To loan or not to loan...
September 6, 2011 3:35 AM   Subscribe

If I can afford a car outright but it will almost completely wipe out my savings should I get a partial loan anyway?

I may be in the market for a new (used) car as I'm starting to think that insurance is going to write off mine after an accident. I have enough money in the bank to afford the kind of car I want outright, but it'll likely wipe out my savings account and leave me paycheck to paycheck for a while.

Am I better off getting partial financing so that I still have rainy day money set aside or is it better to not have any debt, but not have any savings either?
posted by Silentgoldfish to Work & Money (16 answers total) 2 users marked this as a favorite
Best answer: Partial financing is probably wise just in case. You can still afford to put a down payment that is worth a big chunk of the price of the car.

You might end up paying a bit in interest over time. You can avoid this by making sure your loan doesn't have any penalties or drawbacks for paying it off faster than scheduled. Then you can make larger payments than necessary in order to minimize the amount you spend on interest, while keeping a lot of your savings at the same time.
posted by twblalock at 3:48 AM on September 6, 2011 [2 favorites]

Well, what I'd do is buy a cheaper car that I could definitely afford.

Failing that, I'd consider

- how good is your cashflow? Paycheck to paycheck or do you have plenty left at the end of the month? Do you have really high monthly expenses?
- how likely is a rainy day at the moment? How secure is your job? Do you own a house or something else that's likely to land you with large bills at short notice?
- how well could you weather a rainy day? Do you have a partner who would bail you out, or an easily marketable skill you could earn extra money with?

If you think a rainy day is unlikely, and you're well set up to get through it anyway, I'd spend the savings, and then make it a priority to build them up again right away - pretending to myself that I had borrowed the money from a loan shark with a baseball bat.

If you are likely to need the emergency fund, and you're going to be bad at replacing it and you'd struggle to get by without it, get the loan.

Or just get a car that you can afford with the money you can spare.
posted by emilyw at 3:57 AM on September 6, 2011

Best answer: Use a decent chunk of your available cash, get a small loan to cover the rest, pay it on time, and you increase your credit rating (somewhat) easily.
posted by kuanes at 4:36 AM on September 6, 2011 [2 favorites]

I was in a similar situation a few months ago and ended up getting a loan for about half the cost of the car. What made it worth it for me was that my credit history got me an amazing interest rate - so much so that unless inflation somehow stops happening, I would have been stupid not to take the loan.

I'm saying this assuming that you have no debt of any kind - consumer, educational, or otherwise. If that's not the case, you should probably buy a less expensive car.
posted by punchtothehead at 5:17 AM on September 6, 2011

If buying a car outright would wipe out your savings, you can't afford to buy the car outright. If you need a car, finance part of it by taking out a loan, or finding a cheaper car.
posted by dfriedman at 5:30 AM on September 6, 2011

It's absolutely worthwhile to take the time to research the loan, find out what your rate will be, and do a bit of forecasting. Sketch out the scenario for taking out a 100% loan, a 50% loan, a 25% loan, or 0% ie paying cash, looking at how much interest you'll be paying total, how fast you expect to be rebuilding your savings account, any expected expenses you've got coming up (holiday travel plans, known annual bill due dates, etc.) Then consider what else might be pending disasters - for example, I've got to keep $800 on hand because my refrigerator may go out at any minute. Then consider what general emergency fund you're most comfortable keeping in the long run, and how long it will take you to build up that cushion in different loan situations. Also consider your support network: do you have family who's willing and able to help? do you have good credit and a good relationship with the bank such that if you didn't get this car loan they'd still extend you a non-car loan if you needed one 8 months from now?

There is no "right answer" about whether to take a loan or not - it's up to you to look at the risks and benefits involved and decide what you feel most comfortable with. You may decide you're most comfortable having a guaranteed cushion, or you may be more comfortable knowing that you're not spending unnecessary money on interest. Either is a valid point, and it's up to you to inform yourself and make the choice.
posted by aimedwander at 5:41 AM on September 6, 2011

I am probably in the minority but I think a car with a price tag equal to your entire savings is much more car than you can afford.

to afford the kind of car I want

I recommend spending some time thinking about what kind of car you need.
posted by fritley at 6:13 AM on September 6, 2011

This would help if we know what kind of car you want. If you're talking you want a relatively new car which holds value well and is known for good mileage and cheap cost of ownership, that initial investment may be a good idea worth taking out a loan for.

