Why not pay in full upfront for a car?

Question

I assume the following 3 hypotheses, which doesn't duplicate and instead only narrows https://money.stackexchange.com/a/38838/10763, https://money.stackexchange.com/a/15812, https://money.stackexchange.com/a/21617, https://money.stackexchange.com/a/39314.

1. The car is only intended for daily commuting purposes in a major Canadian city (eg Toronto or Montreal). I expect snow but nothing off-road (I'll avoid driving during a blizzard).
2. My interest in cars is purely utilitarian; I intend to drive it for as long as serviceable (until it fails or a maintenance incident outweighs the costs)
3. I can pay in cash the total cost of the car now upon receiving the keys from the dealer.
4. I'll try a brand that offers lower maintenance and upkeep costs (eg Honda, Volkswagen?)

The many answers in the linked questions above suggest that the best choice is to settle the cost of car outright and fully. Yet for want of a balanced view, are there any sound counterarguments? Or do my hypotheses categorically imply an answer?

Answer 1

In general I'd say, yeah, if you can pay cash, pay cash. If you pay cash, then by definition you pay zero interest. If you get a loan, you'll pay interest.

Most people get a loan to buy a car because they don't have the cash.

Possible reasons not to pay cash when you could:

One: Technically you can pay cash, but if you did, you would have little or no reserve for emergencies. Like if the car costs, say, $20,000.00, and you have $20,010.00 in your bank account, then technically you could afford to pay cash, but you probably shouldn't, because you don't want to have just $10 left. What if tomorrow something comes up?

Two: Arguably, you have a place to invest money that pays more than the interest on the loan. Like say you can get a car loan for, whatever the going rate is today, say 6%. And you know a place to invest your money that is very safe and almost guaranteed to pay 10%. It would make sense to borrow to buy the car, invest the cash, and then withdraw money from the investment to make the payments on the car. You'd end up 4% ahead.

There are a lot of catches to that strategy, though. The biggest is that the more the investment pays, the more likely that it is risky. If you thought the investment would pay 10% but it ends up paying only 4%, then you will lose money by this strategy.

Also, there's the psychological element: Many people SAY and fully INTEND to invest their money, but then find other things they want to buy and so spend it instead. If you pay cash, you're committed.

Answer 2

Possible (unlikely) reasons:

• You could pay in cash, but have limited amounts of cash, and better uses for it (e.g. emergency fund, unique investment opportunity).
• You can get an exceptionally good financing deal where you're effectively paying no interest. This can occasionally happen when a dealership is strongly incentivized by their financing partner to sell loans, e.g. because some manager's bonus depends on hitting a number-of-sold-loans target. But of course, any proficient salesman will try to convince you that a perfectly normal full-rate loan is actually such a once-in-a-blue-moon special offer (see comment).

But usually, yeah, if you can pay cash, you should.

Answer 3

You need to do the maths exactly. The cost of buying a car in cash and using a loan is not the same. The dealership will often get paid a significant amount of money if you get a loan through them. On the other hand, they may have a hold over you if you need their loan (no cash, and the bank won't give you money).

One strategy is that while you discuss the price with the dealer, you indicate that you are going to get a loan through them. And then when you've got the best price for the car, that's when you tell them it's cash. Remember that the car dealer will do what's best for their finances without any consideration of what's good for you, so you are perfectly in your rights to do the same to them.

Answer 4

Two adages come to mind.

• Never finance a depreciating asset.

• If you can't pay cash for a car, you can't afford it.

If you decide you can finance at a low rate and invest at a higher one, you're leveraging your capital. The risk here is that your investment drops in value, or your cash flow stops and you are unable to continue payments and have to sell the car, or surrender it.

There are fewer risks if you buy the car outright. There is one cost that is not considered though. Opportunity cost.

Since you've declared transportation necessary, I'd say that opportunity cost is worth the lower risk, assuming you have enough cash left after buying a car to fund your emergency fund.

Which brings me to my final point. Be sure to buy a quality used car, not a new one. Your emergency fund should be able to replace the car completely, in the case of a total loss where you are at fault and the loss is not covered by insurance.

TLDR: My opinion is that it would be better to pay for a quality, efficient, basic transportation car up front than to take on a debt.

Answer 5

There many car loans at zero percent interest.

Finance the car at zero percent, then take your money and invest it. If you want to be super safe buy a CD the same length as the car loan. 5 years you will get 2%. If you still want safety and a better return take up a asset allocation strategy that moves your cash to risky assets when the market is performing well, then to cash, bonds, or cds when the market under-performs.

Now you have your car with a zero percent loan and you are making the return on the money instead of the car company.