Car: cash or credit?
July 1, 2013 9:36 AM   Subscribe

Does it make any sense to finance a car if you have the means to buy it outright with cash?

The car I'd like to buy is just under $30,000.

I have $60,000 in savings and no immediate need for it... I've been saving it up for years to buy a house "someday". But finding the right house has been long and difficult and who knows if/when that's going to happen.

I have excellent credit and could easily get financing for the car.

I also have a modest but steady income stream and, while it would take a few years to replace 30k, I could rebuild my nest egg over time.

Is it smart to hoard my cash and finance the car... or stupid to take out a loan when you really don't need to?

(Oh, there is a "cash back" bonus of $1,000 on the car. Not really a deal breaker either way for me.)

Thanks for your thoughts!
posted by falldownpaul to Work & Money (28 answers total) 6 users marked this as a favorite
Well, work out if the interest you'd repay on the loan is greater than the interest your 30K would earn if you left it wherever you have it invested. If it is (and it almost certainly will be), you're going to come out down on the deal, right? So pay cash if you don't need it for anything else in the near future. It's almost always better to buy things outright if you can afford it. Loans will generally screw you on the interest.
posted by Decani at 9:41 AM on July 1, 2013

To me, no debt is always better than debt.
posted by something something at 9:43 AM on July 1, 2013 [9 favorites]

If you can get 0.0% financing, then absolutely! Keep the money in whatever account you've got it and just pay it off within the promotional period.

Same goes for a situation where you can get a non-zero interest rate that's lower than what you're making. This is pretty unlikely these days, but if you can do it, hey, more power to you.

But unless you're in one of those two situations, then paying cash will always be cheaper in the long run. And not the very long run either: most car loans only go for 3-5 years. A $20k loan at 5% (which is great for a standard car loan) would be over $2,600 in interest at five years.
posted by valkyryn at 9:43 AM on July 1, 2013 [6 favorites]

I have financed a car I could pay cash for as the incentive for financing was greater than the incentive for cash purchase. I paid the loan in 5 months and I paid less in interest than I received in incentives. So yes it does make sense sometimes.
posted by crazycanuck at 9:47 AM on July 1, 2013 [7 favorites]

Like the previous two comments mentioned, think of paying cash as an investment earning the rate you would have paid if you had financed.

If you had a chance to invest that $30,000 at that guaranteed interest rate, would you? If so, pay cash, otherwise, finance.
posted by zippy at 9:47 AM on July 1, 2013

How actively are you looking for a house? Is there a chance you'd find the house you wanted before you could replenish your savings? If so, you might want to consider financing part of the car.
posted by lunasol at 9:47 AM on July 1, 2013

Many dealers desperately want your cash and may offer you a better price if you are making a cash offer.
posted by goethean at 9:49 AM on July 1, 2013 [3 favorites]

Is the $60K on top of your 6-month emergency fund--the money you'd need if you lost your job tomorrow and had to support yourself on savings? That would be a factor for me.
posted by brianogilvie at 9:50 AM on July 1, 2013 [2 favorites]

Best answer: Is it smart to hoard my cash and finance the car... or stupid to take out a loan when you really don't need to?

Good question. People will have different answers. For me, personally? I'd rather keep the cash. You never know what life might have around the corner—that house you've been waiting for, an unexpected medical bill, who knows.

It's fair to say that paying cash will be cheaper than borrowing, and to analyze the decision strictly in those terms, but that's facile. The real question is, what do you get for that extra cost? For one thing, in exchange for paying X-amount in interest, you get to keep your cash hoard. Is one worth the other, to you? I have a good idea what kind of interest rates I could find in my area, what $30,000 means in my financial situation, what my plans are for the next few years, what monetary habits I prefer, etc. That's what I'd base my decision on. If your feelings about those criteria happen to differ from mine, then probably so would your decision.
posted by cribcage at 9:53 AM on July 1, 2013 [2 favorites]

With a car I recently purchased and could have paid for in cash, there was a very substantial incentive from the manufacturer - many thousands of dollars off the cost of the car - that was only available in combination with financing direct from the manufacturer. Since I qualified for 0% financing, and because any discounts the dealership could give me for paying in cash would be less than this manufacturer's incentive, financing the car quite surprisingly resulted in a substantial savings over a cash purchase. (This was a limited-time promotion that is no longer going on, so your mileage will definitely vary - but it's something to check for.)
posted by I EAT TAPAS at 9:54 AM on July 1, 2013 [1 favorite]

So you know where I'm coming from, I think it is best to avoid debt when possible, but not at the expense of interfering with other important aspects of your life, such as having a (cash) savings cushion or buying a house.

