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I just graduated and will be starting a job in a week at a salary of $65,000. After accounting for retirement savings and taxes, I should bring home about $3,500 per month.

Unfortunately, my 8 year old car with 177k miles on it has a transmission related issue, and the several dealerships and automotive garages I've checked with can't even find the available part needed to order. At this point I am considering just purchasing a reliable used car that I can drive for at least 5 - 7 years.

I have $90k in savings, and will be living with my parents. I know that just starting a new job I don't have any real job security, but buying a car is the only option that makes sense to me. My initial budget was no more than $10k for my next car, and with a 3% APR 60-month loan would be about 5% of my net income.

I had originally planned to just pay cash, but I've had people tell me to just take the loan and pay the interest. I have a credit score of 750, with a 3-year credit history.

I've already checked out: Buying my first car out of college

Should I take out the loan vs. paying cash? What is the advantage of the loan?

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    How much of that $90K is your emergency fund? (Not that you'll need much when living with parents, but it's good to put some aside so that you aren't tempted to spend it, and will have it when you do move out.)
    – RonJohn
    Commented Dec 29, 2017 at 16:19
  • @tpm900 The answers given are correct given the assumption that 3% is the best rate available; there is no reason to pay interest if you have the liquidity to buy a car outright. However you should consider that right now the automakers are frequently offering 0% financing to people with good credit; you should be able to find a decent brand new compact within or slightly above your budget -- you also get warranty protection and possibly some free oil changes etc, while also keeping your cash invested somewhere more profitable. This way you can sorta have your cake and eat it too...
    – jkf
    Commented Dec 30, 2017 at 20:57
  • What form is the $90k in? If it's in a bank, then there's good news and bad news. The good news is that you can easily use a portion of it to pay for the car. The bad news is that bank interest is insanely low right now, so you're forgoing a very large amount of money that you could get by investing at least some of it. On the other hand, if the $90k is in some other form, such as stocks, then you have to look at the hassles, tax complications, and such involved in liquidating some portion of it.
    – user13722
    Commented Dec 30, 2017 at 21:23
  • @BenCrowell half is earning 2.2% interest in a CD. The rest is earning .4% interest, except $500 of it is earning 7% interest - gotta love credit unions.
    – tpm900
    Commented Dec 31, 2017 at 1:06
  • Excellent advice in the accepted answer. I'd only add "never borrow money to buy a depreciating asset."
    – pojo-guy
    Commented Dec 31, 2017 at 19:20

9 Answers 9

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You are in great shape. Very few people have 90k in savings at any age, let alone coming right out of college.

The question you checked out, really does not apply to you. You are making a conservative choice with the car, so there is no problem there. A 10K car will be a small portion of your net worth and will not depreciate as rapidly as a new car or by as much. Your salary and likely investments will easily eclipse any depreciation suffered.

Given your credit score, I can see no logical reason to take a loan. Some people would advocate taking a loan to improve your credit score, but I find that pretty darn silly. Even they would admit, that a 10K auto loan would not likely increase your score beyond 750. Also much beyond 720 or so, it is just vanity, any such person qualifies for the best loan rates provided sufficient, stable income.

Buy the car and pay cash. Also I would move out of your parents home.

You have achieved a level of greatness with such a salary and such a savings account at such a young age!

Oh, don't listen to broke people when taking financial advice, such as your friends that are telling you to get a loan.

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    I second all of @Pete's statements. Fabulous advice. Wealthy people don't care about their credit score; they care about how much money they have and how wisely they spend and invest it.
    – rocketman
    Commented Dec 29, 2017 at 16:46
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    @Pete thanks for the great advice! I'm curious about your reasoning to move out of my parent's home though. Could you elaborate on why? I'm in the Northeast so property values and rent is a bit higher than elsewhere. I figured I could save the $1k+ a month I'd be paying to rent a small apartment, and instead put that towards buying a home some day.
    – tpm900
    Commented Dec 29, 2017 at 19:10
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    "don't listen to broke people when taking financial advice" ....so, so true!
    – Ogre Psalm33
    Commented Dec 30, 2017 at 17:37
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    @tpm900 you can have the car brought to a mechanic you trust to have it checked out before you buy it. Any seller that is being honest will have no problem with it. A car from a used car dealership is just as likely to have hidden problems.
    – Kat
    Commented Dec 30, 2017 at 19:37
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    @tpm900, don't listen to the naysayers. Live with the parents and bankroll the cash. If you're comfortable where you are at then stay there, otherwise you'd just be pouring money down the drain because some stranger on the internet told you not to live with your parents.
    – James
    Commented Dec 31, 2017 at 0:00
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What is the advantage of the loan?

