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Old 12-08-2015, 12:20 PM   #1
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Cash or loan

I expect we'll pick up our new car sometime this week. I had intended to pay cash (about $30k) but the manufacturer is offering 1.9% financing for 60 months.

For most purposes, I assume our portfolio will generate 5.5% or better. So if it did and I took the financing then over the 5 years I would be about $2,700 ahead ignoring taxes ($15k average balance over 5 years * 3.6% difference), or $540 a year.

However, we haven't had a car payment in over 20 years other than a loan we paid off after just a couple months just to get the $500 up-front bonus offered by the financing company. Also, there would be a lien on the title that would have to be cleared, I assume that we would have to continually prove that we have car insurance on the car, etc. so just a bunch of minor hassles associated with financing.

I'm leaning to just pay cash but think I might be hypocritical given some of the other hoops we jump through to save less than $540 a year for other things.

What would you do? If it makes a difference, the $30k is relatively minor in relation to our NW, etc so if investment performance was less than 1.9% it would not be a big deal.
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Old 12-08-2015, 12:23 PM   #2
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The only time we finance is if we get an additional amount Cash Back at time of purchase.

Many times, you will see something like this:

0% Financing
or
$2500 cash back

We finance it (take the Credit Inquiry hit) then pay it off the following month, thus saving an additional $2500.

If there was absolutely NO incentive to financing minus a 1.9% rate, I'd pay cash. If it was 0%, then I'd finance. YMMV
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Old 12-08-2015, 12:25 PM   #3
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For me, as much as I hate, hate, hate having a monthly payment of any kind there's the 'investment' side of making money on the deal.

Heck, I wait for the "buy 1 get 2 free" monthly sale on English Muffins figuring I'm up $8 bucks and putting it in my pocket.

Now, if you have to buy additional insurance that you normally wouldn't get, that changes the calculation. When I paid cash for my cars, I took the minimum insurance required.
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Old 12-08-2015, 12:25 PM   #4
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Originally Posted by pb4uski View Post

What would you do? If it makes a difference, the $30k is relatively minor in relation to our NW, etc so if investment performance was less than 1.9% it would not be a big deal.
I was faced with a similar decision a few months ago. Planned on paying cash until USAA offered a 36 month car loan at 0.99%. Hello $600+ per month car payments...
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Old 12-08-2015, 12:34 PM   #5
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I would be on the fence about 1.9%. I am not as optimistic about market returns as you are. However, when I bought my current vehicle in 2012, I jumped at a 36 month loan at 0.99%. Looking back, it was a good decision. The monthly payments were onerous, though, and I certainly noticed their disappearance!
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Old 12-08-2015, 12:36 PM   #6
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I've repeatedly been led to believe that you can negotiate a lower price paying cash than you can when financing which would change your direct interest vs return comparison, but I can't prove it. I know when I've bought cars and they ask, 'will you be financing,' I always answer 'whatever will result in the lowest price' - and it's always been cash whether interest rates were high, low or in between. But I enjoy haggling over car prices, and I realize many people hate it.

Just one data point, but from a car salesman on another forum 9 months ago (interest rates were just as low then):
Quote:
Buying a car with straight cash has several advantages. For one, dealers (used or new) will be more open to haggling than if you were to finance. With financing, you have less of a chance to strike a particular deal that will be in your favor. Secondly, the most obvious is avoiding interest. More interest means more out of pocket money down the road regardless of percentage rate. $300 more is $300 more no matter which way you cut it. Third, you have no control over the sort of insurance you want to carry on a loan. Forth, you can avoid heavy depreciation since financing will keep the asking price upwards of what the vehicle is actually worth (if you think that dealers don't ask over bluebook you're crazy). With cash you can often buy the vehicle for what it was traded in at. I've done this myself.. FACT!
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Old 12-08-2015, 12:37 PM   #7
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While not a car, I financed my expensive hearing aids and the plantation shutters on our home. They were both at 0% interest for one year, so why not?
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Old 12-08-2015, 01:00 PM   #8
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I expect we'll pick up our new car sometime this week. I had intended to pay cash (about $30k) but the manufacturer is offering 1.9% financing for 60 months.