That said, I would analyze the situation like this. First, will you have enough cash left over after your purchase to pay for ~6 months of living expenses, in case you lose your job or have a catastrophic accident or something? If the answer is "no" then finance it, period, end of discussion.

If yes, then do this calculation: Determine, given your salary, local prices, and other factors how much you will need for a down payment on a house. I know it can vary; just come up with your best estimate. Then ask yourself when, realistically, you actually do want to pull the trigger and buy a house. It sounds like not a super-huge priority to you but something maybe you want to accomplish in 2 or 3 years? Then, figure out how much you would need to save every month to get your savings back up to that amount, by that date, after you buy the car outright.

If that monthly savings number is realistic, then yes, buy the car outright. Otherwise, no. Also, note that you make as large a down payment on the car as you want, so "financing" the car purchase is really a spectrum of options and not a single option - for example you could make a 50% down payment and finance only the other half if that would make your down payment saving easier.
posted by Joey Buttafoucault at 9:59 AM on July 1, 2013

If you have the need or desire to keep $60K in savings, that's your business, but I'd encourage you to invest it-- a car loan's interest will be more expensive than a savings or interest-bearing-checking account any day of the week, good economy or bad, but against a mutual fund over the 3-5 years, probably the investment will do more-- you should be getting at least 2.5%, preferably more like 3.5%.

Money is basically losing value in savings at a slow rate; it's still worth keeping savings for the convenient access you have to it--it's your more or less any time a bank is open.

Since you don't need it for anything, chop that down to maybe $10-15K at most for an emergency fund and invest the rest, and then take the car financing at low interest. You'll get the lowest interest rate if you take the shortest term loan, such as 2-3 years (and accordingly the highest payment, which you can pay from the $60K, or however you want). Also, you don't need to take the car seller's financing. Talk to your bank/credit union about a loan; perhaps even one secured against the $60K. (That the car is usually collateral for the loan doesn't mean it has to be, when other collateral, especially cash, is available.) Debt isn't a bad thing; debt you can't afford is a bad thing. You can afford a car.

And finally, if you change your mind any time, just pay off the loan with the cash reserve. You'll be free and clear.
posted by Sunburnt at 10:06 AM on July 1, 2013 [1 favorite]

As others have suggested, it depends almost entirely on the interest rate you get, and what you'd be doing with the money instead. If you can pay under 2%, it's almost certainly a good idea.
posted by Perplexity at 10:13 AM on July 1, 2013

You mention that you aspire to buying a house. In that case, you should reconsider spending $30K on a new car and instead buy a good used one for, say, $8K cash and save the rest for a home down payment. A new car just pushes you farther from that goal.

A lot of people just sort of give up on the idea of their own home and replace it with a series of nice cars as the next best thing. Decide which is more important to you.
posted by JackFlash at 10:15 AM on July 1, 2013 [1 favorite]

Many dealers desperately want your cash and may offer you a better price if you are making a cash offer.

Many dealers also desperately want your financing deal and will offer much better incentives if you finance than if you pay cash. So, you know, it depends on what you're being offered at the dealership in terms of the current promos.
posted by jacquilynne at 10:16 AM on July 1, 2013 [1 favorite]

Keep the cash on hand. Invest half of it. You never know what life will throw at you.

Finance the car. It'll help your credit score to have another account that is always paid on time, and add to the "mix" of types of credit you have. Should you buy a house, this can save you way more than the $2k you might pay in interest over the life of the car loan.
posted by fontophilic at 10:18 AM on July 1, 2013 [2 favorites]

A little over two years ago I debated this and chose to finance because the rate was pretty low (around 2%) and I preferred to keep the liquidity of the cash. On paper I lose some money but the head rests a little easier on the pillow. Make sure your loan has no pre-payment penalties and you can always choose to pay it down faster if you are simply averse to holding debt.
posted by dgran at 10:30 AM on July 1, 2013 [1 favorite]

There's just one thing to consider that isn't immediately obvious.

