Well if you can't survive a downturn and the risk then no you shouldn't do it. But if you can then you should and in the long run you will end up ahead.

While that is fine in the abstract:

Current 5 year CD APYs are 4.2-4.7%, while current new car auto loan APRs are 5.2-6.7%.

There is usually no magic spread to be captured unless you’re willing to take more risk (say, money in equities instead of CDs). Financing a depreciating asset against one that is volatile in the short term (and has seen drawdowns of 20% several times in the last 10 years) is a duration to risk mismatch.

That spread capture argument often is just justification for a bad decision - people don’t in practice use credit as liquidity backed by an investment, they use it as a cash advance to buy more car than they would absent financing.

So now instead of buying a $20k car cash, people will buy a $40k car, increasing their debt load against a depreciating asset.

In general, my theory is… if that small spread from borrowing to buy a depreciating asset makes a significant difference to you financially, you can’t afford that car anyway, and you’re better off buying cheaper.

Sorry to unload a bit… that wasn’t about you, that was about me being triggered by seeing this advice a lot :)

> There is usually no magic spread to be captured unless you’re willing to take more risk (say, money in equities instead of CDs).

Which is what one should do, provided one believes that the long-term result will be positive.

> Financing a depreciating asset against one that is volatile in the short term (and has seen drawdowns of 20% several times in the last 10 years) is a duration to risk mismatch.

Financing an asset and the value of an asset are independent. If one believes that one will get a better yield by investing than one could by avoiding financing, then one should finance. I believe that over time my investment returns will be higher than the current car loan rate.

> people don’t in practice use credit as liquidity backed by an investment, they use it as a cash advance to buy more car than they would absent financing … So now instead of buying a $20k car cash, people will buy a $40k car, increasing their debt load against a depreciating asset.

Yes, fools are foolish. A wise man makes educated predictions of the future. If his current total portfolio debt load can support financing a purchase, and if the rate to finance it is less than what he predicts his yield will be, then he’ll finance it.

> if that small spread from borrowing to buy a depreciating asset makes a significant difference to you

Hey, an extra 1% a year for the duration of one’s working life adds up quite significantly! The key is to carefully manage one’s expenses and balance sheet, maintaining a healthy debt ratio, only incurring debt when it makes sense, and refinancing or paying it down when that makes sense.

All totally valid points. If used responsibly across all those elements, within someone’s budget, with the ability to tolerate the risk… I can see the case for financing. I just think most people don’t quite use car loans that way… hence the proliferation of 72 month+ loans. (But then, they’re adults who can make their own decisions, so fair enough. They would probably say I’m risk averse, anyway.)

> Hey, an extra 1% a year for the duration of one’s working life adds up quite significantly!

I agree - but in this case, you’re not really netting an extra 1% per year forever… in that example, you’re saying you’d have a car payment for your entire working life! And a long period of buying depreciating assets I think is going to hurt a lot more in the long run than the 1% spread :)

That being said, I get that purchases are not always spreadsheet math. So maybe someone is willing to spend a little more over time to drive newer cars, and that’s up to them.