Wednesday, January 10, 2007

Econ 101

Ben, I took it as a given that I would need to invest the money from the 3.9% interest loan into something that would yield more than a 3.9% return. What I don't follow about your idea of making money from a car loan is the "CAR" part. Last I checked, concerning car loans, the only thing a bank will allow you to invest in with that money is an automobile, which starts depreciating before you even drive it off the lot. I suppose if you got a lender to just give you the cash so you could invest it in something other than a car, then you could make money on that investment. But it wouldn't be a "car loan" anymore...

Ben's response:

Money is fungible. It doesn't really matter (I don't think) whether it comes from a car loan or in a 3.9% loan from your Aunt Tillie. If you can invest it at 4.9% or 5.9% you are well ahead of the game. Right?


Anonymous Anonymous said...

Of course money is fungible, all things being equal. But that's not true about a car loan. The money the bank lends you to buy a car MUST be spent on a car, it can't be spent on something else. In fact, most banks go out of their way to make sure the loan funds get disbursed directly to the car dealer instead of some other shady person who will spend the money on something other than a car. In most cases you must also provide proof that you will properly insure the car in order to receive a bank loan to pay for it.

On the other hand, as you pointed out, Aunt Tillie can give you money if she chooses to grant you an unrestricted loan. In that case, the money IS fungible. You can invest in whatever you want with that money.

Bottom line, the only thing you can "invest" in with a car loan is a car. That's why it's called a "car" loan.

January 10, 2007  

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