Would You Borrow at 1.8% and Invest at 10%? Why We Financed Our New Mazda 3

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Would you borrow at 1.8% and invest in a guaranteed 10% investment? It seems like a silly question. It’s kind of like when USAA offered me a 3% cadet loan and was also offering 5% CDs. An FDIC guaranteed 2% spread: a no brainer right? I took the cadet loan and invested it in CDs, the S&P 500 (SPY), and paying down higher interest student loan debt.

At the time, I just had too much of my monthly paycheck going towards servicing my student and cadet loan debt. After 3 years of committing 50% of my pay towards my debt, I paid off the cadet loan two years early. I’m still working on my student loans. Only $23,000 to go! My goal is to be done in the next two years, before my 30th birthday.

Trading the 2002 Saturn for the 2015 Mazda 3

Looking good for 13 years old
Looking good for 13 years old

That was 2010-2013 and now it’s 2015. A few promotions later, I’m now a captain (O-3) with a wife also working. Being DINKs (Dual Income, No Kids) is the perfect way to accumulate a stack of Benjamins for financial independence. It also allows us to start looking at getting rid of the 140,000 mile 2002 Saturn L300 that always seemed to cost us about $1500/year in repairs and didn’t get great gas mileage (24 mpg three year average).

We were putting away $300/month to cover auto insurance and repairs, and also to save for a new car. After three years, we had $1000 to show for it. Not very impressive. The Saturn sucked up a lot of the money in repairs and gas. This is what convinced us it was time to start looking for something better. (If you’re still living paycheck to paycheck, not maximizing your Roth TSP contributions, or haven’t gotten your financial house in order, don’t even think about a new car! Start with used and start saving.)

Before my last deployment, my wife and I were out car shopping. After looking at a few new and used cars, we decided on the new 2015 Mazda 3 i Touring hatchback. Taking a break from used cars for a bit made sense to me only if I drove this car for the next 10-15 years. The car comes with lots of fancy standard features. Some reasons we liked the Mazda:

  • 2015 Mazda 3 hatchback best priceBluetooth, HD radio, fuel economy monitoring, fog lights
  • Blind spot monitoring and backup camera. Definitely a luxury, but nice to have backup on crowded highways and tight city parking spots.
  • 30 mpg in the city and 40 mpg on the highway
  • Comfortable and minimalist interior
  • Small size which makes it easier to park in the city
  • 5-star crash test safety ratings, lots of airbags, and a very survivable vehicle

“My Wife Looked At Me Like I Was Crazy…”

After test driving the Mazda 3, my wife and I started talking about how we were going to pay for the car. I said we should save up over deployment and pay cash for it when we get back. My wife looked at me like I was crazy:

“Let me get this straight,” she said, “You want to take $20,000 out of our investments and put it into a depreciating asset. Alternatively, you could invest $10,000 in the stock market and make about a 7% return and $10,000 into the SDP and make a guaranteed 10% return. How does borrowing money not make sense?”

I tried to argue for a while about the benefits of never having a car loan but I realized I was being illogical. I had been brainwashed by Dave Ramsey. She was right. When USAA is offering auto loans at 1.79% and I can get a 10% guaranteed return in the SDP, I really shouldn't be paying cash for a new car. I could essentially borrow at less than 2% (below inflation!) and invest my money and pocket the spread.

After negotiating a great out the door price (better than TrueCar) of $20,880, we decided to go with a 3 year loan resulting in payments of $600/month for 36 months. If we take the full 3 years to pay it off, we’ll pay $581 in interest. If we keep our SDP going for the same period of time, we’ll earn $3000 in interest, resulting in over $2400 of spread. If I miss a 90 day period in a CZTE (Combat Zone Tax Exlcusion) area, then I’ll have an extra $10,000 payment to make on the car.

Advantages to Financing a Car

  1. You keep your money working for you. This is the best reason I can come up with. Instead of dumping $11,000 in a depreciating asset, you can instead max out your Roth IRA accounts for you an your spouse, max out your SDP, or get over 50% of the way to maxing out your Roth TSP.
  2. You can get dealership rebates to decrease the out-the-door-cost of your new car. Most dealerships offer some kind of rebate if you finance through their lending service. While their rates are normally awful, most loans have no early payoff fees, which means you can refinance at any time to a better rate. I’ll get more into refinancing an auto loan in a future article.
  3. Many car companies offer 0% financing, zero money down, or a few months of no payments. If you have 0% financing, it’s pretty easy to find an investment that will return more than that. If you have a few months of no payments, this will give you time to build your savings to invest or to make a large initial payment on the car. Don’t squander this time! If you’re not disciplined enough to save for your upcoming expenses, you’re probably not financially mature enough for a car loan.

The One Rule You Must Follow When Buying a Car on Credit

While I normally abhor consumer credit, especially for depreciating assets, I make an exception for car loans. My new one rule for car loans is:

You must have the cash readily available to pay off the car loan and you must be making a decent return on that cash.

