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Curious to hear about your experiences financing – did you take a car loan? How was that process?
I've paid cash, leased, and financed. Unless you have poor credit it usually makes no sense to pay cash. You'll likely end up paying more if you use cash. Lots of instructional videos out there explaining why. Between leasing or financing, you have to do the math on the particulars of the loan. In any case, it's just a matter of filling out some paper work. I purchased my most recent car online, filled out some loan paper work online, and then signed a couple of forms when the car was delivered to my home. It was incredibly painless. The $70K I paid for the car is still sitting in an investment earning nearly 10%, and my loan is 2.99%. I would have been an idiot to pay cash, but I can't deny the psychological benefits of paying cash. My last new car (before the most recent) was $85K. I put down $30K and financed the rest. After a few months, I couldn't stand the thought of having a loan, so I paid off the balance with cash. It was a dumb move financially, but I couldn't help myself.
Our passbook savings is in credit unions, currently paying only 1%, but that's still a lot better than paying out the average car loan interest rate of 5.61%.
Cash wins if you have it. Most people don't, especially when they start out in life.
30,000 purchase: 3K down and 60 months financing 27K gets you a payment of 517$ X 60 = 31,020. So you paid 4,020 in interest. Total = 3K down + 31020 = 34,020.
28,000 cash purchase: Cost you 28,000 + the 1% per year for 5 years. That's 280 X 5 = 1400. Total cost 28,000 + 1400 = 29,400.
But most people simply do not have that option. We all gotta do the best we can...
Regarding the bolded, I usually avoid the "I finance cheap and invest" or "I pay cash all up front" arguments as I find them pointless, but I saw something worth mentioning.
They depreciate the same, whether you pay 100% cash, finance 100% or some balance between the two of them.
The "I finance 100%" side does miss the very real possibility of having your back against the wall and being upside down in a car, and needing to get out of it. Oftentimes, when it rains it pours, and when you're looking at getting out of the car you're doing so because life has served you a turdburger in other venues as well; the big 3 are job loss, major medical event, Divorce/custody battle but there are others to be sure.
If you don't finance more than 80% of the car's value it's way easier to stay ahead of it; you aren't dipping into savings/investments at a time when they're more important than ever or having it repo'd since you've kept the car as long as you can since you need a car and couldn't get out of it.
Quote:
Originally Posted by Listener2307
That's the biggee, right there. If you finance 100% of a new car you are going to be upside down for many, many months.
It may be no big deal. But if some sleepy dump truck driver takes out your 3 month old Hupmobile while it is parked at the curb, you could be out a lot of cash. You just spent 30K, you owe 29,750 and the insurance company is telling they will pay 25,000 because it depreciated and you have a pretty high deductible.
That used CR-V you almost bought suddenly looks pretty good.....
The "finance 100% side" people are those who actually have the cash and credit to decide, so the discussion of "back against the wall" or coverage does not really apply, because the person is going to have the cash to cover these issues.
Cash wins if you have it. Most people don't, especially when they start out in life.
30,000 purchase: 3K down and 60 months financing 27K gets you a payment of 517$ X 60 = 31,020. So you paid 4,020 in interest. Total = 3K down + 31020 = 34,020.
28,000 cash purchase: Cost you 28,000 + the 1% per year for 5 years. That's 280 X 5 = 1400. Total cost 28,000 + 1400 = 29,400.
But most people simply do not have that option. We all gotta do the best we can...
Cash wins only if you have very poor credit and have to pay a high interest rate. Otherwise, the lost opportunity costs of using cash more than offsets the interest paid on a loan.
The "finance 100% side" people are those who actually have the cash and credit to decide, so the discussion of "back against the wall" or coverage does not really apply, because the person is going to have the cash to cover these issues.
100% agree. However, people who claim that paying cash is always the best option need to include lost opportunity costs in their calculations.
Explain to me what's mental about not being able to sell a car because its value exceeds the note on it?
It is no longer mental when it's a monthly expense causing real financial strain.
True story, from someone I know well...2 cars in the family, one older/paid for, one new/financed. One mostly commuted on the train, he had the older car, the other had a normal commute.
Emergency fund funded, 6 months of household expenses. They get pregnant; long story short, there's a long stay in the NICU, followed by her not being able to work for an extended time period. Lots of bills, less income, and three months later, the savings account has been chewed through by out of pocket max and other stuff, there's less income, and these mostly responsible, planning types are looking at basically taking penalties for 401K or IRA early withdrawals to get rid of the car that they no longer need (She isn't working during the day, he's commuting.)
It can be a lot simpler than that...a job loss, etc...
It is a mental issue because the discussion is between cash or financing, meaning a person has a choice. You cannot seriously think a person that has $30k cash to spend on a car is going to be all of a sudden worried they are going to be underwater on a loan if they finance. It makes zero difference to that person unless they go to sell it, and the results are ultimately the same, they will get less than either they borrowed or paid, one of the two.
