Hello everyone I’m facing a cash vs debt dilema. I would like to purchase a car worth $100,000. My father is willing to give me $50,000 upfront to buy the car leaving me to take a loan for the remaining $50,000. I personally think $50,000 of my own money (or rather dad’s) is too much to put out and think this doesn’t make much financial sense. I’m currently weighing the option of taking a full loan for $100,000 over a 6yr term and keeping the $50,000 from my dad and investing it. Here’s my 2 Options, which one is the better option: OPTION 1: LOAN FULL AMOUNT ($100,000) 1) $100,000 Loan -12% APY Monthly Payment= $1995.02 -Total Interest over 6yrs= $40,761 - Total Repayment=$100,000 + $40, 761 Interest = $140, 761 However If I keep the $50,000 and invest it in a MMA at 5.5% (compounded monthly)I earn a total of $69,495.99 which can be used to offset the amount of the loan. Thereofre at the end of 6yrs: My net cash outflow = Total Repayment of loan - (Future Value of $50,000) = $140, 761 - $69, 495.99 = $71, 265 OPTION 2: PARTIAL LOAN ($50,000) + $50,000 DOWN PAYMENT 2) $50,000 Loan - 12% APY Monthly Payment = $977.51 Total Interest = $20,381 Total Repayment of Loan = $70, 381 Total Cash Outlflow = $70,381 (loan) + $50,000 (downpayment) = $120, 381 However my monthly downpayment of $977.51 under Option 2 is half of what it would be under option 1 where I take a full loan ($1955.02). Therefore I have $977.51 at my disposable under Option 2. Assuming I invest this extra $977.51 every month at 5.5%, the Future Value = $83, 160.11 which can then offset my repayment costs as follows: Net Cash Outflow = Total Repayment - FV of $977.51 annuity = $120, 381 - $83, 160.11 = $37, 220.89 Now comparing the Net Cash Outflow of the two Options I’d be better off by $34044.11 if I stick to Option 2 and pay $50,000 down rather than take a loan for the full amount of the car. Is this logic sound?
Forgive me if this is a stupid question, but if you’re paying 12%APY on a loan, why would you invest the $50K at 5.5%? Now I’m not the sharpest knife in the drawer, but I would probably pay down that balance as much as possible as opposed to earning negative carry on my $50K…
You are borrowing $50K from your father to buy a $100K car? Have you no sense? And then you are thinking of taking Dad’s money and investing it for your own profit? Tell your father he did a lousy job raising you.
Is this for real? If so, it is good for a laugh. :)))
seriously, this is funny. you want an enzo, you probably have the cash to buy a T pass.
There’s only one reason why a guy would go through this much trouble to buy a car and it’s just not worth it and it doesn’t even really work.
There’s no point in buying a $100,000 car if you have to finance it.
take it easy guys, I think amber202 meant to give us a practice question on quants and corp fin… amber202, maybe you can gives us a question on borrowing money from your dad to buy a house too, that’d be interesting
amber, first off, I congratulate you on how lucky you are to have such a dad. now regarding your little “dilemma”: don’t you also have to repay the $50,000 to your dad after 6yrs? Shouldn’t you treat it as a 0% loan for six years and include it in your DCF model? Coz I mean if that’s simply a present, then for Pete’s sake, be nice to him, would you?
Why is there no point in buying a $100,000 car if you have to finance it. My father does it and so do a lot of our family friends and they’re friends (this is small sample of mostly doctors). They buy them because they enjoy them and don’t like the idea of dropping 100k in one day. Theres a difference between really stretching yourself and just not wanting to put up that much cash.
Niblita, I think there’s a difference b/t your dad putting up his own money to finance the car vs. (presumably) a recent college grad using “daddy’s money” to buy a car that she shouldn’t be buying…
I guess I just consider it a poor investment unless you truly don’t need the money for something else
Niblita75 Wrote: ------------------------------------------------------- > Why is there no point in buying a $100,000 car if > you have to finance it. My father does it and so > do a lot of our family friends and they’re friends > (this is small sample of mostly doctors). They buy > them because they enjoy them and don’t like the > idea of dropping 100k in one day. > > Theres a difference between really stretching > yourself and just not wanting to put up that much > cash. Well, if they are finance types but not doctors, they will put down 100k if they can because there is no way you can beat a risk-free 12% return.
No, we will not do your Principles of Finance homework for you.
They’re piss poor investments for the most part. One of my dads neighbors has the life. Hes “in” with the local Ferrari dealership. He will get one of them at MSRP, drive it around for a few thousand miles, and trade it back in to the dealership for the the next latest and greatest and lose maybe 10K at most. I’d love to drive Ferrari’s for free . . . funny thing is he isn’t a doctor. Edit: I am curious to what car he/she is considering. There are a truck load of options around that price point (cars are one of my loves along with watches . . . I need to make a lot of money lol)
why do people on AF insist on calling the cost of a car “an investment”? unless the kid is a car dealer… anyhow. i think bryant hit the nail on the head. this kid just got an A on his/her homework.
So what’s the make of the car?
A suped-up Hyundai. Sittin on some 12"s…
Everyone knows that riding on 12’s increases the future value of any car. However, 13’s drop the panties.
Cherry Bomb Muffler included?