Final pre-purchase car questions!
March 26, 2014 11:08 AM   Subscribe

Continuing my car questions (1, 2, 3). 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?

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.

posted by Admiral Haddock to Travel & Transportation (14 answers total) 2 users marked this as a favorite

You can buy one aftermarket, once the original warranty is up directly from the company. The mark up on those things is heinous!

AAA has so many benefits, roadside assistance is just one, so keep them.

Don't buy a pig in a poke warranty. Do comparison shopping. Find out what the dealer has to offer, then call around and see what you can get on your own.

Disclosure: Husbunny works for a Vehicle Service Contract company, I can attest that they are honest, easy to do business with, etc. Also, neither Husbunny nor I have VSCs for our new cars. We'll wait until the manufacturer warranty expires. Our families have purchased VSCs and are VERY happy with them.
posted by Ruthless Bunny at 11:14 AM on March 26, 2014 [4 favorites]

i am in favor of all-cash deals and opposed to extended warranties, but i predict there'll be dissenters.
posted by bruce at 11:15 AM on March 26, 2014 [4 favorites]

I agree with bruce; I paid cash for my last two cars (and financed only about 10% of the one before that) and am happy to not have monthly payments. The last time I financed a car was when Mazda had 0% for 36 month financing in 1999. I also agree that extended warranties are not a good idea; if you are financially secure enough to pay cash for a car even as you prepare to buy a house, then you should be able to handle unexpected repairs. One thing I always keep in mind about extended warranties is that they are not offering them to you because they are such nice people, they are selling them to make a profit; on average, the cost of repairs needed that the warranty covers will be less than the cost of the warranty. For people that would be seriously financially stressed by a major car repair they make sense, but I think a lot of people have them that don't need them. Pay cash and put what would normally be your payment into a savings account and you will have plenty of money for all sorts of unplanned expenses. (I also avoid extended warranties on appliances and electronics and even turn down Applecare).
posted by TedW at 11:25 AM on March 26, 2014

NEVER buy an extended warranty from the dealer. They are useless.

I have a Subaru (which came with roadside assistance I never used, in favor of AAA, so I don't know how good their roadside assistance is). Keep AAA. Why?

* AAA follows the member, not the car. If you're a passenger in someone else's car and they break down and need a tow and aren't a member? No problem. You're a member, traveling in their car. They can have their car towed. I've done this; it convinced the person whose car I was a passenger in to join AAA.

* AAA has been very good to me in terms of low-cost car insurance and homeowner's insurance.

* AAA discounts on a whole bunch of things, many of which I'm not aware of until I'm asked if I'm a AAA member.

I would argue that if you can at all afford to pay for the car outright in cash, then you should do so. Used car loans always have high interest rates, and it looks better to the mortgage company that you own the car outright and don't have a car loan as debt. Not that you wouldn't be able to get a mortgage if you have a car loan -- I own one of my cars outright and the other is financed and I got a mortgage just fine -- it just looks better for your credit the less debt you have, so you'll get better terms.

However, if paying for the car outright severely affects the amount you can put down as a down payment on your house, then go ahead and finance whatever portion of the car you need to finance, preferably with as short a term of loan as possible. Shop around on a car loan with your bank or credit union as well as others. (Making another recommendation for shopping around - they cover car loans, too.) Go with the best rates.

If you qualify for membership, Pentagon Federal Credit Union has a 1.99% used car loan and you only have to open up an account with them containing $5.00. Lending Club might also be an option for you, just to get the cash to buy the car outright. MeMail me for a referral link if you decide to go that route.
posted by tckma at 11:29 AM on March 26, 2014 [2 favorites]

I don't really know how this works, as it wasn't a planned thing, but financing a car at a similarly low rate about a year before buying a house led to a noticeable increase in my credit score come mortgage-hunting time.
posted by ndg at 11:36 AM on March 26, 2014

Another vote for not buying the warranty but keeping AAA. Would not think twice about that.

