Advice Needed: $100k auto loan for someone with no loan history?

[RandomHero]

Originally Posted by NemesisX

Also you mentioned he graduated from one of the top engineering schools in the nation. It wasn't Cockrell by any chance was it

It was, yes. My location probably was the tip off, huh?

Originally Posted by NemesisX

Did the bank (or whatever institution loaned him the money) give any explanation as to why they were comfortable with loaning money to someone with no auto loan history? Did his impeccable credit history suffice or did he have to jump through some of the other hoops I mentioned (like showing sufficient assets and/or income)?

He brought in his 52-week transaction history which showed his beginning balance at the start of 2013, and his current balance now. Essentially, that was proof of his monthly expenses, as well as the fact that he's saved ~$100k in less than 1 year.

[NemesisX]

Originally Posted by RandomHero

It was, yes. My location probably was the tip off, huh?


He brought in his 52-week transaction history which showed his beginning balance at the start of 2013, and his current balance now. Essentially, that was proof of his monthly expenses, as well as the fact that he's saved ~$100k in less than 1 year.

Nice, glad to hear it worked out for him

And yeah the location gave it away a little I'm actually at Cockrell myself doing ChemE/Neuroscience, although I plan on going to medical school after graduation. If your friend was petroleum I think that's actually rank 1 in the nation. ChemE is rank 4.

Anyways I hope your friend enjoys the car in good health!

[gatorfast]

So wait...after all this he took out a large loan at 3.5% only to keep funds invested in muni bonds at 1.75%???

Besides that being a terrible strategy (I thought the whole point of him taking a loan was to "take advantage of the low rates" ), why wouldn't he just pay for the car in cash since he is so rich and avoid paying all of that extra interest? Sounds like he needs to fire his financial adviser...

[Mr Tonka]

Originally Posted by gatorfast

So wait...after all this he took out a large loan at 3.5% only to keep funds invested in muni bonds at 1.75%???

Besides that being a terrible strategy (I thought the whole point of him taking a loan was to "take advantage of the low rates" ), why wouldn't he just pay for the car in cash since he is so rich and avoid paying all of that extra interest? Sounds like he needs to fire his financial adviser...

Likely because he want's to build some credit history. Aside from the numbers and comparisons listed in the thread, he's also building a credit history at the same time.

Having a wonderful financial statement coupled with excellent credit can afford you loans most people can't imagine. Paying cash for everything might save you a few bucks in the short term, but it isn't always the answer.

When i was 23 i was in my second year of making ~$75k. I was paying all of $150 / month rent and driving my 11 year old toyota supra. I had money to burn at the time but no way in hell could i get a loan. Parents hooked me up with my first and only co-signing for a 95% of a 1995 M3. Auto purchases, set up on an auto draft, running the term of the loans have helped make my credit score over 800. Until 2003 i didn't use credit cards. And the one i have now is in my company's name. So auto and home loans are the only source of my credit score.

It can be difficult for cash/income heavy young people to build credit. Especially when it's easy to buy things outright. Sometimes it'll cost a few extra points on the first couple of loans to build that credit.

[1fastdoc]

Originally Posted by RandomHero

Let’s compare a potential situation many people on this forum are probably in:
1.) $60,000 BMW 335i leased at $650/month
Shame on anyone for not ponying up the extra $$ for the M3

2.) Going to the bar twice a week…..$250/month or more.
LOL, I must be old. Bar is twice/year. On the plus side many bars don't have near my liquor collection

3.) Going out to eat twice a week….$250/month or more.
LMAO, yep, I'm old. I'm lucky to eat out twice/month

4.) Buying nice clothes….$300/month or more
Shit! I'm still wearing jeans from 1994. Do dudes really drop $300/month in clothes?

I added my responses because I find it hard to believe that the average person on here is hitting the bar twice/week and spending that much on clothes. The eating out I can understand. Am I just out of touch with reality??

[ddk632]

I am typing this from the bar as we speak

(No, no, I'm not.)

[paradoxical3]

Borrowing money at 3.x% to invest at 1.X% is the dumbest thing I've ever heard.

If I was in a similar situation I would look into a couple of multifamily buildings. Obtain low down payment loans via proof of assets and use the would-be downpayment money for improvements to force appreciation. Let's say you get a 4.5% rate with 5% down; on a 150k building you can force more than 4.5% appreciation immediately by spending 30k on improvements. For the next decade the tenants would be paying them off for me while I am cashflowing a couple hundred extra a month, and by the time I am 35 they would be a semi-passive stream of income.

[ddk632]

The kid is 23.

However much he's making, he's at the beginning of his earning potential. I think he understands he will be making a lot more money by the time he's 30.

