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Re: Another point of view (archive)

[ Follow Ups ] [ 3-series (E46) Message Board ] [ Msg. Board FAQ ]

Posted by Larry in TN on October 04, 1999 at 09:44:15:

In Reply to: Another point of view posted by BMdeW on October 04, 1999 at 07:32:42:

No one's every reposessed a paid-for car. :)

Actually, at 8% it doesn't make sense mathematically to finance if you could pay cash.

The market has historical returns of 10%-11%. Let's assume 12%. That return is taxed at something around 30%-50% depending on your tax rate and state tax. Let's assume 35%. That gives you an after-tax rate of return of 7.8% so you're already losing money.

Even if your tax rate is less, say 15%, your after-tax return is only 9.35% but that doesn't account for risk. You're 100% guarenteed not to be charged interest on a car that's paid for. Your stock investment is not guarenteed at all and can go down. If you try to compare the 100% guarenteed 8% car loan with a not gaurenteed 12% investment you're not comparing apples to applles. You first must adjust the investment return to account for risk. This can be done by applying the investment's Beta to the equation.

Bottom line is that for this to make sense mathematically you'd need to end up with a several percent greater return on investment after taxes. This often happens when comparing investments to a mortgage as the mortage interest is deductable so you're after tax cost is less. (I still paid off my house 25 years early but that's another thread)

Don't let the recent historic stock returns lead you to beleive that these return rates are normal or will continue indefinately.


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