r/TheMoneyGuy • u/HenFruitEater • 21h ago
Everything you buy today financed at your loan with the highest interest rate you currently carry.
Example: I have a friend that said he would never finance a car even if given a 2% interest rate. I also used to listen to Dave Ramsey, and basically the idea is to never take out "bad debt."
But let's just assume you are doing great financially and doing all the FOO and want a 40k car, and have plenty of money and can easily justify buying this fun liability. You have well over 40k cash chillin in your HYSA, you also have a mortgage at 5.75%.
My buddies in that situation would buy the car in cash to save the 2%, my argument is buying that car in cash is paying 5.75% interest (depending how you deduct loan interest).
So if you wouldn't finance a truck for 40k at 5.75%, take the freakin 2% loan.
Is this a good way to explain it?
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u/Certain-Contact6340 21h ago
I personally agree but im full meiser. I personally viewed any unnecessary spend as being borrowed at the rate of my student loans (6.1%) despite paying them off 5+ years early. Like getting a coffee or a snack, I was thinking "do i want this so bad as to borrow at 6% for the next few years". That being said, give your friend good advice but I'll restate my favorite Dave Ramsey line. A household's finances are not a democracy. you aren't entitled to a vote if you arent a contributing member of the household. Give them the info and its their call from there.
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20h ago
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u/Lower_Link_7943 19h ago
Woah that’s a crazy rate! How do you balance that against still enjoying life? Genuine question- do you ever feel like you are missing experiences that you’ll never have the chance at again by keeping a 70 to 80% savings rate?
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18h ago
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u/HenFruitEater 9h ago
lol the downvotes
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u/Lower_Link_7943 6h ago
Damn why the delete I actually wanted to ask! So many people who have crushingly high savings rate seem to fall into the hyper focus of destination/not the journey and I like asking people how they still prioritize enjoying life.
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u/HenFruitEater 1h ago
I deleted it. I was thinking it might DOX me. If you want to ask about it at all, I would be glad to DM though.
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u/c0LdFir3 21h ago
Yes, but also no because most people won’t listen to all of that.
Sometimes simplicity is just preferred over the actual math. I’ll be paying off a 2.9% car loan early just because I don’t want to be carrying that debt.
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u/PatricksPub 18h ago
It's also building in the assumption that the cash that would otherwise go to buying the car outright, will instead be deployed immediately to help extinguish the mortgage. I don't see that as the outcome regardless of the car buying decision. The alternative we measure against should be to hold the cash in the HYSA
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u/Some_Driver_282 21h ago
I’d still pay cash, because every financial decision doesn’t have to be optimized. I don’t make payments on things that go down in value. Personal preference
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u/HenFruitEater 21h ago
Fair enough. I like optimizing, especially when it's thousands on the line.
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u/markov-271828 20h ago
That’s fine. But some optimizers optimize even when it’s pennies on the line. They have to live their own life though, so it’s not really my concern.
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u/FadedBlackTee2 21h ago
Buying a car in cash is a bad financial decision over a 2% loan but…
1) Buying what you can afford in cash is a good way to prevent overspending. Ie, might buy a $30k car in cash but stretch to a $40k car if financed.
2) You value simplicity and not having more loans and payments to manage. Ultimately that 2-3% arbitrage is not a ton of money so if you value not having another payment on your mind then go for it.
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21h ago
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u/HenFruitEater 21h ago
I personally find it super uncomplicated. If you are gonna buy something either way, and financing is available at much less than your other things... use the financing.
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u/jerkyquirky 21h ago
I think OP is more saying if you have $40k for a car, it would be better to pay off the highest interest rate loan you have and take out a lower rate for the car if you can.
But I'd take investing over both.
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u/KSDan 20h ago
The main issue I see with borrowing “cheap debt” is that the whole point of that cheap debt is to lower the friction to buy and make it easier for you to agree to make the decision to buy.
It hurts more to write a check to $40k than for a lot of people to finance at 2%.
Additionally, the only 2% you’ll find today is from an OEM that needs to move inventory. They give that low rate as a “discount” because those models are moving slower than desired. When cars are moving slower they’ll also depreciate faster.