Keeping yourself liquid.

Find an auto loan calculator (like https://www.onlineloancalculator.org/), punch in the numbers, and decide whether or paying that amount of money to someone else is worth your liquidity.

In my opinion, though, with that much money, even a $14K car (really $15K with sales tax) isn't a big enough hit on your savings to worry about liquidity. Thus, I'd pay cash.

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    You would consider 80k in savings non-liquid?
    – Pete B.
    Commented Dec 29, 2017 at 16:34
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    @PeteB. loans are a good way to keep yourself liquid. But it appears that you did not read the last paragraph, where I specifically wrote that he had enough savings not to worry about liquidity.
    – RonJohn
    Commented Dec 29, 2017 at 16:36
  • Funny the only answer that addresses OP's question about loan is getting downvoted.
    – xiaomy
    Commented Dec 29, 2017 at 19:17
  • @xiaomy: Welcome to StackExchange...
    – user541686
    Commented Dec 30, 2017 at 8:31
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    If you take a loan on the car, you'll have to take out additional insurance that you otherwise might not have which is an additional cost to consider that those calculators ignore.
    – Glen Pierce
    Commented Dec 31, 2017 at 3:53
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If you can afford to pay cash for the car, as you can, you should separate the purchase decision from the loan decision. First, find the car you want and imagine you pay cash for it. That is a realistic option. Now you have to decide whether to take out the loan. You are just borrowing some money on certain terms. These are probably better terms than you could borrow that money if it wasn't secured by the car. What will you do with the money? Maybe the interest rate is low enough that you think you can make more investing it. In that case, take the loan. Maybe you are worried that you will have a demand for cash in the future that exceeds the reserve you have left after buying the car. What is the chance of that? How much worse will the interest be if you have to borrow in the future? The interest will likely be much higher if you take it on credit cards, but in your place the chance is rather low. Based on the ads I see, a 750 credit score is good enough for anything you want to do, so improving it is not a priority. If the interest rate is silly low, I would take the loan. Otherwise, I would pay cash and replenish the cash from income. You are just paying yourself the interest that the loan would consume.

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One additional thing to keep in mind: with OP's savings, it almost surely makes sense to purchase liability-only insurance rather than full coverage. Buying a car on a loan precludes that, which means OP would be paying significantly more for insurance on top of the money spent on interest.

Aside from that, I would go so far as to say that getting a loan to buy a car never makes sense. If you have money to pay cash, you're just wasting money, and if you don't have money to pay cash, you should simply select a cheaper car. Look for something so cheap that even if it's impractical to fix you can just buy another one like it for less than the payments you'd be making on a nice car.

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  • Interesting idea with the super cheap car. One downside I see is if it breaks down, it may take time to find another car, which isn't practical if you're commuting to work every day; even if it just takes a couple days to find a new car. I'd rather have a nicer used car that I can drive for 150k miles than 15 cars I can drive for 10k miles.
    – tpm900
    Commented Dec 29, 2017 at 23:23
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    @tpm900, at the super-cheap end of things, a $500 car can be had off Craigslist in a matter of hours, and should last at least a few months even with no maintenance.
    – Mark
    Commented Dec 29, 2017 at 23:30
  • @Mark: Exactly. You can just buy an extra $500 car to have on hand, and buy another "spare" when you get down to just one left, for much much less damage to your finances than taking out a loan and buying a $8k-10k car would do.
    – R.. GitHub STOP HELPING ICE
    Commented Dec 29, 2017 at 23:50
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    Huge fan of the "super cheap car" concept. Knowing how to fix cars becomes a huge multiplier. A lot of cars are super cheap because what's wrong with them is a trivial repair the owner just lacks the confidence to fix. It also helps if they are manual transmissions, because automatics fail in very expensive ways, and manuals generally don't - clutches fail but a clutch swap is much cheaper and fairly DIYable.
    – Harper - Reinstate Monica
    Commented Dec 30, 2017 at 23:55
  • You can also adjust your definition of "a nice car". That is, if your main goal in buying a car is to impress people with your fancy wheels, you pretty much have to spend a lot of money. (Whether many of them will actually be impressed is another question :-)) But if you're just into practicality and/or enjoyment... Well, I get a lot of enjoyment from the 15 year old Miata that I paid $2500 for, and a lot of practical use from the $2800 Toyota pickup...
    – jamesqf
    Commented Dec 31, 2017 at 19:38
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Advantage of car loans

