Maximum down-payment on new car, or invest the rest?
November 1, 2006 1:25 PM Subscribe
I'll be buying a car next month. The total with tax and fees will probably be around $23,000 and I'll have about $16,000 saved up. Which is a better move, financially: putting it all down and getting my monthly payments very low, or putting a smaller amount down ($5,000 or so) and investing the rest?
Sorry for the multi-part question but if I choose to invest, how would I realistically invest $10k to $11k for the best return without too much risk?
Sorry for the multi-part question but if I choose to invest, how would I realistically invest $10k to $11k for the best return without too much risk?
Over what term are you looking to invest the money?
posted by mr_roboto at 1:52 PM on November 1, 2006
posted by mr_roboto at 1:52 PM on November 1, 2006
Put it all down, then pay as much as you can each month until the car is paid for. In my opinion, it's wiser to pay down existing debt than to save or invest. This goes double for such a small amount. At 5% return, you'll get less than $600 per year out of your $11,000... is 45 extra bucks a month really worth the trouble?
If you do decide to invest it, look into online savings accounts. There's no reason to take 5% on a CD when you can get the same rate on a savings account with no minimums or restrictions. I recommend HSBC, but there are many other banks that offer online savings accounts with 5% interest. Just make sure it's FDIC insured!
posted by vorfeed at 2:17 PM on November 1, 2006
If you do decide to invest it, look into online savings accounts. There's no reason to take 5% on a CD when you can get the same rate on a savings account with no minimums or restrictions. I recommend HSBC, but there are many other banks that offer online savings accounts with 5% interest. Just make sure it's FDIC insured!
posted by vorfeed at 2:17 PM on November 1, 2006
I think in part it depends on what other savings you have. If paying the $16K towards the car will deplete your easily accessible savings, then I wouldn't put the whole amount towards the car because you never know when you might need cash for an emergency.
On the other hand, if you have other savings, then the question is more purely mathmetical (x rate on the car loan vs. x potential return on investment).
posted by GregW at 2:21 PM on November 1, 2006
On the other hand, if you have other savings, then the question is more purely mathmetical (x rate on the car loan vs. x potential return on investment).
posted by GregW at 2:21 PM on November 1, 2006
If the interest rate on the money you're borrowing is higher than you could expect to make with an investment over that time, pay off the loan. If you can make a greater percentage investing than the rate on your loan, invest it.
I'd say, unless you have some game in the investment world, you'd probably do well to break even. (Car loans around 5-6%, CDs at 5%, not really long enough for a stock investment to pay off.) On the other hand, if times turn tough, you'll be happy to own your car or be making low payments.
Put it all down, then pay as much as you can each month until the car is paid for. In my opinion, it's wiser to pay down existing debt than to save or invest.
This isn't quite right. If you have a reliable way of making a better percentage investing, you should definitely go for it. This is why it's not always a good idea to pay down student loan debt. If the loan's at 3% and you can make 5% in a CD, it's much better to pay down the loan at a normal rate and use the excess to invest in a CD.
posted by ontic at 2:31 PM on November 1, 2006
I'd say, unless you have some game in the investment world, you'd probably do well to break even. (Car loans around 5-6%, CDs at 5%, not really long enough for a stock investment to pay off.) On the other hand, if times turn tough, you'll be happy to own your car or be making low payments.
Put it all down, then pay as much as you can each month until the car is paid for. In my opinion, it's wiser to pay down existing debt than to save or invest.
This isn't quite right. If you have a reliable way of making a better percentage investing, you should definitely go for it. This is why it's not always a good idea to pay down student loan debt. If the loan's at 3% and you can make 5% in a CD, it's much better to pay down the loan at a normal rate and use the excess to invest in a CD.
posted by ontic at 2:31 PM on November 1, 2006
The way my financial adviser explained it the other say is that by paying off your debts you get an automatic return equal to the percentage rate you are paying. While you may or may not get that return elsewhere. We owe money on our car, and our adviser has recommended we pay off our car when we sell some land we have. As I said above, the logic is that by paying off the loan (say it is 7%) we get an automatic return of 7%, but by giving the money to him to invest we have no such guarantee. We *could* make more, but by paying off the debt we automatically get that return. Even though he stands to make money by us investing through him, that was his suggestion.
Unless your loan is DIRT cheap like the example above of a student loan. But a car loan is usually higher than that example.
Good luck.
posted by terrapin at 2:41 PM on November 1, 2006
Unless your loan is DIRT cheap like the example above of a student loan. But a car loan is usually higher than that example.
