Sad, but I think I’m out

[Jeremy3292]

My niece was buying a new car.. I told her to finance it for sure. She got a good loan at 3.5%, she has good credit but “only” 85K in income (not including deductions etc.)

I told her it was far better to continue to maximize her contributions to her employee pre-tax savings plans and to keep her after tax tax contribution to her ROTH IRA as high as possible. She puts in the money in, I manage the account - so she does quite well. ;-)

Good use of lending/debt can be easily and legitimately justified assuming it’s not just to spend more money. Even paying down DEBT (like a high interest credit card) would be a good use of taking on a loan on a car at ~ 4.5-5.5% rather than paying in precious cash.

Just a couple ways to think about it.

Yes, I agree.

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[runwithscissors]

So if lease rates for Tier 1 credit are roughly 10%, who benefits from that, Rivian and Chase? Just Chase? I'd love to know what the money factor/interest rate would be for Tier 2 credit and beyond. The number seems astronomically high for a R2. I know Porsche and other more expensive manufacturers hover around those rates but if the goal is to sell a ton of them, why that rate? Most people want to lease nowadays and I think the monthly payment will be a major turnoff.

 

[tivoboy]

"Income" and "wealth" are two separate things. Many "wealthy" people actually have very low "income". See Steve Jobs before his death, see Mark Zuckerberg, Larry Page, Elon Musk. All of them were/are billionaires, yet officially have very low salaries. Thus their "taxable income" is very low. Qualifying them for many "low income" tax credits. (Sure, every few years they sell a bunch of stock, so in THAT year they have high income.)

I would argue that most of those ppl mentioned probably have >100M a year in INCOME.. they certainly don’t take any SALARY, and many disciples of that position didn’t like paying the paltry PAYROLL taxes - that was their position. But actual 1040 income, most are well into the low to mid NINE figures on an annual basis.

Sure, they gets loans for billions against their stock, but everytime they make a new contribution to a foundation or DAF or trust, they are clearly ”taking” income to offset that deduction

 

[tivoboy]

So if lease rates for Tier 1 credit are roughly 10%, who benefits from that, Rivian and Chase? Just Chase? I'd love to know what the money factor/interest rate would be for Tier 2 credit and beyond. The number seems astronomically high for a R2. I know Porsche and other more expensive manufacturers hover around those rates but if the goal is to sell a ton of them, why that rate? Most people want to lease nowadays and I think the monthly payment will be a major turnoff.

I think in THIS case, and it’s often with a new gen vehicle, the lease rate is high because nobody knows what the “RESIDUAL VALUE” is going to be at lease end.. neither the lender nor the OEM wants to take on ALL that risk, so it’s factored into the lease terms in the shape of loan rates.

Historically there was a cap cost reduction, part to lower the lease rate, but also to make the true lease terms less transparent.. most ppl can’t figure it out.. the law changed on this several years ago - about transparency - but it’s about future value of the asset more than anything.

With a full financing, the lender has no care about future value of the asset and loan end, other than they hope you’ll be able to pay it off.

 

[Dark-Fx]

But I do wonder how so many afford quad R1s lol. I am a pretty high income earner and would never think of purchasing a 120k plus car.

There's like 25 million millionaires in the US.

 

[Millbarge]

There's like 25 million millionaires in the US.

and most of them would need to sell their house or dip into their 401k to realize it....

 

[R1S88]

There's like 25 million millionaires in the US.

Also, many look at it as 120k - residual value/years owned...what is the cost per year for the depreciating asset. It's worth it for some to spend that amount per year to drive something that brings joy.

 

[bobdod]

Yeah....I think many buyers at this or higher price points know there are technically more 'responsible' options. But in economics, everyone is rational in their own process.

I am upgrading from a 20+ year old 300k mile Toyota. I feel that I've earned a little joy/luxury, and admittedly was very fortunate to be able to save money along the way for so many years.

I still wont be going for their launch lease offer though. Just planning to finance at the best credit union rate I can find when my order invite comes (Sep-Oct)

 

[mkg3]

I'm fairly young (under 40) and can't believe some of the financial advice being given out these days.

"Why pay off your car or house loans early at 4% when you can easily make 7% in the market"
"Interest rate spread bro haven't you heard"

Everyone looks like a genius in a bull market.

