Cash or loan

[pb4uski]

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.

 

[DROPOUT]

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

 

[marko]

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.

 

[REWahoo]

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...

 

[Meadbh]

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!

 

[Midpack]

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):

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!

 

[Souschef]

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?

 

[RE2Boys]

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.

 

[pb4uski]

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%.

 

[Bestwifeever]

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?

 

[pb4uski]

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.

 

[pb4uski]

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).

 

[bclover]

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

 

[Trawler]

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.

 

[woodguy00]

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.

 

[Texas Proud]

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....

 

[pb4uski]

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.

 

[Bestwifeever]

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.

 

[Del Q]

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.

 

[cyber888]

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.

 

[pb4uski]

I hear you... and that is what I am weighing...but on the other hand that $540/year will pay for a good bunch of dinners for me and DW at our neighborhood watering hole and it could be more... or could be less.

 

[Animorph]

We financed DW's last two cars with 1% to 2% loans. No hassles that I remember. Once it was set up for auto-debit from a checking account there was nothing else to do. One loan started in 2001, I think that car was about 50% off or more when I subtract investment gains from the price. The second one I didn't track as carefully, but the loan started in 2009 so I'm sure that was a cheap car too. Got to break DW of that recession car buying habit!

As a one-time short-term thing I'd do what is easiest for you. If you have opportunities to do this more often your average results have a better chance of being positive.

 

[walkinwood]

Do the deal! Like you said, if your portfolio didn't return greater than 1.9% (it actually has to return less because of compounding), it won't be a big deal.

This way, if it works out, you'll feel great about it and have a good story to tell. And like you said, what's the point of pinching pennies if you let a big deal get away because of a little risk.

It seems to me that you're trying to get enough reasons NOT to get the loan. I believe that there comes a time when you've expended enough effort into a decision that you should just go with it. Sometimes it works, sometimes it doesn't, but you know the outcome.

 

[Jerry1]

Not sure of your retirement portfolio, but here's another consideration I've been considering. Let's say you were living pretty lean and are under the 28% tax bracket. It's possible that taking the entire amount from a tax deferred account will cause a 28% tax consequence. Where if you are about $6000 under the highest tax bracket ($30,000 car divided by 5 year loan), you could keep from having to pay the higher tax bracket on the money you need for the car.

Of course, this is probably not something that most will have to be concerned with but it's a possibility that's not too far fetched.

 

[walkinwood]

Can you put the car payment on a credit card and pay in full at the end of the month?

There's a citi card that gives you 2% cash back.