New Car - Pay Cash or Finance?

[popntx]

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?

 

[flintnational]

We bought a car about a year ago. We wrote a check for the purchase price. They did let us put part of the total on a cash rewards credit card (maybe $5k?). We did that just to get the 2% back on the credit card. The card was paid at the next billing cycle.

 

[ShokWaveRider]

Lease, While money is still relatively cheap.

 

[Another Reader]

Dealers make money on the financing. Negotiate hard on the price and offer them the opportunity to beat your financing.

2.75 percent is good in the current market. Most banks are above 3 percent now.

 

[Rianne]

APR or APY? For CD and for car.

 

[Magoo30]

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/

 

[Big_Hitter]

the difference in interest rates typically makes very little impact on a car payment

 

[Big_Hitter]

. I only buy Fords.

sweet!

i have 3 fast cars and a ford myself

 

[lemming]

Ugh... I hate the thought of going through the process. I think, for the moment, that I am going to finance through my Penfed account and even use their car buying service to negotiate the price.
I am trying for a zero tax liability this year so if I buy this year I don't want to make any taxable withdrawals. Next year I intend to pay the balance of my mortgage which is a higher rate then Penfed is quoting for a car loan. The principal and interest is about what I expect a car payment to be.
I want the new Honda Insight which I have never seen so I am going to have to venture into a dealership before I start the process. I should really go now before I have money to keep me from an impulse buy.

 

[LRDave]

The only debt we have now is the payment on my little John Deere tractor. We got some friends-and-family pricing plus they offered 5 years at 0%. I put the purchase price in a separate Ally savings account (currently 2.2%) and autopay the monthly payment out of it. I get a small pleasure watching the balance in the savings account slowly exceed the remaining balance due on the tractor.

 

[Sojourner]

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 car several years ago and was prepared to pay for it fully in cash. At that time, the interest rate on my savings account was lower (around 1%, I think), so I was going to lose less by paying cash than with dealer financing at 2.5%. What changed my mind, though, was the $1,000 discount they offered on the already-negotiated sales price if I used dealer financing to pay for some portion of the sale. IIRC, I financed about $7,000 of the price, made monthly payments for about 4 months, then paid off the loan in full with no prepayment penalty. So I ended up paying a grand total of $65 in interest charges to get that $1,000 discount.

If I were you, I'd be prepared to pay for all (or most) of it with cash, but see if the dealer is offering any rebates or discounts for using their financing plan. These discounts can be substantial, and as long as you do the absolute minimum amount of financing allowed, you'll probably come out ahead. Just be sure to only bring this up when you go in to pay for the car. Up until that point, tell them you plan to pay fully in cash.

 

[Montecfo]

Unless you need the financing or it is cheaper than your cost of funds, why buy it?

Having said that, we did finance DWs new car in December because we received a$1000 incentive for doing so. And just paid it off. So incentives would be a reason.

 

[Lewis Clark]

The last time we bought a new car (2012), the dealer gave us an extra discount (about $700 or $800 if I recall correctly) if we financed through the dealer for some minimum amount - I think it was a couple of thousand dollars. And we had to keep the loan for at least 2 or 3 months.

After the 2 or 3 months, we paid off the loan entirely.

 

[gwraigty]

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?

We paid cash for several new cars without thought, until I'd read of the strategy of taking out a loan if the interest rate on the loan is lower than what you're earning with your investments. We financed our last car purchase because of that. You can usually pay off the loan early without penalty if you change your mind.

ETA: As others have done, we once took advantage of a 4 figure discount for financing a minimum amount through the dealer and paid it off right away. There was no minimum amount of time to keep the loan outstanding.

 

[Kwirk]

When comparing rates, consider that you may be taxed on the interest you receive but unable to deduct the interest you pay.

 

[Nick12]

I pay cash then I sit thru the finance guy song and dance on extended this extended that warranties all of which I decline. And when I trade in my car I get a pretty good deal even though the fuel gauge reads empty when I trade the car in.

 

[Qs Laptop]

Lease, While money is still relatively cheap.

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.

 

[nhcycling]

Following - need to purchase a new car in the next few months. Pay cash or finance?

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

 

[ExFlyBoy5]

Not giving advice really, just my recent experience. About a year ago, I purchased a new (actually used, but less than 18 months old @ CarMax) vehicle and financed it through USAA w/ a 2.9%'ish rate (or something in that neighborhood). Kept the note for a month then paid it off since I don't like having debt. Well, today...I wish that I still had that note as I would have made more than that in returns had I still had the cash. Granted, it's not a huge amount of $ in the grand scheme of things, but nothing wrong w/ financing and then paying it off later if you want to.

 

[Montecfo]

Not giving advice really, just my recent experience. About a year ago, I purchased a new (actually used, but less than 18 months old @ CarMax) vehicle and financed it through USAA w/ a 2.9%'ish rate (or something in that neighborhood). Kept the note for a month then paid it off since I don't like having debt. Well, today...I wish that I still had that note as I would have made more than that in returns had I still had the cash. Granted, it's not a huge amount of $ in the grand scheme of things, but nothing wrong w/ financing and then paying it off later if you want to.

Hindsight is always 20:20.
That's why you don't wear bifocals on your butt.

 

[bobandsherry]

Something else to consider, if you pull money out, what time will you do if you suddenly experience a large unplanned expense. Would that suddenly require you to divest investments and end up with large tax hit? I'm in similar situation as you, considered paying cash but then considered just carrying a loan and keep my $$$ invested and available should something come up suddenly. Having $30-35k available to withdraw largely tax free if needed is also drawing me to that conclusion. But may also lease if terms are beneficial. So no one right answer for oner person let alone an entire retirement forum community.

 

[ExFlyBoy5]

Something else to consider, if you pull money out, what time will you do if you suddenly experience a large unplanned expense. Would that suddenly require you to divest investments and end up with large tax hit? I'm in similar situation as you, considered paying cash but then considered just carrying a loan and keep my $$$ invested and available should something come up suddenly. Having $30-35k available to withdraw largely tax free if needed is also drawing me to that conclusion. But may also lease if terms are beneficial. So no one right answer for oner person let alone an entire retirement forum community.

That is a very good point, as well. We recently moved (twice!) and the purchase of a new home (actually about 12 years old) has resulted in quite a bit of expenditures. On top of the normal moving/relocating/closing costs expenses, we have spent close to $15K in "extra" expenses. Again, while not a TON of money, that, combined with the vehicle purchase put a pretty big dent in our cash holdings that we *try* and keep fairly low for obvious reasons.

 

[davebarnes]

Lease, While money is still relatively cheap.

Lease, because the technology is changing so quickly.

 

[Which Roger]

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.

 

[Bamaman]

It's hard enough negotiating selling prices without the factory throwing around a variety of sales incentive programs. Low APR. No APR. $750 if you finance with the mfg. captive financial company. $500 off the price if you're a member of the American Quarter Horse Association. $500 if you're fresh out of college. $500 if you're in the Armed Forces. 1.9% 36 months, 2.9% 48 months, 3.9% 60 months. And it goes on and on.

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.