How would you respond to this post? Suppose I want a car that cost $10,000. If I

Question

How would you respond to this post?

Suppose I want a car that cost $10,000. If I borrow the money at 7% interest per year, compounded annually, and I pay it back over 6 years, the amount I would have spent on the car is $14,200.00 total. My alternative is to save for perhaps 3 years until I have enough money to purchase the car outright. In this scenario, I must also consider inflation. If inflation is perhaps 2%, the $10,000 car I could have purchased is now $10,600.00 in 3 years. Therefore, the opportunity cost of buying the car right away is calculated as $14,200 - $10,600 = $3,600.00. However, the opportunity cost of not buying the car is having the use of it for 3 years, in addition to whatever transportation expenses I may have incurred.

Explanation / Answer

It would be better option to save money for 3 years and buy the car than to buy the car right away by borrowing money at 7% interest per year.

One has to take into account that car is a depreciating asset and there are runnings costs incurred in the form of gasoline and maintaineance . If a person saves the money he could invest that money regularly in any financial instrument which pays his interest and his returns would be greater than the inflation price of the car after 3 years. Usage of public transport will be much cheaper than investing in car right way by borrowing money.

Therefore saving money and buying car after 3 years will give higher returns than investing in the car right now by borrowing money .

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