Consider this. If you have a sudden cost pop up from nowhere, how will you cover it? You'd most likely turn to credit cards, a high interest "loan" that can trap you in a vicious cycle. Any auto loan is going to be significantly lower while generally being a boost to your credit score. If the car you want is a financially sound investment, then get the loan and keep enough savings to cover an emergency. Three months worth of living expenses is a start. It's not ideal, but it genuinely beats what most people have saved up.
posted by Saydur at 6:23 AM on September 6, 2011

Do you really need a car right now?
posted by yarly at 6:26 AM on September 6, 2011

Guys, telling the OP that they're wanting too much car is a bit presumptuous, without knowing any of the numbers involved. The "new car" in question is used not brand new. Yes, it costs more than the insurance payments of the totalled-out previous car - no big shocker there, insurance doesn't help much. The OP's "all my savings" could be $3000 or so. Frankly, there's a lower level where if one buys a car for less than $N you'd better have money left over to pay for repairs (whatever N is in Australia these days), and I think boosting above that limit is a fine goal. I agree that if OP is replacing a junker that got totalled out at $500 with a late-model barely-used whatever that requires $17,000 or more, that's a bit too much disparity, but let's give him/her some credit for asking us about a basically sensible scenario.
posted by aimedwander at 7:15 AM on September 6, 2011 [3 favorites]

First, check an make sure the interest you are earning on your savings is less than the interest you'd be paying on the car. Some times VERY low interest is a perk car companies offer to get you to buy a new car. Assuming this is not the case:

The answer to your question is a balance between your current savings, income, financial security and the details of the loan you're looking at. If you're young, healthy, your job is secure, and you life in an apartment (and don't have to worry about all your appliances dying at once) it probably doesn't matter that much. But having money in the bank is like having insurance against whatever comes down the road.

What you need to do is look at the rate you'd get on a loan and the rate on your credit card and ask yourself, what the odds are of something coming up that would force you to run up a bunch of credit card (or whatever) debt and how the interest on that sort of debt compares to the interest on the car loan you'd be taking.

If you live in a very well ordered universe where nothing ever goes wrong, deplete the savings. If your world is more chaotic and you know the moment you deplete the savings your refrigerator, stove and washing machine are all going to die horrible deaths, take the loan.
posted by Kid Charlemagne at 7:36 AM on September 6, 2011

Why not get a super short (eg: 1 year) loan, then you can pay if off in 12 big chunks, while giving you 1 year to build up a reserve?
posted by blue_beetle at 8:23 AM on September 6, 2011

but let's give him/her some credit for asking us about a basically sensible scenario.

The problem is that so many people are not sensible about car purchases that you can't really make this assumption. E.g., not realizing that a car is a depreciating asset.

(Plus, Askme would be much less fun if we had to have an implicit assumption of sensibleness.)
posted by yarly at 9:32 AM on September 6, 2011

get a loan and keep some rainy day money (like pay outright for half the car, loan for the other half and pay off the loan early if possible). Having debt isn't always super duper terrible and at times, dare I say it's sometimes necessary to maintain one's lifestyle (i.e. unless you can rearrange your life to walk or take transit everywhere, you need a car and might need to go into some debt in the short term to make that happen, which in the long term is better for you because you can keep your job, etc)
posted by WeekendJen at 11:04 AM on September 6, 2011

Best answer: People think that paying cash will get them a discount on a car, and that's not always the case. I went car shopping last year and discovered that the opposite was true: Part of the commission checks the salesmen I talked to got was based on the number of loans they signed people up for.

So I financed most of the car and paid it off right away. That saved me about $2000.
posted by coolguymichael at 12:03 PM on September 6, 2011

Response by poster: Thanks for your help!

The condescension about getting a cheaper car wasn't really helpful, warranted, needed or asked for though.
posted by Silentgoldfish at 12:07 AM on September 7, 2011

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