New Car - Pay Cash or Finance?

[Katsmeow]

Where was the money to make the car payment coming from?

I guess if you are mainly living off annuity type money and have no plans to tap the IRA then I see it.

Otherwise it seems like a question of tax bracket.

A lot of our income is social security. We withdraw from the IRA for the difference between SS and spending.

It is partly a matter of tax bracket. But it is also a matter of SS taxability. This year, if we withdrew the cash to pay the car loan then 85% of our social security (the max under the law) would be taxable. If we just make payments on the loan this year, less of our SS is taxable (a lot less of it) and the tax bracket is lower. I have projected this out over the car loan and we save more money paying the loan out over time even with the interest than we would by taking out a large lump sum and vastly increasing the amount of taxes we pay.

It is possible things will change. For example, if we needed to withdraw enough any way that all of our SS was going to be taxable and we moved into a tax bracket where paying off the loan would not change the bracket then we might pay it off earlier.

 

[HadEnuff]

I hate car payments. I was often saddled with them when I was younger and had no capital. When I got older and had the capital I always paid cash.
However, I've come to the conclusion that just because I can, does not mean it's the best move.
My plan, going forward, is probably to lease. I won't have to tie up as much cash, and I am less at risk from buying a car with a fundamental mechanical issue, or a car that gets cracked up in a wreck. With CarFax, now, if you have that happen, you can take a big hit at resale time.
YMMV

 

[dadu007]

I'm not as savvy a negotiator as many are on this forum...
We've been in the market for an SUV the last couple of months. Currently driving a 2000 Subaru Impreza wagon (113,000 miles on it) and the wife drives a 2014 Outback. But our sons (high schooler and university student) are needing the use of a car more and more. We tend to hang on to our cars, so no leasing.
DW spotted a Subaru Ascent several months ago and had her heart set on one. Turns out I had to make a plane trip to visit my ailing mother two weeks ago. My older brother lives near her and he just bought an Ascent; so I got a free no-pressure test drive! Turns out I loved the vehicle.
Previous to my trip I had been emailing with the local Subaru dealership where we had bought the Outback. They were good on responding and gave me some ballpark numbers on a new Ascent (Premium trim level). When we bought the Outback there in 2014, it was with a no-haggle discount coupon price from a professional organization I am a member of. Easy-peasy transaction.
So yesterday we went to the dealer (I did have a coupon for a $50 gift card for just test driving the Ascent). We knew the exact color and trim level we wanted and did my best to get ready for the price negotiation. After we agreed on purchasing from them I started the negotiation price lower than the max price I had in my head...The young sales rep said, "Oh, I'm so sorry, we changed to no-haggle pricing back in 2008." LOL. Their no-haggle price was already at the low end of KBB, so I knew it was fine, and had a laugh.

Of course, the real "sales" part comes from the finance guy! Listened to the finance guy vomit out his long-rehearsed spiel on warranty packages...sent him away to huddle with my wife...he came back and we declined them all. This was then a new lesson for me: he THEN offered what I thought was a reasonable bumper-to-bumper warranty extension (8 years total) for not a lot of money. Since the Ascent is a first year model and is turbocharged, I bit on the warranty.
In the end we put down $10000, and will finance the rest, giving ourselves the option of paying it off early (did the same with the Outback; paid it off in a year). There were no deals or incentives on interest rates, which ended up at 3.49%. But I HATE car negotiations and like this dealer after many interactions with with them, so I just thought, what the hey, I have bigger battles to fight. While we have the money to pay cash, the money is sitting in a 2.10% savings account and I just want the big pile of cash in the bank to stay big; for unforeseen emergencies.
We take delivery on our new Ascent this Wednesday or Thursday.

 

[W2R]

We take delivery on our new Ascent this Wednesday or Thursday.

