Advertisement
YOU ARE HERE: LAT HomeCollectionsLos Angeles

Car-Buying Advice Uses Faulty Logic

September 29, 1985

Although I don't have a personal computer, my common sense tells me that S. J. Diamond has been woefully misled.

Diamond contrasts two methods of buying an $8,000 car: paying cash versus investing the $8,000 in a savings account and borrowing another $8,000 to finance the car. She speciously argues that because the loan's (large) interest rate is applied to a declining balance while the savings account's (small) interest rate is applied to an increasing balance, the consumer comes out ahead financing the car and investing his $8,000. Diamond neglects to mention that if the consumer invests his cash and finances the car, he will have to make monthly payments totaling more than $2,700 a year.

To make a fair comparison, the consumer who opts to pay cash for the car should also make monthly payments to a savings account. I calculate (roughly and conservatively) the interest thus earned in 48 months to be $1,862. Add this to the $10,846 paid into the savings account and the consumer now has $12,708, or $1,374 more than he would have by following Diamond's advice. Where does this $1,374 otherwise end up? In the hands of smooth-talking bankers?

CHRIS JONES

Los Angeles

The preceding three letters, along with more than 100 others received by The Times, are correct. S. J. Diamond will address the issue further in her column Monday.--Editor

Advertisement
Los Angeles Times Articles
|
|
|