New car buying newb.

November 2, 2008 4:27 PM

Buying a new car... is there any advantage or disadvantage to paying the full amount up front rather than monthly payments for 3-5 years?

I'm going to buy (NOT lease) my first car sometime soon. Nothing fancy at all, probably in the low 20k range.

I used various price estimate calculator things, and I see my monthly payment would be something like $300-$400 assuming I put $3000 down.

I got to thinking about this I started wondering if there is any benefit to putting down a significantly larger amount. I got to doing more thinking, and I realized I could pay the full cost of the car the day I walk into the dealership to buy it.

What I'm unsure of is if there is any advantage to doing this, is there any disadvantage to doing this, or does it not really matter that much either way?

Thanks in advance for any help.

posted by creative to work & money (19 comments total)

Questions to ask yourself to help with your decision:

Will the investment rate you can earn on your savings be greater that the interest rate on the car loan?

Will the dollar (or whatever your currency is) be worth more today or at the end of the loan term?

Is your job secure?

Are you planning any other major expenses during the term of the car loan? (mortgage, etc.)
posted by netbros at 4:42 PM on November 2, 2008

The advantage is it saves you money! I've paid cash for every car I've ever owned and never regretted it for a second.
posted by unSane at 4:42 PM on November 2, 2008

Not to state the blindingly obvious, but if you take out a loan, you have to pay interest. However the interest rate on new car loans is typically very low, much less than 10% if you have decent credit.

10% is typically how much investments average per year, so you could theoretically make more by taking the loan and investing instead. Of course, these are not great times to invest, unless you're buying for the long-term.

The other point about having a loan is simply that you will have to make the payment every month. You seem to have a lot of cash on hand, but if somehow you hit hard times you could mess up your credit or even get the car repossessed if you couldn't make the payment. Then again, if you keep the money you were going to pay upfront in savings, you will have more cash to deal with other emergencies along the way.
posted by drjimmy11 at 4:42 PM on November 2, 2008

The advantage is that you don't pay any interest on the car loan. According to an online loan calculator I just used, borrowing $17,000 ($20k minus $3k) for 48 months at 6% interest will cost you a little over $2000 in interest -- not a life-ending amount, but not trivial, either.

On the other hand, that $17000 could be earning you interest in your bank account, and if you think you can beat the interest rate of the loan, you could conceivably come out ahead that way. There's an opportunity cost to having all your spare cash tied up in the car.

(And to be really anal, you'd want to factor the expected rate of inflation into your analysis, but that gets beyond my limited abilities.)

More immediately, paying cash removes one additional level of negotiation at the dealership. If you are borrowing, the common approach is to negotiate the sales price first with the sales person, and then you go in a room and dicker over the loan rate with the finance person. It's not a lot of fun and it always takes another hour and involves a bunch more paperwork, so if you can avoid that step you are really coming out ahead.
posted by Forktine at 4:42 PM on November 2, 2008

I'm not a financial planner, but here are some trade offs I can think of off the top of my head.

Advantages to paying cash up front include:

• You will not have to pay interest on the purchase amount, and so ultimately you will pay a lot less for the car.
• Related: unlike with a home mortgage, you cannot deduct the interest on your car payment, so it really is genuinely more expensive.
• You have more freedom as to how you insure it; any lender will insist on you carrying collision and comprehensive insurance, whereas you may opt for state minimum coverage (or something in between) if you own it outright.

Advantages to financing it:

• If you make all the payments on time, you will create a record of on-time payments that may improve your credit score, if you are concerned about this, e.g. because of another upcoming purchase.
• Related: if you're planning to buy a house soon, the down payment will go MUCH further in that domain and could affect your standard of living for years to come.
• Depending on how much cash you have overall, it might not be a good idea to spend $20K of it on a car, even though you can technically afford it. You should always have a cushion of a few months worth of expenses in case you lose your job or something else comes up. Don't spend this money on a car - finance it instead.
• If you already have a good credit score, and if you can finance through a local bank or credit union rather than through the dealer, rates are probably really low right now. Or the dealer may even have a zero percent promotion; they are generally desperate to sell cars right now.

