Not sure if investing is a good idea? Let’s take a look at a hypothetical example. Say you have cash on hand and are trying to decide if you should pay for your car up front or take out a car loan and invest that money instead.
You’re looking at a $30,000 car loan on a $37,500 car. You could qualify for a car loan with a five-year term at a 6.5% APR and invest that money in a portfolio with an average return of 15% per year. Since it’s a new car, it’s set to lose 20% of its value in the first year and 10% per year for the next four years.
Here’s a breakdown of how much you would net by borrowing and investing:
- Total loan cost: $5,219.07
- Total investment returns: $30,340.72
- Net gain: $25,121.65
After five years, your car would have depreciated by 60% or $22,500. Even factoring in depreciation, you’d still earn a total of $2,621.65 and have a car worth $15,000 and that original $30,000, adding up to a total of $47,621.65.
In this scenario, you’d have:
- $17,621.65 more than you’d have if you’d just let that money sit in a no-interest bank account.
- $40,121.65 more than you’d have if you’d paid that $30,000 in cash.
Investments are a risk. There’s still a chance you could lose some or even all of that money — and on top of that have to pay off a car loan. But even if you invest in a low-risk option like bonds, the earnings could still put you in a better position over time than if you’d paid in cash.