Final pre-purchase car questions!
March 26, 2014 11:08 AM Subscribe
Continuing my car questions (1
). We’re buying a gently used Forester. Two questions I need to resolve before picking up the car: should I finance any part of the purchase (can pay all cash), and should I pay to extend the bumper-to-bumper warranty to seven years?
posted by Admiral Haddock to Travel & Transportation (14 answers total) 2 users marked this as a favorite
We can pay cash for the full cost of the car. We’re also going to start looking for a house soon, and we already have a down payment set aside (plus a cushion for closing costs, moving, bidding war etc.); we don't need this cash for anything in particular. We have not starting applying for loans yet, and will not until after we own the car, so the first credit report pulled by our mortgage lender would reflect any car loan we get. Dealership is offering 60 months at 1.99% for any portion that we finance.
Does it make more sense to pay cash for the full value of the car and not have the car loan on our credit report (but lose the opportunity cost for the full purchase price, whether for investment or use in buying our home, or just having in the bank when qualifying for a mortgage)? OR does it make more sense to take the financing on all or a portion of the purchase price of the car, given the low rate? I am confident that over the 60-month term of the loan I can invest the cash to beat 1.99% on an after-tax basis.
The question boils down to: for purposes of qualifying for a mortgage and getting the best rate on a mortgage, will lenders care whether I own the car outright (but have 20K less in liquid assets) versus owing 20K (but having 20K in liquid assets in my savings or investment account)? I have no doubt we'll qualify for a mortgage; the question would be to the rate we'd get.
I am indifferent from an emotional level, and I’m not one of those “I hate debt and so I’d always pay cash” people. Other than credit cards, our only monthly debt payments are about $450 in student loans (combined); online calculators suggest that if we financed the full cost of the car, the monthly payment would be about the same (and less if we finance less, obviously).
It’s a certified pre-owned car, so I’m getting the remaining term of the original 3-year bumper-to-bumper warranty, plus, I think a 7-year powertrain warranty.
I can pay something like $1300 to extend the bumper-to-bumper warranty to match the 7-year powertrain coverage. The bumper-to-bumper coverage includes roadside assistance, so I would likely drop AAA for the term of the policy, which brings the cost down to, say, $1100 or so.
The car is in great shape, has low miles, and has been inspected by mechanic. I’ll have about 18 months left on the original factory warranty. Does it make sense to pay $1100 to get this coverage on a pretty new Subaru? I've never owned a Subaru (or any even remotely new car in general), so I’m not sure what costs I might encounter while the policy is in place that would be covered by the extended warranty.