posted by rkent at 4:46 PM on November 2, 2008

Also, since you specifically mention it's a new car, you know it's a much better value to buy something lightly-used (like one year old with low mileage), right?
posted by salvia at 4:52 PM on November 2, 2008

Hows about this scenario: you don't tell them you're financing the car, but strike a deal where the amount financed is as low as possible but the dealership makes a ton of money on a high interest rate. Then you pay off the whole loan on the first payment.
If you saw my financial record you'd think twice about taking this advice from me, so hopefully someone here can point out the flaw in my plan.
posted by spikeleemajortomdickandharryconnickjrmints at 4:54 PM on November 2, 2008

Then you pay off the whole loan on the first payment.
If you saw my financial record you'd think twice about taking this advice from me, so hopefully someone here can point out the flaw in my plan.

Prepayment penalties.
posted by dersins at 5:06 PM on November 2, 2008

Prepayment penalties.

car loans generally don't have these, AFAIK.

10% is typically how much investments average per year, so you could theoretically make more by taking the loan and investing instead. Of course, these are not great times to invest, unless you're buying for the long-term.

Actually IMO these are excellent times to invest, if you dollar-cost average over the next 3-4 years into blue-chip, dividend-paying companies.

However I would quibble about the 10% return going forward thing, since the stock market was subject to three separate boomlets -- the demographic boom of the early 1980s (which will start subsiding in 2020 when the baby boom hits retirement en masse, the petrodollar boom/busts, which might bust some more on the downslide of the peak oil curve, and the increasing globalization of the work-force -- more wealth being manufactured, more trade, more profits -- over the past 10-odd years.

10% rate of growth implies a Dow Jones index of 62,000 in 2029.


anyhoo, my advice would be to buy, or wait, for a car you want with a 0% offer. Given the macro economy, these should become more and not less available as time goes on.

Then your $20,000 can be put into a CD earning 4%, meaning you're getting $800 a year in interest income for the hassle of having a car loan.
posted by troy at 5:18 PM on November 2, 2008 [1 favorite has favorites]

Banks/Credit Unions typically require extravagant insurance policies with the smallest possible deductible. My insurance would have been twice as much had I gone with a loan.
posted by mmdei at 6:06 PM on November 2, 2008

there are many unknowns here. we don't know whether building up a positive payment history is of concern or value to you. we don't know what car we are talking about. we don't know where you'd get the loan. we don't know what you make and what you have in the bank.

I am a big fan of keeping a decent wad of cash stashed away for a rainy day and would take a small hit for that. I'm also not a fan of having to negotiate with a car dealer. you want leverage and for that having your financing already worked out is great. watch this video on how to buy a car without getting screwed.

whatever option you choose, don't go to a car dealer to get financing.
posted by krautland at 7:20 PM on November 2, 2008

salvia's comment about a one year old car being a better value is not always the case for all cars. For my Jeep Patriot, a one year old model with 10-30k miles would only have saved me 1-3k because of the huge dealer discounts on the previous year model that had been sitting on the lot for way too long.

On top of that Jeep's have a Lifetime Powertrain Warranty, which is NOT transferable. Since I plan to keep this car until it's ready to go to the junk yard, the lifetime warranty on the transmission and engine is very valuable to me, more so than the 1-3k I would have saved that a one year old model would have been.

Not to mention that I would be buying a car that had been driven 10-30k miles in a manner completely unknown to me. I drive the speed limit or under, never mash the pedal down, etc. Who knows what kind of a jackass has been driving a used car and reducing it's life substantially through abuse.
posted by zhivota at 9:09 PM on November 2, 2008

I realized I could pay the full cost of the car the day I walk into the dealership to buy it.

If you're a savvy negotiator, offering to pay cash right then and there will significantly increase your ability to lower the price of the car. Some people go as far as to say they'll walk into the dealership with a check already filled out with the amount they're willing the pay. While I don't recommend that, walking in and saying, "I'm buying a car today and I'm paying cash for it," will make many a salesperson take notice of you in an effort to make a quick sale, even if the profit margin is slightly lower than what they could get from someone else.
posted by Cool Papa Bell at 9:22 PM on November 2, 2008

If you're a savvy negotiator, offering to pay cash right then and there will significantly increase your ability to lower the price of the car.