Good luck.
posted by terrapin at 2:41 PM on November 1, 2006
ontic: This isn't quite right. If you have a reliable way of making a better percentage investing, you should definitely go for it.
Well, I did say "in my opinion". And in my opinion, it IS quite right. Unless you are certain to make much, much more through investment, I think that this sort of investment shuffling just isn't worth it. The 2% difference between a student loan and a CD isn't worth X more months or years of debt -- months or years in which you are not guaranteed to be as flush with cash as you are today.
You yourself said it: "if times turn tough, you'll be happy to own your car or be making low payments." Is the American economy solid enough to be making unnecessary, long-term and low-return bets on it? It seems to me that the potential payout isn't high enough to justify the risk. Debt, even so-called "good debt" like student loans, is dangerous.
posted by vorfeed at 3:19 PM on November 1, 2006
Well, I did say "in my opinion". And in my opinion, it IS quite right. Unless you are certain to make much, much more through investment, I think that this sort of investment shuffling just isn't worth it. The 2% difference between a student loan and a CD isn't worth X more months or years of debt -- months or years in which you are not guaranteed to be as flush with cash as you are today.
You yourself said it: "if times turn tough, you'll be happy to own your car or be making low payments." Is the American economy solid enough to be making unnecessary, long-term and low-return bets on it? It seems to me that the potential payout isn't high enough to justify the risk. Debt, even so-called "good debt" like student loans, is dangerous.
posted by vorfeed at 3:19 PM on November 1, 2006
There's no reason to take 5% on a CD when you can get the same rate on a savings account with no minimums or restrictions.
Sure there is. The FDIC-insured savings account can adjust its yield downward anytime. The FDIC-insured CD is locked in for a specific time period of your choosing.
Bear in mind inflationary risks. 5% is good, but then you must subtract the inflation rate from that to discover what your "real" (inflation-adjusted) return is. Luckily, inflation eats away at your car loan's value in the same way it eats away at your savings, because both are denominated in dollars.
Bear in mind tax risks. 5% is good, but if your state and local governments are going to take 40% of that 5%, then it amounts to a real (tax-adjusted) return of 3%. If you think you're going to beat inflation over the next 2 years with a 3% return, you're smoking something.
For this next part, I'm assuming you have a stable income that can cover your rent, monthly bills, car payment, car insurance payment, gasoline, car washes, oil changes, food and entertainment expenses for the foreseeable future; and you have enough money to cover 6 months of those expenses also sitting in a savings account, for emergencies. If you don't, my advice is: do not purchase a $23,000 car. You cannot afford it, even if someone is willing to sell it to you.
OK, so you can afford it. If I were you, I'd set aside $4000 of that money and put it in a Roth IRA this year. That way you get returns free of tax consequences forever. In reality, in 2006 I think it's damned hard - maybe impossible for an individual small investor like you (and me!) to beat both inflation and taxes outside of an IRA. What sort of a vehicle you should invest in once you're covered by the IRA tax umbrella is a tough question; your options include domestic and foreign stocks, domestic and foreign mutual funds (of stocks), government bonds, corporate bonds, bond funds, CDs, exchange traded funds, real estate investment trusts - sky's the limit.
After that $4K, I'd put the rest towards the down payment of the car, under the expectation that I couldn't reasonably expect to beat interest costs with my investment abilities. If the rate on your auto loan is substantially under 4% I might reconsider that decision.
posted by ikkyu2 at 4:52 PM on November 1, 2006
Sure there is. The FDIC-insured savings account can adjust its yield downward anytime. The FDIC-insured CD is locked in for a specific time period of your choosing.
Bear in mind inflationary risks. 5% is good, but then you must subtract the inflation rate from that to discover what your "real" (inflation-adjusted) return is. Luckily, inflation eats away at your car loan's value in the same way it eats away at your savings, because both are denominated in dollars.
Bear in mind tax risks. 5% is good, but if your state and local governments are going to take 40% of that 5%, then it amounts to a real (tax-adjusted) return of 3%. If you think you're going to beat inflation over the next 2 years with a 3% return, you're smoking something.
For this next part, I'm assuming you have a stable income that can cover your rent, monthly bills, car payment, car insurance payment, gasoline, car washes, oil changes, food and entertainment expenses for the foreseeable future; and you have enough money to cover 6 months of those expenses also sitting in a savings account, for emergencies. If you don't, my advice is: do not purchase a $23,000 car. You cannot afford it, even if someone is willing to sell it to you.
