Advising a friend.

[Saul Good]

Originally Posted by Tylerthigpen!1!

College kid here. What do you mean by whole life insurance? And do most used car lots run this business model?

Whole life insurance is life insurance that has an investment component attached to it. You've probably heard of the Gerber policies that grandparents buy on their grandkids. For $15 a month you get $10,000 of coverage. It builds up cash value, so the kid can cash it in when they turn 16 and get about $3,000 to buy a car or something.

If you just buy term life insurance on a kid that age, $10,000 costs about $1 a month. You can invest that other $14 and wind up with more than double that amount. Most of the money for a whole life policy goes towards fees and commissions.

Most used car lots don't use this business model, but the "buy here pay here" places all do. Generally, you find them near liquor stores, pawn shops and payday loan stores. Just stay away.

If you ever think about taking out a car loan, find a financial calculator online. Plug in the monthly payment, the loan duration, and the 8%-10% interest rate you could be earning on that money if you invest it instead of buy a car with it.

If you buy a $20,000 with nothing down and finance it at 9% for 5 years including 6% sales tax, your monthly payment comes to $441. If you then trade that car in and do it again every 5 years, you will purchase 8 cars from age 25 to age 65 for a total purchase price of $160,000.

If you had invested that same monthly payment at 9% during the same period of time, you would retire with $2,080,000. Only $185,000 was from money that you saved. The rest is interest.