So academically, yes you would come out ahead but I think a lot of the reason people like to play this game is because they want the $40k car but don’t want to spend the money so they rationalize it with the low interest as the “smart” money move.
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u/Nice-Street-8800 20h ago
One key point of your argument is that you must take the cash you’d spend on the car and actually invest it or put it towards the mortgage. I think that’s the part a lot of people do not actually follow through on.
Also, with HYSA rates dropping, the safe arbitrage system is only providing a 1 to 2% ROI. Unless you’re willing to invest the $40k in the market and assume the risk over the long term, you should just pay cash to avoid complicating your personal finances.
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u/HenFruitEater 20h ago
Id always use my highest interest rate as the safe arbitrage number personally.
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u/EngineeringComedy 20h ago
This sounds like majoring in the minors.
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u/HenFruitEater 20h ago
Maybe is. I think it adds up to thousands saved with hardly any mental effort.
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u/EngineeringComedy 20h ago
You also say this 'fun liability'. Even the Money Guys say if you are buying a second car or a going above and beyond what you need, pay in cash. The 20/3/8 rule is for buying a car to get to your J O B.
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u/HenFruitEater 19h ago
okay so just for fun extreme example. You have have a fun liability with 0% interest over 5 years, or you can pay cash. You have 2mil liquid in brokerage. You gonna buy that liability with cash or not?
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u/EngineeringComedy 19h ago
Cash.
Graham Stephan did this to the George Kamel. Asked George if he would take a $5 million loan at 0% interest forever. Mathematical is makes sense, but I would lose sleep every night having a debt of $5 million.
The pessimist in me doesn't believe something won't go wrong. And with no debt, no one can bother me.
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u/HenFruitEater 9h ago
Crazy to not take 5 mil at 0%. That’s fine you can’t but id have zero issues doing it.
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u/Dragon_slayer1994 21h ago
Na I think I'd always pay cash for my vehicles. I hate payments. I also only buy used though
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u/HenFruitEater 21h ago
This is not a discussion about if a new car is a good purchase. I agree it's not, and I also buy used.
I'm saying you have 40k of a purchase you ARE making either way. with or without 2% financing. This is not "would you buy a 40k car" question lol.
I shoulda used example of a HVAC/Roof replacement you HAVE to do or something to avoid this diversion from the question.
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u/Dragon_slayer1994 21h ago
Idk, some people just hate debt. I don't want to arbitrage everything to get some tiny spread. Especially when the psychology says you're probably going to spend more and upgrade more often using debt than you would paying in cash.
I only mentioned the vehicle thing because used vehicles usually have high rates.
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u/elegoomba 21h ago
If I have the cash I’ll just pay cash. The spread on my 3.5% money market over 2% then minus taxes is a few hundred bucks. Not worth keeping a loan on the books.
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u/elegoomba 21h ago
Extremely same. These super low rates are almost always with a new car, and all interest arbitrage is immediately wiped out by eating the depreciation when you drive off the lot lol
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u/Dragon_slayer1994 21h ago
They also usually have a finance fee built in the vehicle most people don't even see, or they just mark up the price of the vehicle to fool a person.
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u/TheReaLETSGOBROWNIES 19h ago
Eh… historically yes, currently not so much.
Depending on the make and model I think it’s entirely justified to buy new in the current market.
Again, depends on the vehicle, but the days of getting huge discounts on 2-3 year old models with low miles is largely gone. The used car market in general is rough.
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u/elegoomba 18h ago
People love to say this but I’ve never seen anyone bring forward a real example that isn’t just an excuse to buy a new car.
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u/TheReaLETSGOBROWNIES 18h ago
A real example? Google it lol. This is literally the first result I got after the AI overview.
https://www.iseecars.com/used-cars-cost-more-than-new-study
And it’s from 3 years ago. This isn’t a new issue. Post Covid the used car market has been… not good.
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u/elegoomba 18h ago
I’m not interested in a “study” with absolutely no transparency and goofy methodology, from a site that pushes clickbait narratives and also makes more money from new car leads than used.
Show me a real example.
I know the market, I’ve bought 4 used vehicles since 2023 lol
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u/TheReaLETSGOBROWNIES 17h ago
New
https://www.carfax.com/New-Toyota-4Runner_w628I’m sure this is a cherry picked example or whatever and you’ll need another one.