Congratulations! And thanks for the honest (and frankly fascinating!) story of what you went through in buying your Ascent. At some point in the next year or two I want to buy a new SUV also, and I have heard good things about the Ascent elsewhere. I'll check it out online and see if it is one that I may want to test drive.

 

[ziggy29]

Under most circumstances, the dealer hopes to make some money by directing the buyer to in-house financing. When shopping for a car, if I intend to pay cash, I keep that to myself until we've come to an agreement on price, etc.

Yup. They may ask me how I intend to pay for the vehicle, but I remain thoroughly noncommittal until and unless I'm ready to buy. At that point, after agreeing on price, then we can discuss payment/financing options.

 

[bobandsherry]

Yup. They may ask me how I intend to pay for the vehicle, but I remain thoroughly noncommittal until and unless I'm ready to buy. At that point, after agreeing on price, then we can discuss payment/financing options.

If there's additional cash incentive for financing you are shooting yourself in the foot. Better answer would be whichever gives me the best price.

 

[Katsmeow]

Congratulations! And thanks for the honest (and frankly fascinating!) story of what you went through in buying your Ascent. At some point in the next year or two I want to buy a new SUV also, and I have heard good things about the Ascent elsewhere. I'll check it out online and see if it is one that I may want to test drive.

When we bought our last SUV (6 months ago) I did something I had never done before but it has worked out. We test drove several different vehicles but were interested in the new small Volvo SUV. It was in very short supply so there were no deals to be had. But there is a very large Volvo dealer in this area who had a bunch of XC60s. I was surprised that many of them were shown on the website as being loaner vehicles. It was just starting the 2019 model year but they had a bunch of 2018 and basically the XC60 didn't change between the two years in any substantial way. We ended up saving a lot of money buying a "loaner" with about 3k miles on it (it had been driven by and employee for much of the loaner period). Anyway, this dealer is one that still gives you a loaner car when you bring the car in for service and they just basically take something on the lot and loan it out. They gave us an extended warranty and so far it has worked out great. The next time I buy a car this is an angle I will definitely look at. It might not have worked had there been substantial differences in the model year, but with no big changes it has worked out well.

We ended up putting down a large down payment and did get new car financing for the rest of it.

 

[ziggy29]

If there's additional cash incentive for financing you are shooting yourself in the foot. Better answer would be whichever gives me the best price.

These things can almost always be researched ahead of time.

 

[samclem]

If there's additional cash incentive for financing you are shooting yourself in the foot. Better answer would be whichever gives me the best price.

It seems logical to first nail down the price. Then you can know if any "additional cash incentive" is really "additional."

 

[W2R]

When we bought our last SUV (6 months ago) I did something I had never done before but it has worked out. We test drove several different vehicles but were interested in the new small Volvo SUV. It was in very short supply so there were no deals to be had. But there is a very large Volvo dealer in this area who had a bunch of XC60s. I was surprised that many of them were shown on the website as being loaner vehicles. It was just starting the 2019 model year but they had a bunch of 2018 and basically the XC60 didn't change between the two years in any substantial way. We ended up saving a lot of money buying a "loaner" with about 3k miles on it (it had been driven by and employee for much of the loaner period). Anyway, this dealer is one that still gives you a loaner car when you bring the car in for service and they just basically take something on the lot and loan it out. They gave us an extended warranty and so far it has worked out great. The next time I buy a car this is an angle I will definitely look at. It might not have worked had there been substantial differences in the model year, but with no big changes it has worked out well.

We ended up putting down a large down payment and did get new car financing for the rest of it.

What good fortune! Also, since they give out loaners when you bring in the car for service, you know that you always have that service available there, too. That's pretty cool.

 

[bobandsherry]

It seems logical to first nail down the price. Then you can know if any "additional cash incentive" is really "additional."

Always been pretty obvious that there is, especially with manufacture incentive. For me, I never step foot into a dealership until I've buttoned up the deal via email with all the details. I'll put dealer against dealer on pricing, so they'll keep each other honest.

