“When I bought my last car, I offered to pay cash a la your friend Joe. Apart from any financial incentives to the dealer, the dealership’s general manager strongly recommended I finance at least part of it. In light of your column I realize it may have been for his own financial gain, but he told me that the owners of the dealership NEVER pay cash for their inventory, even though (according to him) they have it many times over. Basically, he said why risk your own money when you can risk the bank’s? I thought (perhaps naively) that if it was good enough for them, it should be good enough for me. Love to hear your thoughts on that one.” -Steven E. Rubin, MD

How is the bank risking anything when you take out a car loan? In the first place, they have the car as security; in the second, they have your personal guarantee. (To a lender, those initials after your name stand for Many Dollars.)

No, the only question is whether the 10% you pay, say, is greater than the after-tax return you expect to earn investing this borrowed money; i.e., can you borrow at 10% and earn 11%. And the answer, after tax, is: no. (Sure, it’s possible; but the odds are definitely against you.)

If it was one of those “2.9% or $1,500 cash back” kinds of deals (and I’m sure you would have mentioned it if it was), then you would still have been better off not borrowing. But in this regard, I owe one of you, Erik Sten, a crusade.

Tomorrow: I’ll explain.



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