A friend called me up the other day (I love that nonsense phrase, the other day, that narrows it down to any day other than today… LOL), asking for my advice. She was buying a new car (no, I didn’t tell her to buy a used car though that might have made more sense), and was wondering whether to use the cash in her investment account or take out a car loan.
Normally this would be a no brainer. Use the cash, right?
Except that the car loan was at 2% (and there were no other financial dings). My friend gets a conservative return three or four times that.
Now, my friend is pretty darn financially savvy (she, as a single gal, owns her own home with a lot of equity built up, has both a retirement portfolio and an investment portfolio, and no other debt). She didn’t truly need my advice. It simply felt, as she said, “wrong.”
I know what she means. I currently have a home equity line of credit (the only debt the hubby and I have). The interest on that is a comparably steep 6% but we have it invested earning us a 12% return. Even after taxes (I pay taxes on the return less the cost of borrowing), it doesn’t make sense to pay it off… ever.
But to make the right financial decision, both my friend and I have to move past our fear of debt (the bag lady syndrome) to harness its power.
Note: Be cautious with leasing a car. I have never found a person where that choice worked out the best for him/her (especially if you plan to buy at the end of the lease term).