Taking out a loan at 3.5% to build auto loan history, which is offset by his investment of 1.7%, if you cancel them out, leaves him essentially paying only 1.8% on this loan. That is less than inflation. Essentially it's free money and he gets to build his auto loan history while he's at it.

Coupled with his ability to continue saving and also increasing his income as he gains experience, I don't see the problem with this.

I would do the same thing in his position because, as much as people hate the cliche, you only live once and a 23yo driving a GT3 is living the life in most people's books. I say go for it and don't look back! More than likely this is just the first of many awesome cars this dude will own.

Good things come to those who do what it takes to get the most out of life.

[firstkill]

Originally Posted by 1fastdoc

I added my responses because I find it hard to believe that the average person on here is hitting the bar twice/week and spending that much on clothes. The eating out I can understand. Am I just out of touch with reality??

Bar/eating out for 2 (my wife included) is usually 4-5 dinners a week. Not all of them are expensive, but its usually close to 700 a month for us.

cloths/accessories for 300 a month. 3600 a year. For sure I spend that much yearly.

as long as you don't bankrupt, and force the rest of us citizens to pay indirectly, then keep on spending and pump up the economy please.

fk

[1fastdoc]

Originally Posted by firstkill

Bar/eating out for 2 (my wife included) is usually 4-5 dinners a week. Not all of them are expensive, but its usually close to 700 a month for us.

cloths/accessories for 300 a month. 3600 a year. For sure I spend that much yearly.

as long as you don't bankrupt, and force the rest of us citizens to pay indirectly, then keep on spending and pump up the economy please.

fk

Huh. I still don't get the $3600/year in clothes. I guess I need to go shopping more.

On that note, I didn't realize a used GT3 could be picked up for $110k. I'd rather wear old clothes and get that car in a few years.

[TrevorM3]

Originally Posted by paradoxical3

Borrowing money at 3.x% to invest at 1.X% is the dumbest thing I've ever heard.

If I was in a similar situation I would look into a couple of multifamily buildings. Obtain low down payment loans via proof of assets and use the would-be downpayment money for improvements to force appreciation. Let's say you get a 4.5% rate with 5% down; on a 150k building you can force more than 4.5% appreciation immediately by spending 30k on improvements. For the next decade the tenants would be paying them off for me while I am cashflowing a couple hundred extra a month, and by the time I am 35 they would be a semi-passive stream of income.

smartest thing i've read in this entire thread.

I love getting paid on the first of every month. I look forward to more tenants in 2014.

[Mr Tonka]

Originally Posted by TrevorM3

smartest thing i've read in this entire thread.

I love getting paid on the first of every month. I look forward to more tenants in 2014.

Except it's silly to think that someone with virtually no credit history, barely any income history, would ever get a 4.5% loan with only 5% down. People with great credit can't get a loan with 5% down. Hell, SBA is 10% down. And any loan at 4.5% will have to be refinanced in 5 years while hardly paying any principle due to the 20 year amortization. Who's to say the rates won't be double in 5 years?

Sounds wonderful in theory and to a point, achievable. But not very easy for someone with no credit history or real-estate experience. It is however very easy to become rich on paper. It's quite another thing to do it for real.

Don't get me wrong, i like collecting rent on the 1st of the month as well, but one doesn't just wake up and successfully jump into multi family homes at a 4.5% rate with 5% down.

[Malibu1]

Still want to hear how he is able to get an insurance carrier to cover him at his age.

[PSUSMU]

Originally Posted by 1fastdoc

I added my responses because I find it hard to believe that the average person on here is hitting the bar twice/week and spending that much on clothes. The eating out I can understand. Am I just out of touch with reality??

I'm 27 and single. I go out twice a week and get takeout every night. I spend $2-300 every couple months on new clothes. I'm comfortable enough to do what I want. Seems normal to me.

[paradoxical3]

Originally Posted by Mr Tonka

Except it's silly to think that someone with virtually no credit history, barely any income history, would ever get a 4.5% loan with only 5% down. People with great credit can't get a loan with 5% down. Hell, SBA is 10% down. And any loan at 4.5% will have to be refinanced in 5 years while hardly paying any principle due to the 20 year amortization. Who's to say the rates won't be double in 5 years?

Sounds wonderful in theory and to a point, achievable. But not very easy for someone with no credit history or real-estate experience. It is however very easy to become rich on paper. It's quite another thing to do it for real.

Don't get me wrong, i like collecting rent on the 1st of the month as well, but one doesn't just wake up and successfully jump into multi family homes at a 4.5% rate with 5% down.

Notice I said "with proof of assets." If you show them you have more than the loan amount in the bank and a high income, it's easy to get a good interest rate. And that's leaving out creative financing deals, which admittedly a beginner probably wouldn't do.

