I bought a 2010 Audi S4 as my daily driver 6 years ago. It has been a great car and a fun car as well. I got a letter in the mail this month from Audi saying I had paid off the loan on the car! Some of you who follow me may be surprised that I had a loan on that car since I also have a 1999 Lamborghini Diablo, a 1998 Lotus Esprit, a 1981 Aston Martin V8, a 1986 Porsche 928, and a 1991 Mustang. I could have paid cash for the car when I bought it or paid it off a long time ago, but I did not. Why? Because the interest rate was so low on the loan that I knew I could use the money to make much more money in real estate. I am not saying there is never a reason to pay off a loan, but for me it seemed silly to send any extra money at all towards my car payments, and for 6 years, I did not.
Why did I buy an Audi S4?
I had an Infiniti G35x before I bought my Audi. I was t-boned in that car when the power went out and a pickup decided not to treat a flashing red light as a four-way stop. I was fine, and the side airbags most likely saved my head from smashing into the door frame. The guy in the pickup was super cool and admitted it was his fault, but my car was totaled.
I loved the Infiniti, and it was the first car I had ever bought with a car payment in 2009. I had driven my 1991 Mustang as my daily driver before that and since college. I looked around for new-to-me cars for a few weeks and loved the S4s. They felt much faster than the 333 horsepower the factory claimed they had, and the interior was much nicer than other cars I drove. It also had all wheel drive, which was tough to find in a performance sedan at the time.
I did not want to buy a new S4 because I feel like buying a new car is throwing away money. I found a 2010 car in California with 16,000 miles for $42,000, which was about $8,000 less than the cheapest S4 in Colorado (with the supercharged V6). It was a certified pre-owned car which meant it had a better warranty than a brand new Audi, and I was pretty sure it would be in good condition. I bought it sight unseen and had it shipped to me. The car arrived a couple weeks later, and it was awesome.
Why did I get a loan on a car if I could have paid cash?
I hear the argument about good debt and bad debt all the time. I hear how you should never get a loan on a car because it is a depreciating asset, and that makes it bad debt. I have never thought that way. I have always thought what is the opportunity cost of using cash versus using a loan. It is not what my debt is against that I am concerned about but what my entire financial situation would look like if I got a loan or paid cash.
If I were to pay cash for the car, it would have tied up $42,000 that I could not use to buy a rental or a flip. If I were to get a loan on the car, I would have car payments around $650 per month at less than a 4% interest rate. Over the life of the loan, I would pay about $5,300 in interest or $880 per year. I knew I could use that money to make much more money investing in real estate or using it for my business.
Did getting a car loan cost me over $5,000 in interest?
Some people may say that I cost myself $5,300 in interest over the life of the loan, but I don’t think that way. That is like saying I don’t want to make too much money this year because I will have to pay more taxes to the government. It is not about how much money you pay in taxes but how much money you keep after paying taxes.
When I buy a rental property, I try to make at least a 15% percent cash-on-cash return on the money I invest. If I were to use that $42,000 to buy a rental property and make a 15% return on it, I would make $6,300 per year or $37,8000 over six years. It is obvious which route makes more money.
If I were to buy one flip with that money, I could make around $30,000 in 6 to 9 months. For me, it is cut and dry what the best use of the money is: invest in real estate. Most people will not be making that much money on their investments, but even if you are making a 5% return, it makes sense to invest rather than pay off the loan.
How was I able to make every single payment on my car loan?
I try to make things as easy as possible. I set up an autopay through my checking account to pay the car payment every month. It was tempting to pay a little more once in a while to get the car paid off sooner, but then I thought, why? I am not gaining anything, and I can use that money to get a much better return with other investments. At the end of the loan, I saw that I only owed a couple of thousand dollars and I thought, that would be easy to pay off, but I didn’t. I thought I had made it this far without paying extra, so why start now!
When does it make sense to pay off a car loan early?
There are some instances when it makes sense to pay off a car loan early. I had a $650 payment I was making every month that counted against my debt-to-income ratio. I was still able to get loans just fine, but some people may run into problems with their debt-to-income ratio if they have big car payments. If you are having trouble qualifying for a loan, it may make a huge difference to pay off a car payment. Remember there could be other debt that would have an even greater impact, like credit cards. It is usually best to pay off the highest-interest debt first before you pay off the low-interest debt.
It was cool to pay off the Audi as it was the first car loan I had ever paid off. I have 12-year loans on the Lamborghini and the Aston Martin for the same reason. I could have paid cash, but I can use that money to make so much more money in real estate that it makes sense to get loans. To me, the coolest part was not making any extra payments the entire life of the loan and knowing that I maximized the use of that cash.