For most purposes, I assume our portfolio will generate 5.5% or better. .
I would not look at the percentage your overall portfolio generates but look at the marginal rate. As an example, if you have $100K in a 1% savings account you use for emergencies, I'd take the $30K for the car out of that fund, you only lose the 1%, and replenish the fund over time as if you had car payments to make from whatever source you would use to make the payments. Use your marginal rate, not average or overall rate of return.
Of course, if you've no cash or insufficient cash, the numbers will change.
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Old 12-08-2015, 01:05 PM   #9
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Thanks for the input. Yes, 0% (or even 1%) would make this a much easier decision.. almost a no brainer. Also, if there was an up-front bonus and with a higher rate then I would finance, take the up-front bonus and then pay the loan off after a month or two... I've successfully done that in the past.

My insurance costs will not be any different... however I may have to provide the loan company with proof of insurance annually which is just another small hassle.

I negotiated the price based on paying cash. The price and doc fee is 1.4% below dealer cost for a car in high demand... in fact, we had to order it with a 8-12 week wait to get the configuration we wanted without the junk they add to the cars they put out on the lot. I had a $250 lower price from a dealer in another state a couple hours away and my local dealer said that they would be losing money at that price. They made me this offer and I decided that it was worth $250 to buy local and avoid 4 hours of driving and going to the DMV.

The loan option came into play later when I learned that the manufacturer was offering low rate financing... the advertised rate was 1.49% but for a lower trim level than the trim level we are buying. The manufacturer's interest rate for our trim level is 1.9%.
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Old 12-08-2015, 01:06 PM   #10
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Quote:
Originally Posted by pb4uski View Post
I expect we'll pick up our new car sometime this week. I had intended to pay cash (about $30k) but the manufacturer is offering 1.9% financing for 60 months.

For most purposes, I assume our portfolio will generate 5.5% or better. So if it did and I took the financing then over the 5 years I would be about $2,700 ahead ignoring taxes ($15k average balance over 5 years * 3.6% difference), or $540 a year.

However, we haven't had a car payment in over 20 years other than a loan we paid off after just a couple months just to get the $500 up-front bonus offered by the financing company. Also, there would be a lien on the title that would have to be cleared, I assume that we would have to continually prove that we have car insurance on the car, etc. so just a bunch of minor hassles associated with financing.

I'm leaning to just pay cash but think I might be hypocritical given some of the other hoops we jump through to save less than $540 a year for other things.

What would you do? If it makes a difference, the $30k is relatively minor in relation to our NW, etc so if investment performance was less than 1.9% it would not be a big deal.
Did you already strike the deal regardless of how you will pay for the car?
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Old 12-08-2015, 01:10 PM   #11
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I would not look at the percentage your overall portfolio generates but look at the marginal rate. As an example, if you have $100K in a 1% savings account you use for emergencies, I'd take the $30K for the car out of that fund, you only lose the 1%, and replenish the fund over time as if you had car payments to make from whatever source you would use to make the payments. Use your marginal rate, not average or overall rate of return.
Of course, if you've no cash or insufficient cash, the numbers will change.
I understand your logic, but don't really agree with it as once I rebalance (which will be shortly after the car is paid for), I'll keep the same AA. IOW, I won't adjust my target AA just because my cash is $30k lower... if I did adjust my target AA for the change then I agree that the marginal rate on cash is the correct rate to use in making the decision.

By analogy, in corporate finance you typically use the firm's WACC in making investment and financing decisions. This practice recognizes that using the marginal financing rate can lead to poor investment decisions.
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Old 12-08-2015, 01:12 PM   #12
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Did you already strike the deal regardless of how you will pay for the car?
Yes, I struck the deal assuming that I was paying cash. The price would be the same if I finance (IOW the financing company is not offering an up-front bonus... just a low rate). I didn't assess the financing at all until just now because the financing deals often change from month to month and apply to when you take delivery and not to when you place the order. When December 1 came along, I looked at what they were offering for financing deals (but I think it is the same as what they offered last month).
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Old 12-08-2015, 01:12 PM   #13
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Originally Posted by pb4uski View Post
I expect we'll pick up our new car sometime this week. I had intended to pay cash (about $30k) but the manufacturer is offering 1.9% financing for 60 months.