 

[wrigley]

I ALWAYS have a pre-approved check from my local credit union prior to entering any dealership. Most of the leg work is already done on-line prior to that, but I like listening to the other options the dealership throws out when they realize I don't need their money.

 

[ach88]

I bought a new car last month. I was going to pay cash but was told of a $1000 rebate if financed through Toyota. I asked what was the minimum I had to finance and was told it was approximately half the cost. I then asked how quickly could I pay it off and not impact the rebate and was told I had to make at least the first month payment before paying off. So I put 5k on 2% Fidelity credit card, then financed the required minimum to get the rebate and paid the balance in cash. I paid the credit card off on the next statement, made the first car payment and will pay the loan off on the second payment... A little hassle but definitely worth the time to do.

 

[Bongleur]

I ALWAYS have a pre-approved check from my local credit union prior to entering any dealership. Most of the leg work is already done on-line prior to that, but I like listening to the other options the dealership throws out when they realize I don't need their money.

What do you mean by "pre approved check?"

 

[Walt34]

I bought a new car last month. I was going to pay cash but was told of a $1000 rebate if financed through Toyota. I asked what was the minimum I had to finance and was told it was approximately half the cost. I then asked how quickly could I pay it off and not impact the rebate and was told I had to make at least the first month payment before paying off. <snip>

That's pretty much what we did when we bought the 2014 Honda Accord a while back. There was no rebate involved but we walked in prepared to just write a check for it but a better deal could be had if we financed it through Honda, and they quickly added "there is no prepayment penalty". So we financed it, made one payment, and then paid it off.

I'm sure they gamble that the number of people who do that is minuscule.

 

[winger]

We just bought a 2019 Ford F250 diesel. Wow. I've been driving a 2005 F350 for 228,000 miles. The electronics on this thing are unbelievable. And the diesel is so quiet...wow again.
Cash, rebates and trade in for 2/3 of the price, financed the remainder. Financed it for 6 years, but I plan to pay it off in early 2020. No penalty for early payoff. Wanted the payments to be reasonable for a year. I've already moved the payoff money from our IRas to a Vanguard MM.
Could have paid all cash, but didn't want to be cash poor the rest of the year. Something could come up. Every year, we withdraw from our IRAs to the top of our tax bracket, wanting to avoid the mandatory withdrawals in a few years.

'The enemy of a good plan is the dream of a perfect plan.'

 

[Franklin]

I would second this suggestion assuming the OP drives at least 9,000 miles a year and less than 12,000. If so, a 10,000 or 12,000 miles per year lease would be a good idea. You pay only for the amount the vehicle depreciates and no huge outlay of cash.

I suspect the frugality of this site would suggest cash only. But the decision has been clouded by the elimination of SALT etc. Leasing now makes more sense considering a cash purchase or loan requires you to pay the sales tax immediately. Under a lease you only pay that on the payment amount. In a lease you only pay tax on the difference between cost (also known as the cap value) and the residual value (what you can by it for at the end of the lease). Example:: I live in Cali and paid $60K for a car and I was hit for roughly 10% in sales tax or $6K. If I leased it I only purchased the difference between the cost (cap value) and residual in 4 years ($35K). So I paid tax on what value i used or $25K ($2500 in tax vs.$6K). The tax is built into the monthly payment.

Now if you recall we can no longer deduct consumer interest so financing it not as popular. Your interest is not deductible. So cash (assuming you have it) IMHO is better than financing. Back to the lease the interest rate is called the CAP factor and today it is very low. Lastly, try and sell a car yourself.....it aint easy. I prefer to turn them back to the dealer to handle. So, a few years ago maybe a lease might not be a good fit but today it is a batter choice (especially if you plan to drive it under 15K annually and want a new ride every 4 years).

Sorry more info than you need but I just went thru this last week.