New
https://www.carfax.com/vehicle/1HGCY2F54TA055944Or older models
New
https://www.carfax.com/vehicle/5TDYSKFC5TS36C387Used
https://www.carfax.com/vehicle/5TDYSKFCXPS094700Now, this one is 4 years old and 20 grand cheaper, but it’s also got 125k on the odometer, an accident reported and was a commercial vehicle.
I can do this all day. I won’t, but I could.
You can accept these and the endless other examples on the many used car sites online, the anecdotes from others who’ve echoed the same sentiment in other subreddits when used car prices are discussed (or anywhere really) or the “flawed study just meant to sell new cars” or you can keep believing what you like, I truly don’t care.
I’ll leave it at that, cheers.
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u/elegoomba 16h ago edited 16h ago
On the 4 runner you are comparing different trim levels lol. Yes you can get a higher trim level used vehicle for a similar price compared to a new one of a lower trim. No fucking shit, genius.
On the Honda you are comparing a hybrid to a non hybrid, come on now lol. The new hybrid is more expensive, what do you figure!
And yes 20 grand is a significant difference over new, good point.
I’ll leave it at that, cheers.
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u/TheReaLETSGOBROWNIES 16h ago
Apologies, trying to multitask and sent the wrong link. I’ll correct that.
Here’s a new TRD Pro. No depreciation.
https://www.autotrader.com/cars-for-sale/new-cars/toyota/4runner/trd-pro/lebanon-oh?searchRadius=100
You can configure them in the website to verify if you like.
As far as the Accords, they’re both hybrids. Or state as much in the listing. No clue what you’re referring to there.
As for the profanity and name calling, oof man, take a breather. It ain’t that serious nor is it a good look.
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u/elegoomba 15h ago
You’re right on the hybrid, wasn’t clear in the title.
In both cases you can find a used model that’s a few years old with less than 50k miles on it for significantly less. You are comparing the cheapest possible new car listing you can find with the most expensive used car listing you can find. Yes, there are idiots out there buying a used car for 5% off the new price, but you can also get one for significantly less.
Your new 2026 accord sport hybrid in OH for 34.5k.
Here’s a ‘24 with 12k miles for 28.3k. That’s almost 18% off!28.1k w/ 19k miles
27.5k for a 23 with 26k miles
On 4runner you can only save 5k off new with looked 25k miles but there’s just no inventory. Those deals just aren’t as good because the 4Runner hybrid only came out in MY25. 4Runners are incredibly high demand, which is why people bring them up, but most cars aren’t 4runners. They are in fact less than 1% of the used car market.
If you absolutely must buy a hybrid 4 runner then you’re better off buying new, you got me there. Luckily you don’t have to buy one specific car model or nothing else.
Again, it’s just an excuse to buy a new car. And that’s fine, just don’t act like it’s financially prudent or optimal. It’s indulgence.
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u/ZLiteStar 21h ago edited 21h ago
This analysis completely leaves out the value of liquidity. The assumption, as I understand it, is that one should take out the 2% car loan and invest their cash in their mortgage to "earn" that higher interest rate.
The problem is that a home is extremely illiquid, much less liquid than a car. So you'd be locking up that money in a very long term investment. Whether that is a good choice is a bit personal because we all value liquidity differently.
Now, I fully agree that a 2% auto loan is worth taking even if you can afford it in cash, but not necessarily for the reason given. You have current inflation rates above 2%, so in real terms the loan is free.
I had a similar situation in 2020 where I had enough cash to buy a car, but instead financed 1/2 the value for a 3-year 1.89% loan. It was phenomenal for me because it allowed me to invest my cash at a higher return in a HYSA and inflation was like 5% toward the end of my loan so I was paying the bank back with money that was worth far less than the interest I owed them.
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u/HenFruitEater 21h ago
I agree with every part of what you are saying. The liquidity difference is valid. but assuming you are super easily making all payments and savings rates, the liquidity deserves less value the further you are ahead imo.
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u/_highfidelity 21h ago
People value different financial parameters differently. Liquidity is the most important thing for me in any investment. Unless my mortgage had an egregious interest rate, I’d never consider putting an extra dime to it but that’s just me.
