Should You Pay Cash for a Car?

I’ve seem my mom buy her last two cars in cash and been frustrated by the decision – what’s worse is they were new! I would have gotten the loan and paid off more than the minimum each month so as to reduce the interest on the car as well as get rid of the balance faster. But would have used the rest of the money to either pay down a higher interest mortgage or invest.

I had the same decision a year ago. I bought a 2003 Mini Cooper from a private seller for $10,000 after tax. I put down $2000 and financed the rest at 2.9% at my credit union. Since I didn’t yet have enough savings to buy the car outright, I think I have the deal of the century – the low interest means that the interest I pay every month is so low that I hardly feel it.

I also know that if at any time I just can’t stand the loan another minute, I can sell the car. Consumer Reports recommended putting 20% cash on any used car to cover tax and fees (10%) and a bit of depreciation. You’re unlikely to be upside down that way.

At the same time, my mom (who has enough money for anything she wants) bought a new $42,000 SUV. (She’s frugal and she’s also 90. Her philosophy right now is, hey, I’ve always wanted a new car and I can afford it so why the hell not?) I asked her why she didn’t finance it since interest is so low, then invest what she would have spent on it, and pocket the difference, and she said she didn’t want to drive a car the bank technically owned. I think buying a car is just an experience she wanted done and gone.

Your credit has a huge play in this question as well. If you have really good credit there is no reason not to finance. If you have EXCELLENT credit you can even purchase a brand new Toyota right now with 0% apr for 5 years. If you don’t have to pay any interest on the loan, why not span it out and not shovel all of that cash out? People with good credit that use it wisely always end up paying less for many things and pay for them over small spans of time.

I would have paid cash and for sure not of invested in the market with borrowed money, even in the index fund. Plus just keep it simple And not involve any loans /banks. I am with husband on this one.

Nothing wrong with skipping the debt from psychological reasons – sending monthly checks to multiple banks might be a bit distracting from your goal of passing Ted Turner in land ownership. It may not be mathematically ideal, but it’s not a world-ender (else you could yell at bloggers who don’t have a loan for not leveraging themselves enough).

Oh, I should mention – that’s a great podcast!

YEAH PAULA & WILL!
That’s awesome that Will replaced his stolen car, and in the process you decided to “upgrade” too.

I’m with Will on this one; especially considering that I am currently, NOT in a position to pay cash for the type of car I want (Benz), so anybody who can, I say, “More power to you!” Also, It’s also difficult to have a car payment when you haven’t had one for a long, long, long time. Prior to me purchasing my Accord in 2002 (Brand New…note, I won’t ever do that again); I hadn’t had a car payment for over five years, and currently, that Accord was paid off in 2007, so I haven’t had a car payment in 6 years, and can’t even fathom.

I am in that camp of: the fewer bills to have to pay out every month, the better…for me, anyway.

I would have taken the car loan as well. But it’s only 10k, so in the big picture (of your financial independence) it’s not going to make a huge difference either way. If you were doing this every month (leaving money on the table) that’s another thing. It’s a small price to pay for your boyfriend’s peace of mind, and it’s not like it’s completely stupid to pay cash for a car.

I would take out a car loan and use the cash to pay down the mortgage. With this option, the rates are fixed and I could be certain that I’m paying less interest this way.

Maybe I’m biased against the stock market. The thing is, historical rate of return is just that: something that has happened in the past and may or may not happen again.

But I can also see how having two fewer loans to worry about bring the sort of value that’s unquantifiable. I know I hate having to keep track of due dates.

I love how you are both such “financial nerds” (your words, not mine) that your arguments even mirror one of the most common ones in the PF circles.

I’m a little surprised at you buying cars with such high mileage. Won’t they cost you a lot of time, money, and aggravation if they start breaking down a lot? Don’t get me wrong, I always buy used cars, but I usually won’t go over 50,000 miles because any time I let a car go over 100,000 miles, they start costing me a LOT in repairs. I mean, there are so many parts in a car and as they all get older, they start wearing out. I try to pay cash for cars also just because I hate car payments, but the argument does make sense on the interest rates.

