New Car - Pay Cash or Finance?

[ziggy29]

There used to be larger cash incentives in lieu of zero or cut rate financing, but now that people with good credit can get car loans for under 4% the cash value of the lower financing isn't much. So in reality, if there is no substantial cash rebate or incentive to decline the low-rate financing, I'd pay cash on it. Though if the interest rate were low enough -- low enough that you can earn more in savings, money markets and CDs that don't exceed the loan period -- you can make a case for financing, knowing that you have the cash in reserve to pay it off at any time.

That said, we decided to pay cash on my car last July mostly because I don't want to deal with the payments or the debt, and we already had the cash tucked aside for that purpose.

 

[W2R]

I was going to replace my 2009 Venza a year or two ago. So in preparation for that, for each of several years prior I set aside some unspent cash from my WR. Right now I have enough cash in my bricks'n'mortar bank to write a check for the replacement vehicle - - if I could just figure out what kind of SUV I want. That is the more difficult problem for me since I have to like it better than my Venza. But anyway, on to the financing discussion.

Personally the cash/financing decision is easy, not as a math problem but as a matter of strong personal preference: I will never again consider making car payments, even at 0% with a rebate or whatever incentive may be offered. BTDT with the car payments and I just don't want to DO it again!!! So you all can feel free to think I'm completely bonkers insane looney-tunes now. I just want to buy it, leave, and be done with it.

Each to his or her own, definitely! I just wanted to provide my decision on this and my totally indefensible reasons why.

Edited to add:

we decided to pay cash on my car last July mostly because I don't want to deal with the payments or the debt, and we already had the cash tucked aside for that purpose.

+1000, GMTA!!! I didn't think that anybody else would have my viewpoint on this, but we are thinking along the same lines.

 

[ziggy29]

+1000, GMTA!!! I didn't think that anybody else would have my viewpoint on this, but we are thinking along the same lines.

Well, if the choice was 0.9% financing or a savings account paying (say) 4% or more, I'd take the loan (and keep the cash aside earning interest while paying down the loan). But the best offer I could get was only about 0.4% less than what savings is earning after taxes, and for me the peace of mind of being debt free -- in that case -- was worth the small "lost interest" cost compared to carrying debt and dealing with monthly payments and such. I was looking at a net savings of less than $50 a year over the life of the loan, and being debt free and not dealing with that hassle is worth more than that to me.

 

[CardsFan]

DW is looking to buy a new car this summer, so I am looking at the same thing. We have cash, earning 2% at CapOne, that could be used. OTOH, I hate to use that cash all at once for something we could finance at a reasonable rate.

So, I would be willing to finance at 3%, paying a 1% premium, simply to level expenses. This (the 1% premium) would be less than a $1,000 cost over 3 years.

So, if the dealer offers $1,000 to finance with them, at something close to 3%, that becomes a wash.

We'll give it more thought when she gets closer to buying.

 

[retired1]

Look for "special offers" when you finance. Sometimes they include some goodies like some $$ incentive. Take that, finance, and then pay off the balance as quickly as you can.

 

[Katsmeow]

About 6 months ago, we bought a car. We made a large down payment (about 37% of the cost or so) and financed the rest. We did have after tax money we could use but it was mostly earmarked for something else. I didn't want to pull money out of taxable accounts for this. I have considered paying it off early and we might at some point but I am not really in a big rush to do it. The amount of interest is really not that much and I like keeping my money invested.

 

[homestead]

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/

Whenever I've seen the 0% financing they gave a choice of 0% or $XXXX dollars off on the price. So in those cases you are really paying more for the car if you go with 0% financing. But it still may be advantageous for some to go with the 0% financing.
I like Fords too.

 

[bobandsherry]

Lease, because the technology is changing so quickly.

That's valid, but some penny pinchers will say they don't care about technology. It's more than convenience tech features, but also safety features. And then there's the uncertainty of ICE, Hybrid and EV and how things will shake out. I have to imagine, given the advancement in EV already we will see even further advancement that could be a game changer. Or maybe it won't, but I'm thinking it may be smarter to be in a position that doesn't lock me into something that may be a dinosaur. [emoji3072][emoji3073][emoji16]

 

[pb4uski]

It depends. If you paid cash, where would the funds come from? Do you regularly rebalance to a target AA and is the source of where the funds come from part of that rebalancing?