Eh, not so much. They make so much more on the loans than that they really prefer to push those, and then knock a couple thousand off. Cash in hand isn't really any more incentive for a low price than good credit.

Although, it is possible that auto credit has been tightened significantly lately, and dealers are seeing more people denied than they have before. In that case, cash in hand might be an incentive for them to lower the price (and invite your business thereby).

A little considered benefit of buying outright: if you pay $20k for a car, drive it six months, and total it, your insurance will hand you $17k (or whatever) market replacement value. You can then go and buy a similar car. If you get the loan, and have only paid $2000 in, you're only going to get an equitable fraction back out as most goes to the lien holder. You've now got to get another loan and do the whole thing again with another new car.
posted by Netzapper at 9:50 PM on November 2, 2008

If you spend $20,000 on a new car, a significant portion of that "value" will disappear as soon as you drive it off the lot. This isn't a problem if you plan on keeping the car for the rest of your life.

Depreciation does matter if you are t-boned in an intersection by someone with no insurance, as it's unlikely that your insurance would significantly compensate you for your loss.

You wouldn't walk around with $20,000 in your wallet, for fear of loosing it... you shouldn't drop $20,000 on a new anything without at least some guarantees of protection against significant depreciation or total loss. Hence cars are never a good investment, but property... well, if you buy at the right time that can pay off nicely.

Now, if you're talking about buying a USED then go for it - buy a two or there year old car with good resale value. A Honda or Toyota will serve you well, and if you care for it you're likely to recoup much of your investment when you decide to sell it.

This is why people lease cars, by the way... all those high end luxury and sports cars? No one really owns those things, they just rent them. You should consider that route if you think you'll want a new car in 36 months or so... you get a lot more for your dollar too.
posted by wfrgms at 10:55 PM on November 2, 2008

Cash in hand isn't really any more incentive for a low price than good credit.

It can be, depending on the time of year and how much extra inventory the dealership is sitting on. These days, I'd bet most places would be happy to get the car out the door with a minimum of fuss, a couple hundred profit and still hit their yearly numbers.
posted by Civil_Disobedient at 3:42 AM on November 3, 2008

wfrgms - not all cars drop a huge amount in value when drive off the lot. I went shopping for a slightly used car last year and found that the price difference between a five year old car with and a new car was only $4,000 for the same model noted for it's reliability (less than five years old and the price difference was much, much smaller). This depends on what kind of car you purchase of course; due to emissions testings there are very few clunkers on the road so used cars are expensive in my province. My insurance also had a no depreciation clause for the first year so if my new car had been totalled I would have gotten the full value back for the insurance company, the replacement value after one year from the insurance is quite high because my model car does not depreciate very much.

Leased cars end up costing a lot, with no value at the end (after all, you have to give them back) so spending $20,000 on a two or three year lease and then being without a car AND $20,000 in 36 months is a poor investment.
posted by saucysault at 4:32 AM on November 3, 2008

Yeah I bought a honda civic and looked for the mythical "two or three year old" deal. They were really expensive. (On the other hand if you want a two or three year old SUV right now :)

If you don't have substantially more than 20000 I wouldn't pay cash because then, well, you don't have any cash. The economic craziness right now changes a lot but in theory you could put the 20000 in a CD or something lowering your effective interest rate to maybe a point or two and still have access to your money in an emergency.
posted by Wood at 6:42 AM on November 3, 2008

If you can get a 3% or less loan (which may be very possible these days), definitely keep the cash and stash it in a cd. You'll actually make money on the deal.

In case you don't have much of a credit history established (given that it's your first car), I'd also advise trying to get someone with established credit as a cosigner, such as a parent. The difference over time is in the thousands.

I was really reluctant to do this with my first car (my knee jerk reaction has always been to avoid any type of debt) but I went ahead and it really did work out for the best.
posted by susanvance at 7:06 AM on November 3, 2008