If you finance the car, and get GAP insurance, then, if you have a wreck, the GAP insurance will absorb any loss due to depreciation.

For instance:

You buy a car for $30,000. The minute you drive it off the lot, it drops in value by $5,000. So although you owe $30,000 on it, if you total it, you'll have a gap of $5,000.

Now if you buy that car with cash, YOU'LL have to come up with the $5,000 difference out of your pocket because your car insurance will only give you the Actual Value of the car, $25,000. So if you wanted to go back and get the same car, you're out $5,000.

BUT, if you finance and have gap insurance, well the insurance will cover that $5,000 gap.

So your risk by buying outright is the difference between what the car is worth and what you paid for it.

As the car gets older, the risk goes down, but you get my drift.
posted by Ruthless Bunny at 10:35 AM on July 1, 2013 [1 favorite]

Ah yes, good point from Ruthless Bunny. You should always put something down for that reason. Look up an Amortization table for your loan and purchase price. Look up blue book values of your "driven off the lot" used car. Pay the difference between that price and purchase price into your loan as downpayment.
posted by fontophilic at 10:54 AM on July 1, 2013 [2 favorites]

Understand the significance of me giving the following answer: up until January of this year I had never bought a car that I paid more than $7,000 for and had financed one only once.

I'd almost certainly suggest you finance the car if you're buying new. And if you're considering between a new car and a three year old car I'd buy the new one because the current high demand for 3 y/o cars and less attractive financing makes it almost a wash, price-wise. (which is CRAZY)

Here's the thing - if you have good credit you can almost certainly get a loan at 3% or under, assuming that you can't get a 0% incentive loan from the dealer/manufacturer. (Make sure you keep an eye on direct deposit/auto-pay rate deductions; at our credit union it was worth a full percentage point)

At 0% I'll say that you are flat-out a moron if you pay cash instead. You could have that money in a simple interest bearing savings account and make more than $0 over the 3-7 year life of the car loan.

Even at 3% I'm inclined to say you're better off financing. If you're in an index fund - let's look at the Vanguard 500 index - and you'd made this choice five years ago then you'd have out-performed a 7% loan even considering the 2009 crash. There's some slop in there because you'll pay taxes on the return and there's management fees. But long-term investment rates were 15% so you kept almost 6% of that money. On a 3 % loan you made cash.

Personally I think even if you break even or lose a few bucks it's worth the flexibility of keeping that cash. And you are WAY better off financing $10,000 of car at simple interest rather than not having that money for your house where you'll pay so much more to borrow that money (if you don't need it for your down payment).

We went into the dealership with a loan from our credit union at 2.5% because Mazda didn't have a 0% deal for the vehicle config we wanted. When they asked if I wanted to see if they could do better I almost said no because I didn't want to waste my time. Before we were done with the signing of other documents a local bank came back with a 3.5% offer, which we of course rejected. Two minutes after that their own financing came back with a 1.8% offer.

Looked at another way, it's costing us an average of $17 a month to borrow this $21,000. Even if my mutuals weren't notably out-performing this interest rate I think that's a pretty fair cost to maintain that flexibility. And I am cheap as hell.

Also worth considering for your future home-buying - while the exact details of FICO are a trade secret, there's a premium to your score for a "variety" of types of credit. If you haven't had a car loan in the recent past there's probably a marginal improvement for your score to having one. I don't think it's likely to be enough to justify much cost but current rates don't represent much cost.

I'm also considering a lease... I know it's a bad financial decision, but I may be willing to pay for the convenience of just handing back the keys after a couple years.

Personally I'd avoid a lease because of how low interest rates are now and how low they may not be in 3 years. There may be lease deals that are better than buys if the vehicle tends to hold its value but usually you'd be better off handling it yourself. And if your life circumstance changes you can hang onto the car or sell it and pay off the loan w/o penalties usually associated with a lease.

I think an apples to apples comparison could best be done by looking at the cost of getting into the lease and comparing it to if you purchased with that same down. Then look at what a 3 year old version of that car is valued at right now and what your loan balance will be in three years.
posted by phearlez at 11:16 AM on July 1, 2013 [3 favorites]

Just bought a new car myself (which is something I thought I'd never do) because of the cheap financing at 0.9%. Looking at other makes/models many had 0% for cars over 20k.
posted by wcfields at 11:26 AM on July 1, 2013

Response by poster: To answer a few questions:

The $60k is my entire savings, including my "emergency fund".

