10

Everybody knows "buy used car in cash" is the generally accepted, financially sound decision, but let's assume one wants a nice, fresh, brand-new car.

Given:

  • Car is $30,000. All-in (inclusive of taxes, fees, etc.)
  • You have $30,000 unencumbered cash on hand.

A.) Buying cash, you'll get a $2,500 incentive; You'll only shell out $27,500 total.

B.) Financing for 84-months 0.9% means you'll lose $1,100 on interest and you don't get any cash incentive/discounts.

C.) Lease for 60-months 0.9% means you pay significantly minimal monthly $ for the car. You'll lose some money on interest, get limited mileage allowance, pay some money at the end of the lease and not get anything afterwards.

Most people will say "if you can't pay cash, you can't afford the car." But can't one make that $27k EARN more than 0.9% (and hopefully more than the cash incentive) over the course of 5 or 7 years when you opted to finance or lease the car, while driving a new car and having minimal repair/maintenance costs?

  • 4
    @Fattie "For $450 you can buy a car that is in every way better than the $30,000 car" This statement is highly suspect. Can you overpay for a new car? Yes. Will an old car need more repairs than a new car? Yes. Is the increased cost of maintenance going to be offset by the decrease in initial price? Depends. – Grade 'Eh' Bacon Jun 20 '17 at 18:34
  • Grade, the repairs on an old car are tremendously cheaper than on a new car. (You often hear a sort of myth that "old cars cost more"; nonsensical.) (Brand new cars usually have a vague warranty for 12 months or so, but the price is not even in the ballpark of a simply $450 used car. You can simply buy again say, fifty, or one hundred, of the $450 used cars. The idea that new cars! have a warranty! is one of the more remarkably silly "freakonomics" things out there. So, for 30, 40 or 70 thousand bucks, you get to avoid a .... $500 cost, which likely won't come up anyway.) – Fattie Jun 20 '17 at 20:17
  • Note too that brand-new cars, have, the enjoyment of that "totally fresh" feel. That's fair enough. It's perfectly rational that that is a benefit (even if it's completely silly). But note that if person A buys a new $60,000 car and person B buys a $500 used car, in say 18 months they both have ......... an utterly crappy used car. (Going back to repairs, both are now exactly liable for the identical totally random risk of hugely expensive ("thousands") repairs.) {Except those random repairs, if they happen, are actually much higher priced generally on the $60,000 car.} – Fattie Jun 20 '17 at 20:20
  • As quid mentions also, "don't even mention" the insurance cost on a new car, it's insane. (With normal cars - ie, $500 cars - you never insure them; just the legal minimum third-party.) The insurance cost of a "new car" is epic. – Fattie Jun 20 '17 at 20:26
15

Dealer financing should be ignored until AFTER you have agreed on the price of the car, since otherwise they tack the costs of it back onto the car's purchase price. They aren't offering you a $2500 cash incentive, but adding a $2500 surcharge if you take their financing package -- which means you're actually paying significantly more than 0.9% for that loan!

Remember that you can borrow from folks other than the dealer. If you do that, you still get the cash price, since the dealer is getting cash. Check your other options, and calculate the REAL cost of each, before making your decisions. And remember to watch out for introductory/variable rates on loans!

Leasing is generally a bad deal unless you intend to sell the car within three years or so.

  • 2
    Yes, with financing, you're paying more with $2,500 and the 0.9% interest than paying cash. Which means over 84-months, you're paying about $3,600 more than if you shelled out $27k all at once. – Silver Dollar Nov 3 '14 at 17:42
  • 5
    Another take: using the dealer's financing plan, you're paying 3.48% interest on a $27500 loan.. – DJohnM Nov 3 '14 at 21:01
  • 2
    Thanks for calculating the actual APR, @User58220. That illustrates the issue nicely. Admittedly 3.5% interest isn't all that bad, historically -- but that's the number one should be using when comparing the options. And make sure you know whether that's a variable-rate loan and how much/how quickly it can increase! – keshlam Nov 3 '14 at 22:13
11

If you want the new car, pay cash for it. Here's why:

  1. By paying cash for the car, you immediately save $2,500 off the price of the car. That is not insignificant, it's 8.3% off.

  2. By paying cash, you'll never be upside down on the car, and you can sell the car anytime you want.

  3. You said that all you need to do is beat the 0.9% interest rate with your investment to come out ahead. That doesn't take into account the discount you would have gotten by paying cash. $30,000 invested for 5 years at 1.6% (rough estimate) would get you $2,500 (the discount), so the rate you need to beat to come out ahead is actually 2.5%. Still doable, but it is much less of a sure thing on a 5 year investment, and much less worth the trouble.

  4. New cars are an expensive luxury. If you are wealthy enough, a new car certainly can be appropriate for you. However, if you don't like the idea of paying $30k in cash all at once, that is a strong indication that perhaps the new car is a luxury you aren't in a position to buy at this time. Borrowing the money and paying for it over time makes it psychologically easier to over spend on transportation.

6

While this question is old and I generally agree with the answers given I think there's another angle that needs a little illuminating: insurance.

If you go with an 84 month loan your car will likely be worth less than the amount owed for substantially all of the entire 84 month loan period; this will be exacerbated if you put zero down and include the taxes and fees in the amount borrowed. Your lender will require you to carry full comprehensive/collision/liability coverage likely with a low maximum deductible. While the car is underwater it will probably also be a good idea to carry gap insurance because the last thing you want to do is write a check to your lender to shore up the loan to value deficit if the thing is totaled.

These long term car loans (I've seen as high as 96 months) are a bear when it comes to depreciation and related insurance costs.

Month        Principal       % of Principal
           Outstanding         Outstanding
  1         30,000.00              100% 
 13         25,829.08               86% 
 25         21,620.48               72% 
 37         17,373.83               58% 
 49         13,088.81               44% 
 61          8,765.07               29% 
 73          4,402.25               15% 
 85             (0.00)               0%

There is more to this decision than the interest calculation.

Obviously, if you had the cash at the front of this decision presumably you'll have the cash later to pay off the loan at your convenience. But while the loan is outstanding there are costs beyond interest to consider.

3

One part of the equation that I don't think you are considering is the loss in value of the car. What will this 30K car be worth in 84 months or even 60 months? This is dependent upon condition, but probably in the neighborhood of $8 to $10K.

If one is comfortable with that level of financial loss, I doubt they are concerned with the investment value of 27K over the loan of 30K @.9%.

I also think it sets a bad precedent. Many, and I used to be among them, consider a car payment a necessary evil. Once you have one, it is a difficult habit to break. Psychologically you feel richer when you drive a paid for car. Will that advantage of positive thinking lead to higher earnings? Its possible.

The old testament book of proverbs gives many sound words of advice. And you probably know this but it says: "...the borrower is slave to the lender". In my own experience, I feel there is a transformation that is beyond physical to being debt free.

  • 6
    Depends on the individual. Accepting a debt doesn't bother me if I have good reasons for doing so and know that I can, if necessary, pay it off quickly. It's a sharp tool that has to be handled carefully and used wisely... but if you know how to treat it with respect, and when NOT to use it, it can serve you well. "Money, like fire, is a good servant but and a poor master." – keshlam Nov 3 '14 at 21:42
  • 2
    "Depends on the individual" - on the contrary. It depends on nothing except mathematics. Debt used to purchase an asset (i.e. something that generates cash) such as perhaps an oil pipeline, is a wonderful thing. (Indeed, that's how rich people live.) Debt used to purchase nothingness (a "new car", a suit, a Labradoodle) is the epitome of poverty, and how the poor are kept poor. – Fattie Jun 20 '17 at 20:30

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.