  1. (as @RonJohn mentioned) Liquidity.
  2. They can be very cheap. My local credit union offer loan at rates lower than the rate of their high yield checking account, even after tax.
  3. YMMV, but some loan can have great add-ons such as gap insurance with deductible reimbursement. Use your own judgement though.
  4. Improve credit history.

I don't know why a lot of people on this site hate credit/loan products but I'd suggest you at least take a look at the options you have. If your bank offers you say a 1.5% loan, it's not that hard to put the money you "saved" to work and get back more.

And let's not forget, 1 dollar today is worth more than 1 dollar tomorrow.

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A reliable car is a good investment. My preference is to avoid debt for a number of reasons, and if you can buy a car for cash, that frees you up to save a lot more per month and earn the interest on that as well as giving you a good cushion, of course. If you have other ways to continue building your credit history, I'd pay the cash. However, another thing to consider is that, if you can pay that much cash, really do your research and find the right car that will last you more than 5-7 years. Don't buy it brand new, but buy a low-mileage, like-new car that will be able to grow with you for a long time. You don't have large expenses on the horizon to speak of, so I'd say, spend the money now and plan to build your savings back up. And if you need to, you can use the money you're willing to spend now as a large down payment on a more expensive car (maybe $15-20k, depending) and get a short-term loan with low monthly payments and low interest.

Tl;dr: if you don't pinch pennies now, you can have at least one car you can depend on in 10 or even 15 years when you do have more expenses and debt.

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    "My preference is to avoid debt for a number of reasons" which is?
    – xiaomy
    Commented Dec 29, 2017 at 19:11
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    Not the biggest fan of notions like "a car is an investment" and "the car will grow with you." No it won't. It will be a massive money sink and a total loss. A total loss you willingly eat, because it buys you freedom of movement if you live in places where public transit is a disgrace. A lot of "car is investment" talk is just to put a shine on that dreary predicament.
    – Harper - Reinstate Monica
    Commented Dec 30, 2017 at 23:48
  • @Harper It's not "a total loss;" it's a loss leader: something you willingly take a loss on because it helps you make greater gains elsewhere that more than make up for it.
    – Mason Wheeler
    Commented Dec 31, 2017 at 2:04
  • @MasonWheeler i would accept that for the part of the cost which is the bare baseline; the minimum avoidable cost of doing what that car does. (And by "does" I mean get your bones and your essential tools-of-trade from A to B, not "impress the ladies", "shift without clutching", "sync to the cloud" or even "be in your driveway" if ZipCar will do). Costs for more car than you really need, I call a total loss.
    – Harper - Reinstate Monica
    Commented Dec 31, 2017 at 20:06
  • @xiaomy Personal. As for the investment question, it will not return a profit to you, no. But it gives you the promise of a lengthy period in which you aren't likely to need to buy another car or pay for major servicing. During that period, it provides support for holding down a steady job that requires reliability and you have the opportunity to save money you would be spending on repairs. A car is only a massive money sink if you have the luxury of comparing it to not having a car at all.
    – kmc
    Commented Jan 2, 2018 at 20:21
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With that kind good credit and prospect of a good paying job, I would suggest you put your money in stokes and buy a car on loan since you have good security and you won't be worried about defaulting and repo, meanwhile your money will be growing interest while in stokes,try to diversify your income as much as possible, with the bounty of opportunities available these days and given your net worth, only one's imagination is the limiting factor.