At least financing gives more liquidity for using cash for other things instead of it being all tied up in a car.
Cash wins if you have it. Most people don't, especially when they start out in life.
30,000 purchase: 3K down and 60 months financing 27K gets you a payment of 517$ X 60 = 31,020. So you paid 4,020 in interest. Total = 3K down + 31020 = 34,020.
28,000 cash purchase: Cost you 28,000 + the 1% per year for 5 years. That's 280 X 5 = 1400. Total cost 28,000 + 1400 = 29,400.
But most people simply do not have that option. We all gotta do the best we can...
$30k invested in stocks with an average dividend yield of 7.5 equals $2250 in dividends every year plus you keep your $30k which has the opportunity to appreciate with the general stock market. After 5 years that’s a total of $11500 you would have had had you not wasted it paying off a car.
It cost you $11500 while you were trying to save $4000 interest.
Paying cash makes no sense if you have a lot of cash as that money can be making more money elsewhere.
Paying cash make no sense if you don’t have any money because you don’t have money for down payment and you don’t emergency funds to fall back on.
Like it or not, many must finance so let us try and advise them how to get hurt the least:
1. Dealer offered finance deals come at a price. Typically the lower the finance offer, the more they will stack optional cost items on and the less they will deal on the bottom line price. Like 0% financing.
2. Typically the least painful financing will be offered to you from a credit union and maybe a bank. Arrange for such a head of time and never let the dealer know this. When asked how you are going to pay, say we will discuss that when we arrive at a price I like.
Come on people. Let us help those that must finance.
Cash wins if you have it. Most people don't, especially when they start out in life.
30,000 purchase: 3K down and 60 months financing 27K gets you a payment of 517$ X 60 = 31,020. So you paid 4,020 in interest. Total = 3K down + 31020 = 34,020.
28,000 cash purchase: Cost you 28,000 + the 1% per year for 5 years. That's 280 X 5 = 1400. Total cost 28,000 + 1400 = 29,400.
But most people simply do not have that option. We all gotta do the best we can...
Nice to have options then pick what wins. I put $5k down, don't know if I needed to, financed the rest at 0% so I paid $1,000 in opportunity cost of taking the 0% instead of the $1,000 on the hood and then paying it off the first month. I can't remember what the interest rate was, over 4.25 which I had through the credit union so either pay it off with the credit union loan or cash. 0% for 60 months was a better deal than $1,000 cash on the hood using a 4 percent discount factor though.
Certainly nice to have options, but just because you can pay cash doesn't mean it's the best option. The 0% and .9% were less common up at least until COVID and then the deals kind of dried up since manufacturing shut down for a few months. Don't think they're really out there. 0% was on pretty much everything when I bought. Now Toyota has 0-1.9% on left over slower selling leftover inventory.
Our passbook savings is in credit unions, currently paying only 1%, but that's still a lot better than paying out the average car loan interest rate of 5.61%.
Only 1%? That is a heck of a high rate currently on passbook savings. My credit union is currently 0.05% on savings. 1% is the highest they are currently paying on any deposit account, and that is a 7-year CD.
Quote:
Originally Posted by Ziggy100
$30k invested in stocks with an average dividend yield of 7.5 equals $2250 in dividends every year plus you keep your $30k which has the opportunity to appreciate with the general stock market. After 5 years that’s a total of $11500 you would have had had you not wasted it paying off a car.
It cost you $11500 while you were trying to save $4000 interest.
Paying cash makes no sense if you have a lot of cash as that money can be making more money elsewhere.
Paying cash make no sense if you don’t have any money because you don’t have money for down payment and you don’t emergency funds to fall back on.
One thing you need to consider, though, is that if your investment is paying a $2250 annual dividend, that is also subject to Federal Income Tax, in most cases. Maybe even State, also (depending on your State).
Let's say your top marginal tax rate is 24%. So your tax on that $2250 annual dividend is $540. X 5 years that amounts to $2700 income tax. Interest on consumer loans isn't deductible, so taking out the loan effectively cost you an additional $2700 total in taxes, in this example. YMMV depending on your particular income & tax liability situation. Still come out ahead on the financing, just may not work out quite as well, if you look at the big picture.
I find there are usually four assumptions that are made that often may not be true when calculating the total savings when financing vs. cash:
1. Buyer will finance 100% of the sales price.
2. The amount of additional monthly income a cash buyer would not have committed by not financing is
not accounted for, i.e., assumes it will just be spent on other things, and not invested.
3. No factoring of income tax impacts of the annual investment earnings.
4. Money not spent on the purchase by financing instead, will not be earning below-average returns during
the loan term.
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