Wednesday, January 10, 2007

Let's see if I understand it...

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.

Ben's response.
Let's see if I understand it...I traded in a lemon and used it as a down payment. I am paying 3.9% interest on the roughly $20K balance. If I had put up the $20K I wouldn't have it liquid. If I have it liquid I can invest it. No one (including me) knows whether the $20K I invest "comes" from the loan or the myriad of other that pour freshets, streams, and mighty rivers of $$$ into Wattempire.

Ergo: I can invest it.

Correct? (You seem to know much more than I about the topic.)


Anonymous Anonymous said...

I now see the point you are trying to make. But I think this "making money by borrowing" idea only works if you look at it a certain way. Sure, if you have $20,000 free to invest in the market because you took out a car loan, you could make money under the right circumstance. But, looking at it from another perspective, if you kept the old car for a few more years, or just decided to stop owning a car and use the subway, you could have made even more money. If the car loan's APR was 3.9%, and you made 5.9% on the liquid $20,000 you invested, that's 2% profit. But if you didn't take out the loan at all, and invested that same $20,000 and made the same 5.9%, you'd have a 5.9% profit.

January 10, 2007  

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