For example, let's say that the source of the funds is from an online savings account that pays 2% but that online savings account is part of a $x million portfolio that is regularly rebalanced to a 60/35/5 AA (would be in my case). The relevant rate to use would the the expected rate of return for the 60/35/5 portfolio... probably about 6% or more. In that case, it would make sense to borrow at 2.75%.

OTOH, if the online savings account is not part of what is rebalanced, then it would make more sense to pay cash and avoid paying 2.75% but also not earn 2%... still comes out 0.75% ahead... then if desired you can replenish the online savings account with what would have otherwise been car payments.

On my last car purchase, I got a better deal if I financed through the dealer vs paying cash, but the rate was expensive, so I took the financing and then paid off the loan after making a couple months of payments. On the one before that one, we negotiated a cash deal and then the manufacturer was offering 1.9% financing so I took it since my savings were earning more.

 

[Cobra9777]

We just bought a 2019 Subaru Forester. After much online searching, we finally found the color and options combo we wanted at a dealership a couple hours away (the car was still in-transit). I negotiated the deal by email based on pricing ranges I found on multiple websites. I started at $750 below the low end of that range and ended up at $600 below. I was happy with the deal. There was no discussion of how I would pay until after the car arrived at the lot and the sales guy called. I paid the max they would allow on my 2% cash-back credit card and the rest by personal check. This was after enduring at least 45 minutes of the "finance guy" trying to sell me everything under the sun. However, they offered no additional discount for financing, which I might have considered. No 0% either.

 

[bobandsherry]

I financed a Camry Hybrid last year because they had no rebates of any kind, and only a .9% APR for 60 months deal. I sure get tired of paying that note online. I like to keep my business ultra simple where thought is not required.

How you liking to the hybrid Camry? How's the pickup/acceleration?

BTW, setup your payment up for auto payment, becomes a non-event on monthly basis vs paying online each month.

 

[JAGOTI]

I'm retired and will be in the market for a new car this year. I've always assumed that my next car purchase would be cash but am having second thoughts.

I have the resources readily available in after tax accounts to pay cash. Ally Bank savings accounts currently yield 2.2%, and a 3 year CD yields 2.65%. I also know that I'm pre-qualified at my current bank for a 3 year car loan at 2.75% (the longest I'd want to finance for). I haven't searched for rates elsewhere at this point but can possibly do better on either or both.

Anyway, back to my question about financing versus paying cash. I of course don't like making car payments, but I also don't like the thought of taking a big one-time chunk out of retirement savings.

Is it simply an "interest rate math question" of calculating earnings on savings versus the cost of financing? Or is it a little more complicated than that? How have those of you in similar situations made car purchasing decisions?

I bought a new vehicle in January. I have the cash, but I got a loan at Lightstream - They were really easy to work with. I applied on line, was approved in 5 minutes. I paid no fees-the loan money hit the bank account in 24 hours. It was very streamlined and simple.

I plan to pay off the loan over the next few months...but if I feel like it I can stretch it out.

My advice - do what makes you happy.

 

[corn18]

I like paying cash because then I have to pry the savings out of my account to pay for it. That is much harder than getting a loan and making a payment. My wife wants a new car and we agreed we could afford to get one anytime, but we could not bring ourselves to pull the money out of savings to do it. I don't think we ever want to buy another car ever. That's a nice 60 day vacation in Europe.

 

[JAGOTI]

By the way-Lightstream did not place a lien of the vehicle.

 

[Camping]

I'm retired and will be in the market for a new car this year. I've always assumed that my next car purchase would be cash but am having second thoughts.

I have the resources readily available in after tax accounts to pay cash. Ally Bank savings accounts currently yield 2.2%, and a 3 year CD yields 2.65%. I also know that I'm pre-qualified at my current bank for a 3 year car loan at 2.75% (the longest I'd want to finance for). I haven't searched for rates elsewhere at this point but can possibly do better on either or both.