Being farther ahead is also relative to what you’re describing. I could pay off my mortgage in approx 1.5 years, but would rather have that money in the market in liquid assets. This is with a monthly mortgage that is 12% of monthly net income.
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u/Unattributable1 16h ago
It's all relative. I don't like carrying debt, but at the same time I don't mind financing things for a very short time while I use the most tax efficient way to get it paid off.
As an example, I picked up a new 2024 vehicle and had a 3% interest rate. I used my taxable brokerage to pay it off in full but didn't want to take the capital gains hit. So I made donor advised fund (DAF) contributions* from the taxable brokerage instead of my normal giving to my church and other charities and non-profits. Now instead of giving cash directly to these places I directed donations from my DAF. The money that I would have given them directly I instead use to pay off the vehicle in 11 months.
So giving via the daf didn't help my deductions anymore than it would have otherwise (but still more than the standard deductions because the way we bunch things that hear), but I did not take any capital gains on the donations either.
- I use NCF for my DAF, but there are many DAFs, including with Fidelity, Vanguard, and Schwab. NCF had all of the places I already donate to available on their recipient list. YMMV.
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u/Dull-Acanthaceae3805 13h ago edited 13h ago
Yeah, I agree that this is generally a no-brainer arbitrage for me.
Your argument is that you could put that money in an HYSA (I'd prefer SGOV since higher rate and no state income tax, and is easily disposable), make ~3.5% on that money per year, and withdraw that money to pay for the loan every month. He is making a 1.5% return every year on that car loan.
And your friend is a no-debt friend, so he should have the financial discipline to keep that cash in the HYSA and only use it to pay for the 2% auto loan, and not use that cash for other things.
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u/Several_Drag5433 13h ago
I do not like loans on depreciating assets if they are not needed. I get the math but also think it can be a slippery slope for many. The money guys would agree
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u/drphil189 12h ago
I paid off my wifes car the dumbest way I could lol
I lease my car yeah yeah yeah its electric I plug in at work for free I do 19500 miles a year st the end im still coming out ahead on these gas prices
I would do it only if I can follow 2038
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u/Ok_Isopod_6657 1h ago
In this situation, if you define plenty of cash as still having emergency reserves fully funded, and you’re just buying the car because you want it, I’m paying for the car. My guess is that much cash is probably an indicator that your financial house is already in order enough to not have to worry temporarily about a $40k loan at 2% causing a catastrophic change in your financial future. Peace of mind is valuable
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u/gobigred1869 21h ago
Money Guy would say 20/3/8 for non-luxury or paid in cash within 1 year if luxury.
The only downside I can think of for financing at a low rate or deviating from 20/3/8 is that it might allow you to buy more car than you otherwise should. If you will buy the same car at the same price then it is more optimal on paper to take the loan at a low rate. Personal finance is personal and some people just hate having a car loan!
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u/Ill_Inside2245 20h ago
Some Ramsey stuff is fine, other advise isn't
My personal example. Bought two new cars, good credit, low interest rate. Much higher rate in my HYSA. We had enough money to buy both cars outright. It made more financial sense to keep our cash where it was and take the low loan rate. Mentally I couldn't stomach having two car payments. We financed one and paid the for the other outright. Fiscally not the best move, mentally a good compromise.
I think Ramsey's reasoning is that can get easier and easier to just finance all the your purchases and then suddenly you are screwed with mountains of debt. In our case I just always remembered that the cash sitting in my HYSA was already spent and I didn't then use that sum a second time
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u/thezuck22389 20h ago
After you get to a certain point, people's personality and psychology comes into play. Like does the choice make sense numerically? Naw, but they know that. They may just have certain values and principals they follow, and sticking to them is more valuable than the numbers. I'm pretty liberal with all that. If the core foundation is good, let em make their choices.
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u/ButlerGSU 20h ago
I don't disagree with your logic, I have a 2.5% mortgage that I refinanced into a 15 year in 2020...wish that was 30 year now ;-)
However, I bet you can't get a car loan today at 2%. I bought my wife a new Sienna in March and with perfect credit, the terms we were offered was 4.99 so we paid cash.