This is of course assuming he really is making $7500 discretionary income a month - which is very, very different from making a total of $7500/mo. If he's banking $7500 in play money a month after savings, investments, mortgage/rent, and car payments, he's making 250k+ a year if he's not being irresponsible.

$200,000k is only 16/mo pre-tax so realistically 11k after tax, sub 10k if he lives in a high income tax state. Rent figure 1k car payments figure another 1k so now you're looking at 8k left. That's before food, utilities, 401k, investment, bars etc.

To be really pulling down $7500/mo in play money, you need to have a very high income.

Don't get me wrong, I'm not saying don't buy the car. I probably would. I'm just saying it doesn't make sense to borrow at 3.x to invest at 1.7x.

[Nkc]

Taking a $110k loan at 3.5% to chase a 1.75% "safe" investment for 72 months.


Do I really look like a guy with a plan? YOLO right?

I can clear 5x his so called "fun" money and still can't afford a GT3. FML.

[PSUSMU]

Originally Posted by RandomHero

Find him one in Cararra White with 15k miles for less money and I’m sure he’d pay you a finder’s fee.

$89500 @ 22k, but I still want my finder's fee:
http://forums.rennlist.com/rennforum...white-gt3.html

[kevinbahnz]

Originally Posted by PSUSMU

$89500 @ 22k, but I still want my finder's fee:
http://forums.rennlist.com/rennforum...white-gt3.html

come on man, thats almost 7 years old..

[P1]

Paying $1696 a month (for 72 months) for a car seems completely mental to me at 23. You have to love America.

[se15679875]

Originally Posted by P1et

Paying $1696 a month (for 72 months) for a car seems completely mental to me at 23. You have to love America.

Here's a good way of looking at the cost of driving the GT3 versus a cheap economy car for just these 6 years.

1696/month pumped into the stock market for 72 months with a 6.5% annual rate of return yields roughly $150k by the end of 6 years.

Now, let's take that $150k and keep it invested in the market for the next 30 years (with no annual addition) until this guy is 59. That's $1M and change.

The true cost of owning the GT3 at such a young age is losing roughly $1M in assets by age 59, and even more by retirement age (65+).

Now you can quibble with rate of return that I've assumed for this analysis but this is just a rough calculation. I've ignored taxes for the time being as well. But, as far as I'm concerned, as long as this guy is saving enough money such that he'll have considerably more than $1M by age 59 then he can afford the car.

Maybe he's on pace to save $9M. Had he abstained from purchasing the GT3, he would have $10M. There is little quality of life improvement going from $9M to $10M.

However, if he's 59 and he finds that his nest egg is only $2M or $3M, then he'll probably look back and realize that purchasing the GT3 so young was one of the worst financial mistakes of his life.

Edit: And to be fair, you also have to consider hypothetical investment gains once he sells the car. For example, maybe he sells it after 6 years for $45,000.

$45,000 invested in the market for 30 years @ 6.5% is about $300k, so he's actually losing out on $1M - $300k = ~$700k in assets, but the idea is still the same.

[Arben72]

Can't stop laughing at everyone looking at the car as an investment. The kid wants a better credit score, losing 1% interest on his investments isn't to bad, especially considering he can refinance later on for a better rate. He's young and should enjoy it, even if it means a loss of wealth when he's 50.

[P1]

Originally Posted by se15679875

Here's a good way of looking at the cost of driving the GT3 versus a cheap economy car for just these 6 years.

1696/month pumped into the stock market for 72 months with a 6.5% annual rate of return yields roughly $150k by the end of 6 years.

Now, let's take that $150k and keep it invested in the market for the next 30 years (with no annual addition) until this guy is 59. That's $1M and change.

The true cost of owning the GT3 at such a young age is losing roughly $1M in assets by age 59, and even more by retirement age (65+).

Now you can quibble with rate of return that I've assumed for this analysis but this is just a rough calculation. I've ignored taxes for the time being as well. But, as far as I'm concerned, as long as this guy is saving enough money such that he'll have considerably more than $1M by age 59 then he can afford the car.

Maybe he's on pace to save $9M. Had he abstained from purchasing the GT3, he would have $10M. There is little quality of life improvement going from $9M to $10M.

However, if he's 59 and he finds that his nest egg is only $2M or $3M, then he'll probably look back and realize that purchasing the GT3 so young was one of the worst financial mistakes of his life.

Edit: And to be fair, you also have to consider hypothetical investment gains once he sells the car. For example, maybe he sells it after 6 years for $45,000.

$45,000 invested in the market for 30 years @ 6.5% is about $300k, so he's actually losing out on $1M - $300k = ~$700k in assets, but the idea is still the same.

Very informative, thanks for that!