Am I Crazy? Buy index Funds to Pay For Car Loan Rather Than Buy in Cash...

Submitted by zbeydoun t3_11el6hy in personalfinance

I need to buy a car soon, probably about 15k.

I can pay cash for it, however, I can borrow at a pretty low rate due to good credit + Promotions.

Is it wise to fund a brokerage account, buy index funds with the cash. Take out a loan for car, then divest the account as needed to cover the note.

This would be with the intention that over say 5 years the interest/divs from the index funds would cover the interest from the loan.

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I'm aware that investing in the market carries risk and the current car market.

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Default87 t1_jaenoxm wrote

Car loan rates have increased as the fed rates hav increased, so the spread here is much smaller. If you were buying a car a couple years ago when you could get 2% or less loans, this idea makes more sense.

But the more broad item you are missing out on is called sequence of returns risk. So if the only way you can do this is by needing to cash out the investment monthly to pay the loan, then it likely isn’t a good idea.

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Knipfty t1_jaenx90 wrote

Let me ask you this. Would you borrow 15k to invest in the market if a car was not involved?

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sceap t1_jaeo6sy wrote

You kinda lost me at

>divest the account as needed to cover the note.

Do you have no income? Index funds are not for short-term investments. You the put money in there and leave it in there. And you pay the car payments with your income.

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theoriginalharbinger t1_jaepy2o wrote

Nah. You can run the math, but I doubt it's going to make more than a $10 a month difference.

You'd run the math two ways:

  1. Finance the car. Keep 15k in a brokerage account. Every month, reduce the amount in the account by the amount due for the car note. At the end of the loan maturity, whatever's left in the brokerage is your "arbitrage."

  2. Pay cash for the car with money removed from your brokerage. Then, take the money that would have gone to the car payment (the same dollar amount) and put it in a brokerage account. Increase the account value by whatever the expected rate of return is.

The difference between 2 and 1 is the option cost for maintaining your liquidity (in the first example) / opportunity cost (second example).

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Super_Mario_Luigi t1_jaernuu wrote

Tough to say. The internet is a great place to say. "Pay 3% now to earn 10% later." It doesn't always work out that way, and often, there is more context. Like, is the car even worth it in the first place? What is your salary? What is this "low rate?"

What I do know is I see few posts along the lines of "Help, I paid off reasonably priced purchases and have no debts."

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Bucksandreds t1_jaf052u wrote

The car loan is likely 4-8%. I would pay cash for the car, myself. The market doesn’t tend to do well during times of active rate hikes which we’re going to go through over the next 1 year minimum.

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cleveland_1912 t1_jaf0zuo wrote

Pay in cash. Investing for short periods ( up to 7 yrs ) does not have the same history of positive growth as long term investments. Pay off the car and sleep peacefully.

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