreeme.

Mo

[3002 tii]

Originally Posted by Foxland

Actually if you buy used, letting the first owner take the biggest "hit" you are usually not so bad off. I think it was JP Morgan who said you don't want to own depreciating assets, like boats, planes (although some of them appreciate these days) you lease them. Leasing is not a bad thing, it may also work if you buy at the end of the lease. But shooting the person is a little extreeme.

Mo

The whole lease vs buy question is really simple. What's your horizon? If your horizon (useful life) exceeds total depreciation, the economics are in your favor. Simple finance / accounting says in this case you record a profit or net gain.

If the terms of ownership are less, you are better off leasing - but this all assumes you'll only drive 1 car in your life (whether that's 10 yrs or 3 yrs). But knowing you'll lease again, then owning is truly the better option but one who's always picking up new leases is clearly not interested in owning 1 vehicle for the long term. In this case, it's not economics but just personal preference.

This concept wasn't coined by JP Morgan, Goldman or any "authority" from the street - it's common sense.

[The HACK]

Originally Posted by Dark Schnitzer

Errrrm, then what does that leave ? Steal it ??

You buy it when it stops depreciating.

[The HACK]

Originally Posted by Foxland

Actually if you buy used, letting the first owner take the biggest "hit" you are usually not so bad off. I think it was JP Morgan who said you don't want to own depreciating assets, like boats, planes (although some of them appreciate these days) you lease them. Leasing is not a bad thing, it may also work if you buy at the end of the lease. But shooting the person is a little extreeme.

Mo

BINGO.

And yes shooting them would be a little extreme, since I ALSO bought a depreciating asset (my MZ4 Coupe, amongst other things).

But this whole "argument" of people shouldn't take out loans or should pay cash for cars is stupid at best. Anyone who thinks paying CASH for car is smarter than taking out a loan for a car is like the pot calling the kettle stupid. Or black. Anyone with a decent sense would know that LEASING is the way to go.

[Vertigo//SD]

How depreciation works

Like most things, cars diminish in value as they age. Fortunately, we can anticipate the depreciation. I looked in the N.A.D.A. Used Car Buyers Guide and found a pattern. The car's value is related to its value when purchased. An approximate table of values is below.

Age Value/Original Cost

New 100%
1 year 65%
2 years 50%
3 years 40%
4 years 30%
5 years 25%
6 years 20%
7 years 15%
more than 7 years 15%

Table 1. The value of a car as a function of its age

This table assumes several things. The car is not unusual (like a Ferrari); the car is driven about 10,000 miles per year; and it is reasonably well maintained. The above table is a bit on the pessimistic side, representing someone who might buy a new non-Japanese car from a dealer in autumn, when new car prices are at their peak, and later sell to a dealer, not an individual. For example (an actual example) a 1993 Cadillac DeVille was purchased new for $29,144 and presented to a car dealer seven years later. The dealer offered $4400 (15%) for it. The owner then sold it privately for $6800 (23%). The extra 8% represents the owner's diligence, not the car's value.

Does the table sound right in general? Let's use some common sense. There is nothing like a new car. If a car is two years old, somehow you can tell. The paint is not a shiny. The driver's seat has the owner's "contour." And there is no new car smell. What you don't know can hurt you. Did the owner change the oil? Did he allow road salt to stay on the car and start rusting it? Was there a collision that is only partially repaired? No wonder a two year old car sells for half as much as a new car.

If old cars are so terrible, why does the table say that they stop depreciating after seven years? Because a car that runs well always has value. One assumption of the table is that the car is reasonably well maintained. Old cars can be washed, just like new cars. Parts can be replaced as long as they are still manufactured. If some old cars look like junk, it is only because the owner decided to not invest any more money to maintain it. In saving a few dollars, the owner hastens the departure of the old car and the need to purchase its replacement.

How to work depreciation for you

There are two winning strategies. The first is to buy a car new and keep it forever. According to Table 1, you will lose 85% of its original value, but over several years. The other strategy is to buy the car after it has depreciated. You can buy a seven year old car and it will never depreciate, but then you will always have an old car.

A good compromise is to buy a two year old car and keep it for several years. According to Table 1, you will lose 35% of its value. If you keep it for five years, this is 7% per year ($1400 per year for the average car). By taking this approach, you can get a used average car for the price of an economy car. Better yet, you can get a used luxury car for the price of an average car.

[The HACK]

Damn it, if I was a REAL smart alec I would have said:

I traded in a used cell phone for an old DVD player, then traded the DVD player for a set of plates, then traded the plates for a set of silverware, then traded that in for a used sofa, then traded it in for a used vinyl player, then traded that in for a...

...Then traded that in for a small property in Kansas. Then traded that property in Kansas for an MZ4 Coupe.

[Nikki]

I bought my first Z 1 year old at 65%, so that is in line with the table. My current Z I got 3 years old at 49% (compared with 40% in the table) but I don't think I overpaid. I think it's that the M coupes hold their value better than the non-Ms and also the first year it depreciates a lot. Many varying factors in there.

[O-cha]

Originally Posted by The HACK

Anyone dumb enough to pay cash or take out a loan for a depreciating asset should be shot.

Originally Posted by The HACK

BINGO.

And yes shooting them would be a little extreme, since I ALSO bought a depreciating asset (my MZ4 Coupe, amongst other things).

