Hi Ari,

I wrote out a longer answer, but then realized I wasn't sure if I was understanding your question properly. Do you mean: GIVEN that I will be buying a car, should I use a car loan OR sell my investments to pay for it? Or did you mean something else?

Hi Ari,

I know conventional wisdom among financial planners is to avoid debt on consumer purchases (such as cars), but I personally feel that if the overall purchase price is prudent for you, given your financial situation (income, tax rate, other assets, etc.), a loan may make sense. Particularly given the low interest rate environment we are currently in.

I have a difficult time throwing large lump sums of money at a depreciating asset. Also, beware of buying a brand new vehicle, as the depreciation can be severe in the early years of purchase. We usually recommend vehicles 2-3 years of age (however loan terms may not be as attractive - but you are paying a lower purchase price typically).

If you have enough assets to cover the loan, and you are committed to keeping those assets invested and in a prudently diversified portfolio, why not take the cheap loan? It is not unfathomable that an investment portfolio over a timeframe of 3-5 years would outperform a hurdle rate of 3-4%, but you have to factor in your tax rate as well, as it will take more than 3-4% pre-tax to end up with the total borrowing cost of the loan.

Now, as interest rates rise, this gets to be a tougher challenge.

Don't want to overcomplicate this, but it really is a good question, and for most people, car purchases amount to a significant expenditure over the course of their lives.

Just trying to get behind the decision to buy a car - an automatically depreciating asset with cash from investments/savings vs. taking dealer incentives or a cheap loan (2.9% or 3.9%). In a comfortable market, I'd say take the loan and float the investments...but now I'm not so sure.