As far as financing, I dunno - I'm pretty anti-debt too, but 1.99% is really low, and you can invest the cash at get a higher return than that, so I would probably do that. That would be the financially better option, though maybe not the emotionally better one. The car loan will most likely not affect your options for a home loan.
posted by Lutoslawski at 11:47 AM on March 26, 2014

As a rule, it's never good to finance a depreciating asset. At 1.99%, though, the money is almost free. I suppose it depends on what kind of equity you want in the car right away.

Agreed on extended warranties - better to have your own. Make sure that whatever warranty you have is transferrable in the event it you need to part with the car.

Subarus, if well-maintained, will last a loooooooong time.

One thing in favor of financing the car and keeping cash - it may be worth it to pay some points to get a better rate on the mortgage, and a portion of that is tax deductible in the USA right now.

Can you game it both ways with the mortgage company and see what makes more sense?
posted by Thistledown at 12:05 PM on March 26, 2014

If the monthly payment for the loan is not a burden and you think you can earn more on the cash you have than you'll be paying in interest on the loan, then it makes no sense to pay for the car in cash. Given the very low amount of debt you have and your significant financial resources, I can't imagine that it would have a big impact on your mortgage rate either.

Also, I'd personally much rather have that 20K around as a fund for unexpected expenses, especially if I was buying/owned a house. It's easy to go through that kind of money if something happens to your house, or if you decide you want to update a kitchen or bathroom.
posted by dellsolace at 12:06 PM on March 26, 2014 [2 favorites]

If you finance, you can use the money you'd have paid immediately to earn (x-2)% interest. Unless you put it in quite risky investments, your expected net earnings will be approximately whoopty-fuck.

In your shoes, I'd talk to a mortgage person or other bigger-picture advisor about what makes the most sense for your total financial wossname. Or just assume that whatever the difference is is going to be small, that it's not worth the agita to find out what the really best thing to do is, and just buy the car outright because that's what makes you comfortable.
posted by ROU_Xenophobe at 1:13 PM on March 26, 2014 [1 favorite]

Bumper-to-bumper Warranty Extension: Skip it. You're already covered via the powertrain warranty for most of the big-ticket repairs that might (but not likely) come your way during the next four years. I'd be hard pressed to think of a $1300 repair that is common to that year/make/model that might bedevil you between now and when the existing warranties expire.

Money better invested elsewhere.
posted by nacho fries at 2:15 PM on March 26, 2014 [1 favorite]

When I purchased my house the lender told me I would have qualified for more if I did not have a car loan. So I think you need to speak to a mortgage lender for the best answer for your set of circumstances.

Just to jump on the AAA bandwagon. My car broke down on a trip last year and AAA refunded me the cost of the motel and food while I waited for it to be fixed. The refund took two weeks. Pretty good customer service.
posted by cairnoflore at 3:31 PM on March 26, 2014

I used to sell cars for a living (peruse my posting history and/or me-mail if you want any more advice beyond what you've gotten in your previous ask.mes).

I would finance most that purchase. You're borrowing that money basically for free, you're confident that you can get a better return than 1.99% over five years, you can always make a higher payment or pay off the whole thing at any point in the future, and having the cash on hand gives you some flexibility. If you pay cash for this car now you might find a house later on that would be perfect but is just a little out of reach for you to be able to put 80% down and still have enough of a cushion to feel secure.
posted by VTX at 6:27 PM on March 26, 2014

I think with earlier answers that financing the car is a good idea. It's really cheap and will give you an extra cushion for unexpected expenses. One warning though: the financing company will probably have opinions about your insurance. You might be required to get collision and incidentals, which can increase the monthly cost quite significantly.
posted by brorfred at 7:23 PM on March 26, 2014 [1 favorite]

Response by poster: Update: we paid cash. I ultimately decided that it was worth more to me to go into the mortgage application process with no new lines of credit in the past year--particularly given that we'd be starting that process without having established much of a payment history on any auto loan we got.

I declined the extended warranty.

Thanks, all!
posted by Admiral Haddock at 1:06 PM on April 1, 2014

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