Paying cash for a trivial asset like a $10,000 car is the correct answer and here’s why:

1. While 2% come-on APR loans are technically available, they are available for NEW CARS only, and only if you have an immaculate credit score, and often if you forgo rebates. For used cars, they are a lot harder to get – particularly for anything over 5 years old.

2. The savings in interest (which would actually be more than 2% due to compounding) is a GUARANTEED SAVINGS, like a government-backed bond. When you compare this to a speculative investment, like stocks, you are comparing apples and oranges.

3. The stock market does go down (remember 2008?). So if you borrowed money to buy the car, and then “invested” the $10,000 in stocks, there is a chance that 3 years later, when the loan is paid off, your $10,000 is worth LESS, and you come out behind. This is, on a small scale, what homeowners did in the 2000’s – borrowed money to buy a house, which went down in value, and invested their cash in stocks. They ended up broke.

4. Chances are, you won’t put the $10,000 into anything. These “opportunity cost” arguments are made by car salesmen all the time. But the upshot is, the buyer usually doesn’t have the cash anyway, so they borrow money and DON’T put anything into savings. The vaunted 5% delta investment strategy thus never has a chance to take effect.

5. Paying CASH for a car forces you to make hard choices. When borrowing money, everything is on monthly terms. Go to a car website and see. A $3000 option package is touted as “only $25 a month!” (leasing, of course!). So it is easier to spend more on a car, and not be concerned with the bottom line. When you pay CASH, your priorities change rapidly, and suddenly the panoramic sunroof and leather-trimmed seating surfaces don’t seem that important.

Debt-free is the way to be. You can’t borrow your way to wealth, just as you can’t spend your way to wealth. And you can’t deduct your way to wealth either.

Sadly, most Americans try all three – and wonder why they are broke!

A real miser would have just bought a $3000 car and kept $7000 to spend on insurance and gas.

Just pay the car in cash and be done w/ it. I hate having payments.

I’m going thru the dilemma now of paying off my mortgage vs. going the normal route.

Ok, here’s what we’ve done in the past. My wife and I have owned many cars both new and used. We always weigh the options when making the decision. We recently bought a new CUV and found new and one year old models had substantially better fuel economy and safety features than older models and the prices weren’t that much different. My wife’s commute is 60 miles a day so a reliable, safe car is a must. The car we sold (not traded) to make room for this one was a 9 year old Honda Accord with 160K miles on it. It was still a great car the day we sold it but she needed an automatic transmission. We have two other cars I switch between with 140K miles each on them. My commute is 40 miles each day.

In 2001, I bought a new truck (we still have it). At the time, trucks held their value incredibly well and you couldn’t save money buying a used one. I was also driving 30K miles a year for work at the time. The truck was offered on a 36 month 0% loan. We took the loan and paid off our home mortgage with the money we had saved for the purchase and the proceeds from selling (not trading) our old car. We essentially refinanced our 6% mortgage to 0%.

Between 2001 and 2013 we bought two other cars, initially taking out low interest loans and then paying the loans off within a few months. We still have one of the cars bought in 2004. In 2013 when we bought our most recent car, we were offered a 36 month loan at 1.9%. Since we were planning to buy a house within a year, we took the loan.

We bought a house in March and used the funds we would’ve used to buy our car to put down on the house. The mortgage is 3%. We actually saved 1% by taking the car loan. We generally can’t itemize on our federal taxes so mortgage interest deductions don’t play a role here. Also, we kept our old house making it our second rental property. The rent is more than enough to pay the 10 year 3% mortgage on our new home.

In case your’re wondering, we max out our retirement accounts and have an emergency fund. We have comprehensive on the new car and only liability on the old ones. We plan to drive them until they drop. We would’ve kept the Honda too but my wife insisted something had to go!

