So You Need a New Vehicle. Should You Finance It?
Buying a vehicle is a big decision, especially when you're trying set aside funds to grow your trading account at the same time. Once you've decided to buy new or used, the next question you may ask yourself is, "Should I finance a vehicle or not?" We’ve all seen the commercials advertising 0% financing for cars. We’ve also seen canned financial advice advising against ever financing a depreciating asset such as a car. But is it always a bad idea? In the world of ultra-low interest rates, should an investor utilize their capital on a depreciating asset such as a car? At zero, or even a couple of percent interest, why would you tie up your capital on a car when you could invest it for a higher return instead? Why not use someone else’s money for the depreciating asset, and your money for appreciating assets?
Well, one reason is because you don’t KNOW if you are going to get a higher return by investing. Chances are you will lose your investment rather than earn a return on your investment. In that case you would be much better off having paid cash for the car, which will depreciate, but at a predictable rate that is certainly preferable to losing it.
I have a good friend who has a long history of earning a solid return by trading. He bought a newer motorhome for $225,000 and was faced with the question of whether to finance it or utilize his own capital to pay for it. After some consideration, he ultimately decided to put $225,000 into a trading account and borrow the funds for the motorhome.
After three years, my friend had doubled his trading account, which allowed him to pay off the motorhome and still have his $225,000. For him, borrowing money at today’s low interest rate and using his own capital for trading is a no brainer. He consistently earns a return much higher than what he gets charged to use the banks money to buy a vehicle. For him, it makes perfect sense to borrow. As long as there is a realistic opportunity to earn a return greater than what you are being charged, borrowing makes sense.
Where the whole thing falls apart is if you only think you can earn a positive return, but in reality, you lose money. That is a recipe for disaster, and you need to really be open and honest with yourself. Do you consistently make money in the markets, or have you just had a good year or two? Have you consistently earned a positive return in up and down markets? This is important, because we have no control over what the market is going to do. We only can control our response to what the market does. During a bull market, everyone seems like a genius, but what about a bear market?
In conclusion, if you have a history of consistently making money in the markets in excess of whatever the interest rate that you are charged is, then knock yourself out and borrow to finance a vehicle to your hearts content. But if your market returns have their ups and downs like the stock indexes do, then you’re better off using those hard earned dollars to pay for your vehicle.
If you haven't read it yet, check out Buying a Vehicle — New vs Used.
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