Quote:
Originally posted by iccky
I'm a college student thinking of buying a used car soon (somewhere in the 4-5k price range). My parents have always told me to buy cars with cash, and have always done so themselves. I could pay cash, but that would eat up most of my bank account. Is it a better idea to get a car loan and invest the money or should I pay cash?
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Well, as I am not aware of your current credit situation, I'll do the best I can with the information you provided...
Generally speaking, it certainly is a good idea to purchase vehicles with cash, as they are one of the "worst" assest you will ever have. The reasoning behind this is that they generally depreciate very quickly, and paying interest on a depreciating asset is always a good situation to avoid if possible.
Since you certainly would be paying interest on the vehicle, I would suggest that you invest that money only if you are guaranteed a higher return. If you put it into the stock market (although I believe the average return is 12% per year) you may potentially lose a good portion of those funds, and you would be in a much better position to have a free-and-clear car. However, if you can find a Certificate of Deposit or some type of Government Bond that will pay you a higher rate that the intererest rate on your loan would be, I don't see any issues with investing it and taking out a loan on the car. One thing to consider, though, is that you will have to eventually pay income tax on any money you make, and so the rate of the investment should be substantially higher than the loan.
A couple of other points -
If you are looking to build your credit, a vehicle loan would be a fine place to do so. However, you can also do a "deposit secured loan" and use your cash as collateral. This may be your best bet, as I am not sure that you would want to carry full coverage on the car, and with no lien on the vehicle, you wouldn't be required to do so. At the end of the loan, you would still have that money in whatever savings vehicle that you had chosen to keep it in (Money Market, Certificate of Deposit, ect.) as well as any interest that had accrued on it.
I hope this answers your question(s), if not, post again!