Just a perspective. There are good debts and bad debts.

Historically S&P500 has yielded over 9% annually since inception. So depending on the interest cost versus AFTER TAX investment earnings, it does make sense, depending on the interest rate and asset value.

That said, its the cash flow that matters the most for month-to-month basis so if the payments constrains the lifestyle, there that to consider.

An example - when we retired 6 yrs ago, my wife wanted our house paid off. I walked her through our investment returns over time and told her it makes no sense since our mortgage at the time as 2.6125% (its paid off since then).

Another is when we bought our Rivian R1S, in 2023, we were already retired and the auto loan rates were around 7~8%. I didn't want to take the loan out and pay more for the depreciating asset so we bought it cash by liquidating fraction of our investments. The capital gains tax and impact to our MAGI was a consideration in doing so.

Just make sure you consider after tax and net residual values before deciding which way to go.

 

[Jeremy3292]

Just a perspective. There are good debts and bad debts.

Historically S&P500 has yielded over 9% annually since inception. So depending on the interest cost versus AFTER TAX investment earnings, it does make sense, depending on the interest rate and asset value.

That said, its the cash flow that matters the most for month-to-month basis so if the payments constrains the lifestyle, there that to consider.

An example - when we retired 6 yrs ago, my wife wanted our house paid off. I walked her through our investment returns over time and told her it makes no sense since our mortgage at the time as 2.6125% (its paid off since then).

Another is when we bought our Rivian R1S, in 2023, we were already retired and the auto loan rates were around 7~8%. I didn't want to take the loan out and pay more for the depreciating asset so we bought it cash by liquidating fraction of our investments. The capital gains tax and impact to our MAGI was a consideration in doing so.

Just make sure you consider after tax and net residual values before deciding which way to go.

Yes, agreed. My parents took the opposite approach bc my mom wanted the house for security paid off so they compromised and paid it off it 3 tranches over 3 years instead of paying it off at one time.

My comments are seemingly being taken too literally as it was just to point out the "investment bros" of today lack financial sense as another user said earlier. They only see the bull market and think it will last forever, so they ignore all other financial security advice.

 

[Dark-Fx]

and most of them would need to sell their house or dip into their 401k to realize it....

A lot of them are approaching the age where they start to realize they need to use it or lose it though.

 

[mkg3]

and most of them would need to sell their house or dip into their 401k to realize it....

Couple of things on this though... We all need to live somewhere so equity of the primary house should not be counted unless one sells it and rents somewhere. Any withdraw of equity from one's primary house is a liability/debt so its a minus.

As for the millionaire in this country, there are roughly 18% of households in US according to the Federal Reserve data. So in the country of 350 million people, that's 63 million people - much more than 25 million.

Of course today's million is probably $200K, 10 yrs ago so in the equivalent terms, one really need about $5M to be comparable to what things used to be.

 

[TexasBob]

Ok but your mortgage is for 30 years. What is the average market return over a 30 year period? If it's higher than your mortgage interest rate, that's still sound advice.

If "I may not have a place to live and will be forced to sell my house and its contents at a distressed price if my income suddenly stops due to... [economic downturn, industry shake up, illness, AI/robots, etc.] ... " is a trade you are willing to make for a nominal average of 3% p.a. with high volatility, then sure it is excellent advice.

 

[tivoboy]

Couple of things on this though... We all need to live somewhere so equity of the primary house should not be counted unless one sells it and rents somewhere. Any withdraw of equity from one's primary house is a liability/debt so its a minus.

As for the millionaire in this country, there are roughly 18% of households in US according to the Federal Reserve data. So in the country of 350 million people, that's 63 million people - much more than 25 million.

Of course today's million is probably $200K, 10 yrs ago so in the equivalent terms, one really need about $5M to be comparable to what things used to be.

Technically 720K 10 yrs ago is todays million..

 

[Millbarge]

Couple of things on this though... We all need to live somewhere so equity of the primary house should not be counted unless one sells it and rents somewhere. Any withdraw of equity from one's primary house is a liability/debt so its a minus.

you can feel free to measure your net worth however you want, but including equity in your home is standard in determining "net worth". Your home is an asset, with the value reduced by the liability of your outstanding mortgage.

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