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    Anyone with a car loan could be dealing with defaulting and repo due to the grossly unfair the law works in most (US) jurisdictions, whether it's due to mixed-up paperwork, an unexpected hospital stay, or all sorts of other rare but plausible circumstances. There's no reason to put yourself in that position if you don't have to.
    – R.. GitHub STOP HELPING ICE
    Commented Dec 31, 2017 at 16:19
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Never owe money on a car that's out of warranty.

Because if you do... and you have a mechanical problem... you get hit with a cash-flow double whammy: you must buy another car (or pay a huge repair expense), and also must pay off the note on this car.

The car is the loan's collateral. A broken car is bad collateral. The lender could have a big problem with that - check your contract but they may be able to call the note. This is not a mortgage: If your car is upside-down, you owe that difference to the finance company!

Collision insurance covers traffic accidents, but it does not cover mechanical problems. There is mechanical "insurance" in the form of extended warranties, but many of them are scams, or nearly so in practice.

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    "it is no longer valid collateral, and that makes the loan instantly due in full." Citation required.
    – RonJohn
    Commented Dec 30, 2017 at 23:25
  • @RonJohn Google has failed me, I can't prove it. Editing. "park and pay" is certainly an option (an expensive one), but they will know... either when you drop collision insurance (at this point they could get their own collision insurance and charge you for it) - or from their tracker never moving or shutting off. My point is, "park and pay" is not reliable.
    – Harper - Reinstate Monica
    Commented Dec 31, 2017 at 0:33
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    Do people actually put up with tracking devices installed by the lender in their cars these days? If so that's pretty much the definitive answer for "pay cash, don't finance", i.e. for this question.
    – R.. GitHub STOP HELPING ICE
    Commented Dec 31, 2017 at 16:16
  • @R.. The legality of tracking devices is a (very) gray one.
    – Rui F Ribeiro
    Commented Dec 31, 2017 at 16:25
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    @Harper Since OP's question clearly stated it's cash vs. loan, and you are aware of it, I don't see the point of extending the discussion beyond that. The rest of what you said probably belongs to another question of its own. (BTW I agree with the notion of don't borrow more than what you can afford to repay; it's just not applicable in this question)
    – xiaomy
    Commented Jan 2, 2018 at 21:54
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A car is never in investment, it is a source of a fixed expense you are buying.

The golden rule is never buying a car if you cannot dispose at least of the amount you are paying for it and never, ever, buying it on credit.

Reaching the value of plus 10k, at around that value or a little more you can already buy new cars. I would evaluate running a 2nd hand car, or buying a more simple and less luxurious new car, pristine new and know history. (A friend of mine when he bought a 2nd hand a car from "an old man", bought a car with hidden structural damage that almost killed him) A new car will also burn less gas.

Buying a new car also means money, you know you wont need repairs and new hardware/tires for at least a good 4 years, and adding that to the 10k, it means that it makes more sense buying a new car for 15k than buying an used car for 10k. [it does not mean you will spend 5k with an old car...there are other tangibles and intangibles with a new car]

Take in account the deals of new year 2018, and try to negotiate giving back on your old car, and you can get very interesting deals that will save you some money. This year, in the beginning of January, I bought a new brand card at the same price I would have bought an used car in December 2016 in much similar conditions.

Word of advice, cars depreciate starting on January. You should always avoid buying a car with a plate of December.

Beware also of legalities. From ownership, fines liability from the former owner, and even mortgages/insurance, it is much more simpler buying a new car than a 2nd hand one.

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    How do you figure $5k of repairs/tires in 4 years for a $10k car? I haven't spent nearly that much on repairs and tires for my 26-year-old car in the 8 years I've owned it.
    – R.. GitHub STOP HELPING ICE
    Commented Dec 31, 2017 at 16:13
  • @R.. I know you wont. I still would prefer spending +5k and having a car with a clean slate. You have 3 kinds of car in the market: those of people who upgraded, those of people who could not make the payment , and those who had some kind of irreparable damage. When buying 2nd hand, pray it was not the last.
    – Rui F Ribeiro
    Commented Dec 31, 2017 at 16:19

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