OK, so you can afford it. If I were you, I'd set aside $4000 of that money and put it in a Roth IRA this year. That way you get returns free of tax consequences forever. In reality, in 2006 I think it's damned hard - maybe impossible for an individual small investor like you (and me!) to beat both inflation and taxes outside of an IRA. What sort of a vehicle you should invest in once you're covered by the IRA tax umbrella is a tough question; your options include domestic and foreign stocks, domestic and foreign mutual funds (of stocks), government bonds, corporate bonds, bond funds, CDs, exchange traded funds, real estate investment trusts - sky's the limit.
After that $4K, I'd put the rest towards the down payment of the car, under the expectation that I couldn't reasonably expect to beat interest costs with my investment abilities. If the rate on your auto loan is substantially under 4% I might reconsider that decision.
posted by ikkyu2 at 4:52 PM on November 1, 2006
The optimal financial solution was offered by bitrot. The CarTalk guys once wrote a well-sourced pamphlet on the optimal financial car purchase where they determined that the best deal for the average joe is to buy a 3 year old car. Their comparison was between new, 3yo and 7yo, and while 7yo was somewhat cheaper it also had occasional large costs, was less comfortable, has less safety features (they wrote this in the middle 90s when 7 years old could get you a car w/o even airbags) and the uncertainty made many people uncomfortable.
This is, however, not what you asked.
The most important factor in this question is whether that 16k represents the full extent of your savings or if you still have a good safety net after you spend it. If you'll still have 6 months salary saved for an emergency after you spend that then it's fine to part with it all. If that's the sum total of your savings then you'd be getting yourself a tiny payment but at the possible risk of NO money if you get canned or injured the week after you spend it.
From a pure financial move your best bet would be to use as much cash as possible for the purchase. Even if you get a 7% loan that's more than guaranteed returns in CDs. It's less than the stock market average but that's the average - maybe the next 3 years will be crap, you can't know. The interest on the loan is not tax deductible but any interest earning will be taxed, reducing your margin for error as well.
posted by phearlez at 5:29 PM on November 1, 2006
This is, however, not what you asked.
The most important factor in this question is whether that 16k represents the full extent of your savings or if you still have a good safety net after you spend it. If you'll still have 6 months salary saved for an emergency after you spend that then it's fine to part with it all. If that's the sum total of your savings then you'd be getting yourself a tiny payment but at the possible risk of NO money if you get canned or injured the week after you spend it.
From a pure financial move your best bet would be to use as much cash as possible for the purchase. Even if you get a 7% loan that's more than guaranteed returns in CDs. It's less than the stock market average but that's the average - maybe the next 3 years will be crap, you can't know. The interest on the loan is not tax deductible but any interest earning will be taxed, reducing your margin for error as well.
posted by phearlez at 5:29 PM on November 1, 2006
I have to agree with ikkyu2. If all you have is $16,000 in savings, you really can't afford a $23,000 car. As he pointed out, your first priorities are to establish a 6-month emergency fund, fully fund your 401(k) and IRA, and then think about buying a car, preferably a used one. Taking on debt for a car is not a good financial decision. The days of 0% car loans are over. You are unlikely to find a reasonably riskless investment that, after taxes, would make up for a car loan. I assume that you are interested in a financially prudent strategy because of the way you framed your question. If not, then hey, spend away.
posted by JackFlash at 6:27 PM on November 1, 2006
posted by JackFlash at 6:27 PM on November 1, 2006
Bitrot is Bitright! I've bought three vehicles new and financed them all. There are excellent used cars out there any you save so much money. Even a car with 100K is probably good for at least another 100K, with some maintenance along the way, assuming it's been taken care of. (Regular oil changes go a long way, and I mean every 5000 miles or so, not even every 3000 miles). My next car will probably be a big used Mercedes that's 10 years old that I could never have afforded then but will be less than half of a new car, and I'm talking Toyota here. Remember, they're only really new when they haven't been driven off the lot.
posted by JamesMessick at 7:29 PM on November 1, 2006
posted by JamesMessick at 7:29 PM on November 1, 2006
New car? WTF. Dude, just take public transit!
ok, just kidding.
I think it'll depend on your existing credit. Will you qualify for a low interest rate?
So, another vote for what ikkyu2 said.
posted by drstein at 11:52 PM on November 1, 2006
ok, just kidding.
I think it'll depend on your existing credit. Will you qualify for a low interest rate?
So, another vote for what ikkyu2 said.
posted by drstein at 11:52 PM on November 1, 2006
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posted by Gungho at 1:33 PM on November 1, 2006