For most purposes, I assume our portfolio will generate 5.5% or better. So if it did and I took the financing then over the 5 years I would be about $2,700 ahead ignoring taxes ($15k average balance over 5 years * 3.6% difference), or $540 a year.

However, we haven't had a car payment in over 20 years other than a loan we paid off after just a couple months just to get the $500 up-front bonus offered by the financing company. Also, there would be a lien on the title that would have to be cleared, I assume that we would have to continually prove that we have car insurance on the car, etc. so just a bunch of minor hassles associated with financing.

I'm leaning to just pay cash but think I might be hypocritical given some of the other hoops we jump through to save less than $540 a year for other things.

What would you do? If it makes a difference, the $30k is relatively minor in relation to our NW, etc so if investment performance was less than 1.9% it would not be a big deal.
I purchased my new Infiniti g37 (well new to me, it's a 2013) in October of 2014. dealer gave me 0.9% interest. I keep my cash in the bank and took the loan.

no biggie
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Old 12-08-2015, 01:36 PM   #14
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This is timely for me as I looked at the same type of thing and concluded that with no change in price weather I finance or pay cash as using Costco Pricing plus all dealer and mfg incentives and interest at 1.9% I am going to finance. As I see it using my investments has an opportunity cost of 5.75%. The payment does fit in our budget. If on the other hand I did what my mother did.. she puts money into a car account every month and expenses this in her budget and when she buys she pays cash like she did in October.
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Old 12-08-2015, 02:54 PM   #15
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I ordered an F-150 this past summer that had an additional $750 off if you financed with Ford Credit. Since I'm still working and see bonuses in February, it made sense to take the loan and then pay it off then as opposed to selling mutual fund shares and taking a capital gains hit.
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Old 12-08-2015, 03:43 PM   #16
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I did this a year ago and financed the purchase...

I do not have to 'prove' insurance... just make sure that they are listed a lien holders and the insurance company notifies them...


Set up the 5 years of payments with the online bill pay as an auto pay.... I have not had to do anything (well, almost) in a year...

I say almost because we had a insurance claim and I sent them the check... it was more than a couple of payments and they have sent me a 'bill' for zero dollars... I did stop one payment, but have decided to not try and get back to my real payment schedule.... just keep making the payments and worry about it at the end....
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Old 12-08-2015, 04:06 PM   #17
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Why did you send them the claim payment... was the check made out to them as the lienholder?

I guess you're right on the insurance. I was just messed up because I recently had a hoop to jump through with my mortgage company because my homeowner's insurance renewed.
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Old 12-08-2015, 04:34 PM   #18
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Yes, I struck the deal assuming that I was paying cash. The price would be the same if I finance (IOW the financing company is not offering an up-front bonus... just a low rate). I didn't assess the financing at all until just now because the financing deals often change from month to month and apply to when you take delivery and not to when you place the order. When December 1 came along, I looked at what they were offering for financing deals (but I think it is the same as what they offered last month).
Thanks--we are looking to buy a car soon and understand the deals are all based on financing vs paying cash like we plan to do. We'll try to drive a tougher bargain for cash than usual.
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Old 12-08-2015, 04:45 PM   #19
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A lot of things are based on your credit score, including your home & auto insurance premium. If you do finance the auto tell the dealer to shop it with just 1 finance company instead of shotgunning it to a whole bunch of them, each one is a hard inquiry and lowers your score. Also, if you do borrow money for the car borrow as much as you possibly can and then pay the loan down to what you actually wanted to borrow in the first place. That makes your credit score look better than if you borrowed the lower amount in the first place since you're not maxing out your approved credit limit.
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Old 12-08-2015, 04:48 PM   #20
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If this is a small amount in relation to your NW, why bother with the hassle of getting a loan, making monthly payments, meeting the insurance requirements of the lending agency, etc.? Is that worth the $2,700 - that you might gain (or not if the market does not perform too well). If it is worth the time and effort for you to have that 'potential gain', get the loan.


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