Anyway, back to my question about financing versus paying cash. I of course don't like making car payments, but I also don't like the thought of taking a big one-time chunk out of retirement savings.

Is it simply an "interest rate math question" of calculating earnings on savings versus the cost of financing? Or is it a little more complicated than that? How have those of you in similar situations made car purchasing decisions?

Here's a way one can think of the numbers. If your money can earn 2.65% in a 3 year CD, how much tax will you pay on the interest earned?


What I do is lend myself the money and make the same payment to myself as the loan would require. So I'd be giving myself a loan at 2.75% and the interest I earn off myself is fully tax free. The only difference is that you won't have access to the cash in your loan to yourself where a CD you could remove the money in a financial emergency.

 

[Dtail]

The decision to finance or pay cash is part math problem, part psychology. Just like whether or not to carry a mortgage when you can afford to pay it off. DW and I are in the "no debt" camp, partly because it just feels good to not owe anybody anything.

+1

 

[rk911]

cash. and run all of the numbers ref a lease. you
may find it more expensive overall to lease. write a check and be done with it.

 

[Stormy Kromer]

I recently purchased a new vehicle. I could have easily sold some mutual fund shares and paid cash. I realized that would trigger some LTCG tax and even more state income tax. I'd need to sell at least 20% more than the vehicle purchase price.


Instead I financed it, 100%, and make monthly payments from my regular income sources.


Looking back (with the complete benefit of hindsight) the mutual funds have increased in value 15% since last July when I would have sold....


As long as interest rates are this low, I will borrow as much as I can and budget the monthly payments.


I remember when you could get a better deal if you went to the dealer with cash. No more. One dealer told me "if someone came in to buy a car with cash, my office wouldn't know how to do the paperwork, they've never done it before"

 

[mrfeh]

I would only finance if the interest rate is quite a bit less than what savings accounts are paying. Today, that would have to be under 1%.

I despise debt, but did take a 3 year 0% auto loan in 2016.

 

[ShokWaveRider]

cash. and run all of the numbers ref a lease. you
may find it more expensive overall to lease. write a check and be done with it.

A lease is good if like us we want at least 1 new car every 3 years, as the car depreciates anyway. If one want to keep their car till the year dot, then it is not.

 

[JPatrick]

If you would like to raise your FICO score, a new loan and successful repayment could give you a nice boost. Depends though, lots of other things to factor in. Generally only applies to those who have a good score now, but one that is not moving due to no action for long periods at a time.

 

[T-Minus]

My car philosophy is to buy what I want including options, pay cash, and keep it a long (> 10 yrs) time. Haven’t had a car loan since the mid 90’s.

 

[Katsmeow]

I would only finance if the interest rate is quite a bit less than what savings accounts are paying. Today, that would have to be under 1%.

I despise debt, but did take a 3 year 0% auto loan in 2016.

Well, if I had cash that I was going to keep in a savings account then I would agree with that.

When we took a car loan (with a large down payment) though we had two choices:

1. Spend cash that was actually earmarked for something else (i.e. if we spent the cash for the car then we would have to IRA withdraw for the something else).

or

2. Withdraw money from the IRA that was invested and then pay taxes on the withdrawal. Didn't make much sense to us to do that.

 

[Montecfo]

Well, if I had cash that I was going to keep in a savings account then I would agree with that.

When we took a car loan (with a large down payment) though we had two choices:

1. Spend cash that was actually earmarked for something else (i.e. if we spent the cash for the car then we would have to IRA withdraw for the something else).

or

2. Withdraw money from the IRA that was invested and then pay taxes on the withdrawal. Didn't make much sense to us to do that.

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.

 

[samclem]

I remember when you could get a better deal if you went to the dealer with cash. No more. One dealer told me "if someone came in to buy a car with cash, my office wouldn't know how to do the paperwork, they've never done it before"

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.

Frequently, dealers offer low-rate financing sponsored by the manufacturers (to sell cars). We used that to buy a new Honda CR-V a few years ago--I think it was 0.9%, and a better option for us than the alternative Honda rebate and taking the tax hit of selling investments to pay cash.