Taking Out a Car Loan, Good Idea or Bad Idea? The Surprising Answer..
Hey what’s up everyone. Davey Pockets here, man of the financial frontier. Ready to help you increase your financial IQ, increase your net worth and show you how and where to invest.
For today’s topic we are going to discuss taking out a car loan.
Is taking out a car loan a good idea?
The funny thing is the answer will vary based on your experience with money.
Let’s say for an example someone where to ask you the question- should I do 300lb dead lifts for my workout routine?
Well the answer depends on the person and their experience. If the person is a body building man who has worked out for 5 days a week for 10 years or more then the answer might be YES.
However if the person is a 40 year old mother who just had her 3rd child and has not lifted since high school then the answer is most likely a NO. In this case we might suggest a cardio class to best fit her unique situation.
The one thing I can’t stand is when an infomercial comes on and says something like “cut-up your credit cards and get out of debt? You hear financial advisors such as Suze Orman and Dave Ramsey support this school of thought in their books and programs.
To them the best way to get a cheap car loan, is to pay it off entirely! 100% with cash and have no interest to pay so that you are supposedly at peace financially.
Although this is sound advice to someone who struggles with money or someone who is a beginner. It does not take into effect people who are beyond this beginner level of financial IQ.
You see there is good debt and bad debt. A car can actually be either one depending on your level of financial IQ and what you do with the money.
If you want a big Ford F150 to show off to the guys at work and you have no money to put down on the truck so you are searching for a cheap car loan, this is DEFINITELY bad debt!!
If you are at this level of financial IQ please read and follow the advice of Dave Ramsey. The last thing you want is to take out a loan on something you do not need. Basically you are borrowing money to buy something that takes even more money away from you, also know as a liability.
On the other hand lets say there is an investment opportunity for you with a foreclosed home in your neighborhood. You know that the home is worth $100,000 but it could be had for $50,000 due to seller foreclosure. Let’s also say that you have $10,000 dollars to put down for a down payment, but you already have a lot of your money invested in other things that are making you even more money, also known as assets.
With your current car on it’s last leg, you decide to go out shopping. Rather than buy the truck that you don’t need you find a used economy car with low miles and pick it up for a nice $10,000.
Now you are asked the same question should you take out a car loan?
In this case I say yes. Take out a cheap car loan at 3% and take 100% of the loaned money towards buying a cash flowing asset! Note you must take th money and put it towards an asset. This is the only way the math works.
So let’s say you take money buy the foreclosed home and within a month you have it rented out. After paying your taxes, loan, and property manager to deal with all maintenance and headaches you see a monthly return of 20% on your money!
This is actually a great investment idea because you are now paying back your cheap car loan at 2% and earning 20%, a net gain of 18% on your money without doing any work or even having the money in the first place!
This is one of the best ways to increase your net worth. You can repeat this process in many forms. Using car loans, home loans, rental loans, business loans, private lender loans, etc. The most important thing is that you always make sure the numbers work and that you more than have enough cash to cover it in case the deal goes bad on you. Someone with a high financial IQ will recognize an opportunity like this and totally take advantage of it.
So as you can see the answer of taking out a car loan just really depends on what level of investor you are currently at.
If the thought of more money equals shiny new cars, vacations, and a new watch then the answer is no! Pay cash and stay out of debt!
If the thought of more money equals an opportunity to pick up another cash flowing asset to add to your portfolio then the answer is yes! Bring on the good debt and hello payday!
Agree? Disagree? We love hearing from you in the comments!
Also check out your financial thermostat setting to see more ways to increase your net worth and financial IQ.
Thanks for reading!