When Borrowing Is A Good Thing

When Borrowing Is A Good Thing

It is conventional wisdom that borrowing to buy when you can afford to pay cash is a mistake. It is often a mistake, but not always. When I bought the Jaguar, I was reluctant to put the cash out of pocket, figuring that it might be useful to have the cash available as the economy sinks deeper and deeper.

For example, I was able to get 4.30% APY Certificates of Deposit in late November. The first year, the CDs for the $17,700 (roughly) that I would have paid for the car, title, and sales tax, would earn $761.10 in interest. Assuming a marginal federal and state income tax rate of 33% (because it may be a while before I get a permanent job again), that's a net of $509.94 of interest income. Over five years, the net income from the $17,700 in principal comes to $2700.89.

Over the five year life of the loan, my 5.24% car loan will cost me $2370.59 in total interest. That means that it actually saves me $330.30 over the life of the loan.

UPDATE: See a more detailed analysis here.