By readily available I mean in a CD, SDP, or Treasury bond. Not in stocks or bonds because their return is too fickle as we have seen in recent economic crises. It must be in a government secured investment. By decent return I mean whatever spread above your auto loan you feel is worthwhile.

For me, a 10% guaranteed return in the SDP is worthwhile. If I was getting 5% in a CD, that may be worth it as well. A 3% return on a Treasury bond? Probably not worth the 1.2% spread, at least to me. You’ll have to decide what’s a worthwhile return for yourself.

In the right financial situation, borrowing money for a car can make sense. But always leave yourself an out. Don’t take on too many payments at once. My new rule should keep you from getting into too much trouble. I always highly recommend paying cash for a used car until you’ve got your financial house in order, especially if you’ve just recently joined the military. If you do buy a new car, plan to drive it for the next 10-15 years.

Reader: Do you think you should pay cash for a car or do you finance it? Any proponents of leasing?

12 thoughts on “Would You Borrow at 1.8% and Invest at 10%? Why We Financed Our New Mazda 3”

  1. Quote: “If we take the full 3 years to pay it off, we’ll pay $581 in interest. If we keep our SDP going for the same period of time, we’ll earn $3000 in interest, resulting in over $2400 of spread.”

    How do you keep an SDP going for 3 years? What career field deploys you for that long?

    • The trick is not deploying for that long…It’s hitting a combat zone at least every three months to keep the SDP rolling and not kicking out. Lots of career fields do short TDYs down range every couple months. Good question though!

  2. I bought a car last year and used a penfed 2% auto loan. The one thing you have to remember is that the loan company will require you to have certain premiums on your auto insurance. I typically have mine pretty low cuz i’m cheap but PenFed required me to raise them and I ended up having to pay over +$100 per 6 month policy so it wasn’t as good of a deal as I originally thought the 2% auto loan was going to be.

  3. Great choice in car btw. I personally just can’t justify carrying a car loan very long. We did just find a CPO 2014 Mazda6 for my wife, and I cringed at the thought of financing 15k (after our cash down payment), even at the low rate they offered. I decided to finance just to keep money in my investments. I’ll still likely stop contributing to my TSP and IRA for the next three months and pay it off and keep the debt off my books, but I can see why you would want to maximize the gains in a SDP. I’m not deploying anytime soon, and my NFCU CD is limited to 5k at 5%, so I won’t necessarily break even with the interest I would make from that CD.

    Side note, I just hate having to do the whole car buying/credit dance they play. I think they were plain shocked at the credit score they pulled and how little debt I actually have (mortgage). And they were not too happy when I politely turned down ALL add ons they tried to offer me. Couple that with the fact that they mispriced the car at 24k, and it was meant to be 28500 (thanks USAA pricing certificate guarantee) they made little to no money on the deal.

    • Nice job, Drew. I too hate the car salesman game. I wish I could just go on Amazon and buy a car from the lowest seller and match it to the best auto loan rate for my credit score (which just broke 800 before I bought the car!). I also hate carrying debt and I’m looking forward to wiping out my student loan and auto loan debt within the next three years.

  4. Great tips and post. Many of us learn some of these lessons the hard way or never at all. Love how you blog about personal financial experiences as you live through them and show us the results of your research. Saves us a lot of time. BTW, check out penfed.org when thinking about loans. Membership is open to AD military and is very military friendly like USAA. I have used them consistently for home and auto loans. Like USAA with insurance, other banks usually can’t touch Penfed’s loan rates. Thanks again for the posts, I highly enjoy them.

    • Mitchell – funny you should mention PenFed. I actually looked at their rates before I refinanced my auto loan. PenFed was offering 1.49% and USAA was offering me 1.79%. I asked the nice USAA auto loan rep on the phone if they would be willing to match PenFed’s rate so I could give USAA my business. She got me the 1.29% rate, which is advertised as only offered to those who use USAA Car Buying Service. I’ll be writing a post about that soon.

  5. My husband and I have also been debating the new vs used, cash vs finance options on our upcoming car purchase. Thanks for the great article!

  6. Another great article Spencer! Although I only buy used cars, I can honestly see why the math makes sense in this particular equation! I recently bought a used 2010 BMW 335i x-Drive from the lemon lot, the car is fully loaded and I mean fully! It had 30,000 miles on it, and was listed at $29k…I called the guy and said I’ll give you xx, after about 3 minutes he accepted my cash offer. So, I got a great deal on an excellent used car, but obviously in your case you got a great deal on a brand new car! It’s funny you mentioned you drove a Saturn, I drove a ’98 Saturn that was affectionately named Sally the Saturn and it had about 225k miles on it–lol! Hope all is well!


    • Ha! We called ours “The Sexy Saturn.” I still haven’t used the lemon lot…maybe for the next car or if the wife ever needs one. Thanks for being a frequent commentator and reader :)


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