But this whole "argument" of people shouldn't take out loans or should pay cash for cars is stupid at best. Anyone who thinks paying CASH for car is smarter than taking out a loan for a car is like the pot calling the kettle stupid. Or black. Anyone with a decent sense would know that LEASING is the way to go.

To be so adamant and so wrong, you should probably leave the finacial advice to others. You either don't have a lot of money, or if you do, I hope you don't manage it yourself. Buying a car you can often get a rate FAR FAR lower rate (being a secured loan) then what you can safely make in investments, you can make this difference even greater by taking risk obviously, but that's only in addition to the point.

Whether or not the car depreciates has nothing to do with anything. It could be worth $0 the second you sit in it and it makes no difference.


For instance, if you can make 5% a year off investments and can finance your car for 3%, well it doesn't take a genius to realize that it's going to cost you more buying the car in cash then taking out the loan. Not to mention you can write off the cost of the loan. Rich people don't buy their houses, not ones with good financial managers anyway.

This is compounded if you have a standing investments (if you can pay for a $50k car without a loan, then you probably have/should have investments) If you need to take that $50k out of your investments to pay in cash, you just got taxed on your capital gains. Lets say you have a capital gains of 25k on your 50k. That means that paying for your car just lost you $4,000 that could have continued earning you capital gains and paying you dividends, where as if you just got the loan, and saved money anyway, that money (that isn't even really yours) would have continued to earn you money. This is a lot more obvious when talking about say a $300k house that costs you a brand new M coupe (45k) extra in investments to pay for in cash (And that money would have earned you several thousand a year in addition to the net amount the regular investment would earn you over the cost of the loan)

I have a LOT of the governments money earning me money.



So to the OP, it depends on what rates you can get and how your investments are. If you have no investments and don't want to, then the loan makes no sense. But what would be smarter would be to take out the loan and put the cash in investments.

[3002 tii]

Originally Posted by O-cha

For instance, if you can make 5% a year off investments and can finance your car for 3%, well it doesn't take a genius to realize that it's going to cost you more buying the car in cash then taking out the loan. Not to mention you can write off the cost of the loan. Rich people don't buy their houses, not ones with good financial managers anyway.

THIS is what I was talking about in that other thread (salary poll) but some people just don't get it. Anyone who's taken a basic finance class should be able to conclude that debt to a certain extent is good. Playing the spread game, working investments, tax deductions are all things that ADD value! It's sad that some people have worked/saved so much they are able to purchase a home in full and yet not see the full potential of their savings work for them. This whole "mommy taught me debt is bad" are typically the same business owners that can't break that glass ceiling.

You CANNOT view these transactions as a single moment in time. $40k dropped in 1 day is a huge opportunity cost, denying you investment opportunities down the road. Clearly if you have this much money accumulated, you must have some business sense (and discipline) but why limit yourself - that's my point.

[Twisted Six]

Originally Posted by Dubbedown

THIS is what I was talking about in that other thread (salary poll) but some people just don't get it. Anyone who's taken a basic finance class should be able to conclude that debt to a certain extent is good. Playing the spread game, working investments, tax deductions are all things that ADD value! It's sad that some people have worked/saved so much they are able to purchase a home in full and yet not see the full potential of their savings work for them. This whole "mommy taught me debt is bad" are typically the same business owners that can't break that glass ceiling.

You CANNOT view these transactions as a single moment in time. $40k dropped in 1 day is a huge opportunity cost, denying you investment opportunities down the road. Clearly if you have this much money accumulated, you must have some business sense (and discipline) but why limit yourself - that's my point.

Spot on !!

[z4mcoupe]

Originally Posted by Dubbedown

THIS is what I was talking about in that other thread (salary poll) but some people just don't get it. Anyone who's taken a basic finance class should be able to conclude that debt to a certain extent is good. Playing the spread game, working investments, tax deductions are all things that ADD value! It's sad that some people have worked/saved so much they are able to purchase a home in full and yet not see the full potential of their savings work for them. This whole "mommy taught me debt is bad" are typically the same business owners that can't break that glass ceiling.

You CANNOT view these transactions as a single moment in time. $40k dropped in 1 day is a huge opportunity cost, denying you investment opportunities down the road. Clearly if you have this much money accumulated, you must have some business sense (and discipline) but why limit yourself - that's my point.

I said "if I need a loan for a personal purchase, I can't afford it", then it's somehow being "all debts are bad". I completely agree there's an opportunity cost for paying with cash, but what if one values being debt-free more than which ever dollar amount that cost might be? It's a personal preference.

Take this for example, if Apple Inc. is an individual in the corporate society, no one would deny his financial success in the past decade. Family, friends and acquaintances for years have criticized him for not investing his ever-growing savings. Guess what, he believes in what he does and does what he believes. He pays in cash for all the toys he has. Heck, he even prepaid for toys that won't be delivered until next year.

Some inquired about his secrets for success. He said there's no secret. He only focuses on making money the only one way he knows, unlike his friend, Porsche who tried to dabble his feet in investment and got fucked.

Apple understands though, with all that money there are certain things he cannot buy. For instance, his most brilliant brain cell is departing. He will never be the same without it.

[Hawkeye]

Yay! People that know what they are talking about finally! Thanks HACK and O-Cha!