 

[bobandsherry]

I would second this suggestion assuming the OP drives at least 9,000 miles a year and less than 12,000. If so, a 10,000 or 12,000 miles per year lease would be a good idea. You pay only for the amount the vehicle depreciates and no huge outlay of cash.

The lease is not really the vehicle depreciation. It's the estimated depreciation that manufacturer assigns through residual value. Have to watch as some residual values are too low, you then pay more depreciation. And there are some where residual value estimate is too high, part of incentive program that lowers the lease price. Those are the real gems to find. Case in point, my current vehicle is leased and has a residual value of $26,500. I have looked at what other vehicles like mine are selling for, they are selling for less. So I underpaid on what depreciation actually was, saved me money.

The lease also includes "interest" on the full purchase price. So even if residual estimate was correct there's more than just depreciation being paid.

 

[Kimo]

When I need a new car, I only purchase one when the manufacturer offers zero percent financing. That way I am not taking a chunk of money out of my savings, nor am I paying interest. I only buy Fords. Currently , they have some zero percent financing incentives. Check out their web site.
https://www.ford.com/

1971 Boss 351 here......

 

[ACCD]

I've kicked this around and have two ways of looking at it. I own 3 cars, one is an "exotic" that is expensive to maintain the other two are German made. My BMW is a 2013 and I have a 1993 Mercedes that we've had for 25 years. For me, the idea comes down to..


When I run the numbers I keep coming back to something like 9 years of leasing equals buying option. Consider if you do a 36 month lease for 3 sessions, 9 years total, you should have little to no maintenance.. maybe tires... So you have a fixed cost and exposure. When buying, if I drive the car past warranty, 4 years, then I have the exposure of repairs. Additionally, if I keep the vehicle past 9 years the resale price is probably very low but at least I know have some sort of asset.....and by year 10 I will I want to upgrade. I keep thinking about the cost of ownership after warranty. I have a BMW coming up on the last year of my 7 year extended warranty and wondering if I should just start leasing for both flexibility, lifestyle change and lower hassle / cost of ownership. So far my extended warranty hasn't paid for itself, but I have a year left. I look at the 25 year ownership of my Mercedes and I can say that there's not a huge value in keeping them this long. The hard part for me is the mental part of having a payment. But if I think about that $100k check I wrote for the German car, why do I cringe at having a monthly lease payment? It's all mental...and I should just step back and buy a Honda and keep it forever...maybe I just need a good therapist.

 

[Murph]

Good ideas

I don’t have any input for the OP, but as a “cash only”-type, I sure garnered a lot of good ideas from reading all these options for buying my next car.

 

[isisdave]

Last time I bought a car a few years ago, I was all set with PenFed 4-year financing at 1.99%; the Toyota dealer offered 0.9% for 100% 5-year financing ... and it was a 1-year-old used car. The rate difference didn't really matter; it was just one less set of paperwork to complete.

Several friends who used to buy but are now seniors with predictable annual low mileage are leasing, especially when they can find one of those "no cash at signing" deals.

 

[hpnutty]

If you can't pay for it with cash and be comfortable with the result, then you shouldn't buy it. Having experienced both methods you mentioned, the "no debt" experience is much better feeling. YMMV.

 

[Kroeran]

Not this topic but what do I buy? Criteria - small SUV, AWD, heated driver seat, long term reliability, $25k

Just bought a 2019 AWD Honda HRV,. Higher trims have all the latest safety features new to the 2019. Their smallest SUV

Love the car. Ridiculously practical

 

[Raygun99]

Last car Nissan Rogue.. Leased for the first time in my life. We drive less than 10K per year. I did a 3 year. Thinking technology is changing so fast the next version may be way more advanced. (Maybe self driving!) I don't think buying and holding for 10 years makes sense anymore. I just negotiated the best price and ignored any of the extended warr etc since it will be turned in month 36.. Than we go shopping again. I would prefer to have as many safety features as possible the older I get..