I am single and solely responsible for supporting myself in perpetuity (what family I have is broke, so no big inheritance on the horizon). I am mid-40's and do get nervous about money / retirement... hence the dithering on my part about spending that much cash.

My current car is almost 14 years old and is falling apart. (I bought it used and financed.) I am not mechanically inclined so the lure of new / reliable is strong. I agree with those of you who say that buying used is much smarter. I just like this car and haven't seen one that I liked in a long time. But I should shop around for something cheaper, no question.

The house search is semi-serious and has been on-going for a couple of years now. I had something very specific in mind which, sadly, seems unavailable in my price range and location. I've had the luxury of being picky because I'm in a great, very cheap rental situation.

However, my landlords are elderly now and I've heard that they plan to sell off their properties. I think my hand may be forced within the next couple of years - I will have to buy something, dream home or no.

Thanks to all for taking the time to answer - I am learning a lot!!
posted by falldownpaul at 11:41 AM on July 1, 2013

As fontophilic mentioned, you could very well improve your credit score by a nontrivial amount by financing the car. I was in a similar situation (good credit, had cash, was shopping for a house) in 2011 when I bought a certified pre-owned VW during a 1.9% APR promotion. When I went to take out a mortgage a year later, I discovered my credit score had jumped from the mid-700s to over 800. Nothing else changed - I'm sure it was the car loan.
posted by ndg at 11:52 AM on July 1, 2013

I was in a similar situation, finance-wise, last year. I had cash on the barrelhead and was trying to decide about financing a new $32K car. My credit isn't terrible but it's a ways from excellent. I went with financing to boost my credit. The interest rate was okay and it seemed a worthwhile investment with a return of better credit. The gal at my bank suggested paying on the account for at least a year if that was my goal - a significant period of on-time payments. I will probably pull my credit reports this fall and if things are improving, pay off my loan.

Obviously I don't know what your credit report looks like but it might be helpful to have recent accounts that are being paid on time rather than just a sparkling credit report with older, paid-in-full accounts, if that makes sense.
posted by Beti at 12:06 PM on July 1, 2013

falldownpaul: The $60k is my entire savings, including my "emergency fund".

Two thoughts: you're better off retaining at least some of this cushion in cash/liquid form, and in your place, I would probably not be spending $30K on a car. (Then again, I barely drive - ymmv.)
posted by RedOrGreen at 2:17 PM on July 1, 2013 [3 favorites]

I have no idea from your profile where you might live, but until the last financial year in Australia, it was cost effective to use things like salary sacrifice & novated leases to buy a car on finance.

In other words, you'd pay for the car out of pre-tax income by leasing it instead of buying it, and the contract would give you an option to buy out the ownership of the car at some point - basically, once you'd driven it for a few years & its book value had fallen dramatically.

Some work colleagues had an even cleverer scheme, which involved leasing it for one year, then at the end of that year they'd lease it again (at its new, lower book value) for the next year, and so on & so forth. The net result was effectively to be using a car from new, but only paying the book value of a 5yo car plus a few thousand.
posted by UbuRoivas at 9:22 PM on July 1, 2013 [1 favorite]

Just a comment based on your second post. If you live near a fairly large city, you might want to look into whether there are any used car dealerships that specialize in selling rentals or dealer loaners.

There's a good chance you could get your car you really like, only a year old (or less), and with 10k or less in mileage. And, you'll often save a good 20% or more on what you'd buy brand new.
posted by Old Man McKay at 7:04 AM on July 2, 2013

I agree with those of you who say that buying used is much smarter. I just like this car

One way to test how much you really like this car is to calculate what the depreciation will be when you drive it off the lot. Withdraw that sum of money from your bank, and put that stack of cash on a table in front of you, and look at it.

It's gonna be a big pile. It represents your labor, the hours of your life that you've exchanged for cash. It also represents your buffer against unexpected downturns in your finances.

If the shiny-new car still feels worth it, press on with the purchase. Life is to enjoy. But my sense is that a 2-5 year old car will still feel really nice to you, compared to your current ride, and will keep more cash available to you for your future home, which will feel REALLY good to you.
posted by nacho fries at 7:36 AM on July 2, 2013 [1 favorite]

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