It just depends on whether or not you are willing to take some risks with your money. Paying cash for a used car is risky, but paying for a used car with borrowed money could be even riskier. I’m not sure what I would do in this situation, but I know that I would be hesitant to buy a used car with cash. It would probably end up needing a lot of repairs down the road.

Great concept for an article, enjoyed reading.

Thanks for sharing your thoughts about snuff.

Regards

I apologize if someone has already stated this as I didn’t read all the comments. I think the answer to this question depends on each individual. My mentor has given me a process in which we will pay cash for our cars instead of taking out a loan. For me, that works, for my wife, not so much. But, I don’t think either way is right or wrong.

Here’s my warped thinking: If I know nothing about investing, option 1 (buying with Cash) is better for me. If I choose option 2, what will most likely happen is I will get a car loan and then spend my cash on something else. So option 2 in my opinion will only work well if you are committed to keeping that cash until the loan is paid off. This will protect you from the unforeseen.

My dilemma is I like option 2 better, but as my mentor has pointed out, I should be clear of all debt (with the exception of a mortgage) before I start investing outside of my 401K.

So I think both options are good, but you have to apply them to your own situation and you have to make sure that if you take the loan option, you can cover the worse case scenario without going into bankruptcy.

Not sure if anyone has mentioned it, or if it applies in GA, but a huge consideration would be insurance. In CA at least, financed vehicles require full coverage insurance. This is a pretty huge extra bill that would likely eat away at all of your potential gains (I would assume). It was a factor I failed to consider when I “saved” money by leasing a very, very cheap car. Just my 2 cents. Love the blog!!! Found it very recently!

Wow, that seems like an overly emotional reasoning to pay cash. Also, I have to ask, do you factor in pleasure to your buying decisions? Buying a car with 90K miles on it for cheap might feel good initially, but then you’re driving a 7 year old car with 90K miles on it. You are not taking any money with you to the grave – does enjoyment never factor in?

I spend a lot on cars, and I’m sure fiscally conservative people think I’m nuts (I bought two brand new cars this year alone totalling about $430K, and I have 6 cars right now), but my family and I feel good driving them, have a lot of fun, and enjoy life. I use financing to leverage my cash. I still put down substantial amounts (on just those two I put down about $120K in cash), but financing is useful for sure. Businesses use equipment lines of credit, I use personal loans – it’s all the same. Utilizing credit to increase your spending power can be done wisely.

As an entrepreneur I don’t much think about the consumer items I buy – I buy what I want, take risks, and attempt to come out on top. That’s how real wealth is made, IMHO. Not by making sure that you go to your grave without ever having had a car loan.

On the one hand you believe you are climbing the ladder or success by being super fiscally conservative, but in reality that isn’t how the wealthy make their wealth. Taking a quick look around your site, you say you’re happy being independent from a paycheck, but owning 8 properties really doesn’t make you independent. Not sure how large your mortgages are, but even if they are all paid off, you are betting on your rental income to sustain you (and your management team). You’ve traded one set of shackles (a boss at a job in a cubicle) for another (renters). A major financial event could cause the rental market to stutter. A natural disaster could cause your properties to be unusable (and unsellable). Yes, these are intangibles that, maybe, appear impossible right now, but it’s still a very real possibility.

Personally I would not want to have such potential for disaster looming overhead. Building real wealth means taking risks, which involves taking loans, which involves betting big. There is a reason that “professional gamblers” in Vegas spend hundreds of thousands a night – overall, they win big. Where Vegas wins are the conservative players who bet small, and over the course of a day, or week, eventually lose it all. By trying to horde and protect your assets, you ultimately lose it all.

Anyway, if driving old cars that you spent very little on in cash makes you happy, that’s fine. But to say that loans (and other financial instruments) are crazy, then I guess everyone from Bill Gates on down are crazy (along with every major company out there too).

Thanks!