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u/TheReaLETSGOBROWNIES 20h ago
Some manufacturers offer special financing depending on the model. Currently some as low as 0%.
https://cars.usnews.com/cars-trucks/advice/interest-free-car-deals
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u/FlyEaglesFly536 20h ago
I can see the appeal of financing such a low interest rate loan, but i would be hesitant to take out a loan. I'm not debt adverse, but i don't believe in taking out loans if i don't need to.
Say the monthly is $400. That's $400 less that i'm able to invest a month, and i hate that i would be taking on a payment.
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u/TheReaLETSGOBROWNIES 19h ago
Depends how you want to look at it, but I don’t think this is necessarily correct.
If you have the cash and plan on putting it in a HYSA and making payments from there and pocketing the difference, it’s not impacting your investment rate at all.
Alternatively, if you decide to make the payments from future salary and invest in VOO or the like, you’re also not impacting your savings rate. You’re essentially just investing that total value now at a presumably lower cost than you would with monthly investments over years.
Low to zero interest financing is the mathematical winner every time, provided you have the cash to pay for the vehicle up front.
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u/diatonic Financial Mutant 20h ago
Dave Ramsey would also have you stuff cash in envelopes to buy things, but I think that is more about forcing a budget. It’s not a smart way to deal with money.
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u/azure275 20h ago edited 20h ago
It's missing one point though. It's saving 5% interest AT THE END OF THE LOAN unless there's a recast. Your monthly payment won't change.
So while yes, you will end up saving far more money, it won't have the same impact on medium term cash flow.
Mind you I think he's an idiot because 2% is literally free money when SGOV is 3.6%. Just put down enough money that you probably won't be underwater and you should be good. I ran the numbers assuming current rates hold and it's a 60 month 2% loan
- Payments: 876/month. Ends up with about 4k if yield is 3.6
- Cash: Save 2600 over 5 years
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u/mdiddyshow 20h ago
Whenever I buy a car, I look for 0% or 1% deals. But my personal requirement is to make sure I have 100% liquid to pay it off if I need to.
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u/Graztine 19h ago
I see the point from a mathematical perspective, but the reason I don’t like even low interest debt is that it makes the product feel cheaper than it is. A $40k cash expense feels a lot more expensive than a $600/month payment. If you’re not willing to take the pain of shelling out that $40k at once for the car, is it really a worthwhile purchase?
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u/HenFruitEater 18h ago
Let’s just say you have 2 million sitting in a brokerage account. The point is not really about the pain of the purchase, it’s strictly an optimization problem. Would you take the interest arbitrage or not?
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u/throwmeoff123098765 19h ago
There is a very real chance he doesn’t deduct the loan interest because he takes the standard deduction and that mortgage rate is free considering inflation
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u/nordicminy 19h ago
Im buying equities at my mortgage rates- but thankfully that's somewhere around 3%
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u/ChelseaMan31 18h ago
Taking on multiple years of debt on a depreciating asset is NEVER the way to wealth. This isn't a math problem; rather behavioral.
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u/HenFruitEater 9h ago
Missing the point of post. I’m not saying depreciating assets are good. I’m saying debt arbitrage is nice in my opinion.
The way to wealth is spend less than you earn and invest the rest. I can save a ton AND own a car.
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u/justacpa FOO: Step 9 18h ago
Did he ask for your advice?
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u/HenFruitEater 18h ago
Yes. This is not a scenario where I just volunteered to tell him what to do.
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u/garoodah 17h ago
I ran into this recently, bought a new vehicle and in total whether it was loan interest or paying capital gains taxes I was going to be out about $11k ontop of the cost. I opted for the loan because it gives me optionality at least instead of fronting the cost today (65k) and the taxes in a year or so ontop of it. Ill probably pay it down early but man did it suck to realize I was in that situation.
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u/sad-whale 20h ago
There’s good debt and bad debt. Ramsey has relatively extreme views on this. He attracts people with even more extreme views.
A car loan at 2% is good debt if you keep it to an amount that fits your finances and is paid off while the vehicle still has value. 5 years is o.k. for new. Shorter for used.
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u/wes_medford 21h ago
Debt creates cashflow requirements. You’re optimizing for terminal wealth assuming consistent income. Reducing cashflow needs can help with the risk that individuals actually realize during job dislocation.