Is getting a car loan considered a last resort when you're looking to buy a vehicle?
Growing up, I was taught to never borrow money unless I absolutely had to. Does this kind of thinking apply to car loans?
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Answered on Mar 12, 2021
No! A car loan is never a last resort. In fact, there are two schools of thought on getting a car loan:
Car loans are ideal for those who don’t have money or don’t want to drain their savings to pay for a car in cash. The idea here is that you want to contribute a comfortable amount to the down payment to reduce the amount of interest you pay over time. Even in 0% APR financing situations, you may still want to provide a down payment to reduce the length of the loan.
The other thought is slightly more complex, but still understandable. This idea revolves around return on investments. If you can finance a car for two percent but your investments (stocks, mutual funds, etc.) earn more than two percent a year, you stand to save more money by financing the vehicle rather than paying in cash.
For example, if the car loan rate is two percent but your investments have an annual return of five percent, then you have a gain of three percent. Over the life of the loan, this could net you thousands of dollars. Therefore, a general rule is that if the interest rate is two percent or lower, you should almost always finance the vehicle and let your investments earn a greater return, regardless of whether you have the cash.
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