(L45) Loans & Depreciation

Why shouldn’t I borrow to buy something that depreciates?

I will never borrow money to pay for an item that depreciates in value because in the long-run, the item will end up costing me even more than it should have in the first place. Say, for example, that I borrowed money to buy a brand new car. Well, not only will I be paying interest on the loan that I used to buy the car with, but the car will also immediately drop in value the second that I drive it off of the lot.

In short, this means that I am going to pay more than the car is actually worth from the minute it’s mine. On top of the extra money I am paying to own the new car which will only decrease in value over time, I am paying money to the person I borrowed from. Added together, I am paying a great amount more for the car than it is physically worth. Five years down the line, the car will sell for even less money than it would have the year before. Basically it is just a great loss to me in terms of the future.

Another reason not to borrow money for something that depreciates in value is the issue of repayment to the lender. Borrowing money to invest in a business for example would be a great future oriented decision. A business would bring in more income (hopefully) than it cost me, and I would be able to repay the lender with the least amount of interest costs possible. However, borrowing money to pay for an item that loses value over time will only make it more difficult for me to repay the lender because I am losing money (value) each day. This will also result in me paying more money in interest than I would had I invested in something that has increasing value over time.

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