Auto Financing Options - would love an opinion

[iheartwings]

Greetings all.

I am about to buyout my lease for my 2014 BMW X3 28i. I've chosen to buy the car because I was under my mileage, and I really just love driving this car. It was made for me (literally, I ordered it with all the features and colors I wanted), and it still drives wonderful to drive. I grossly overestimated the amount of mileage I would be putting on the vehicle (I paid for 45k miles, and have less than 30k). Reviewing the KBB value for a trade in, the residual is within $1k what I would get to trade it in today. (Yes, if I had actually driven the 45k miles, the residual would have been overpriced, and it would have been an easy decision to turn in.). 

I have been working with my Client Advisor at BMW. I was prequalified for an APR 2.99% for 72 months on $32,803 (includes TTL and maintenance package extension). Frankly, I would not finance a used car for 6 years (that would be a total of 9 years for car payments, which for this vehicle isn't a good idea for me). An alternative is to go to a local credit union for as low as APR 1.99%, but this would require to open/fund a checking/savings account to get the best rate via autopay.

My options are:

1) Take the financing from BMW. There is no prepayment penalty, so I could pay ~$1000/ month, and have this paid off in 35 months.

2) Join a credit union, open another checking account, hope I qualify for the best rate, make arrangements to direct deposit my pay into account, pay ~$1000/month, and have this paid off in 34 months (assuming I could get "best" rate of 1.99%).

3) Take cash from my savings account, which earns APR 1% and just pay off the car note. Then, I could take the money I use for my car payment/insurance/etc. (~$13k/year) and put that toward replenishing savings account over the next 12 months. (This option leaves me with about $5k in cash savings, and I have about $47k in mutual funds that could be liquidated if needed in an emergency at the time my lease ends in October.).

My Auto Enhanced FICO08 scores are EQ757, TU817, EX746, if that helps. 

If anyone has an opinion, that'd be great.

I am inclined to go with option 3, mainly because I can replenish my funds in a year. I am earning less interest on this portion of my money than I would be paying on a loan, even with the best interest rate I could find locally. Financially, that seems to make the most sense (and I know I am incredibly fortunate to do be able to do this). But, on an emotional level, there is some discomfort in taking that much money out of my rainy day funds.  I would say that discomfort comes more from my SO, who feels that having a nest egg is a good idea (though paying off the car is one less debt to worry about). 

Thanks in advance. 

[Anonymous]

I would go with option 3 and pay cash.  (Though it's easy enough to float a zero interest loan for 12-21 months using credit cards.)

It depends also on how secure is your income stream.  Keep in mind if you have a short term cash flow problem, you can apply for zero interest credit cards that would allow you to put most of your daily expenses on a card, pay the min and not pay any interest for 12-21 months depending on the card.  It is sort of like a short term emergency fund, though morel like an emergency loan.

For me, it's more comfortable to not have any debt than to have a lot of cash, or at least have debt that is zero interest and flexible payment plan.  Right now I carry a balance on my credit cards, but it's at zero interest and I have more than enough cash to pay it all off, but it feels better to have the cash and just make min payments until it gets closer to having the zero interest period elapse.

You could apply for one or even two zero interest card like say US Bank cash plus, use it at near the max credit limit they give you to pay part of the car payment, say they give you 15K, pay 14K wiht the card and keep more cash around for a year or more.  Or if you get two, then that is 28K in cash on a credit cards at zero interest.  I am asusming the car dealer won't mind taking a credit card, which you would need to check first.

Your credit rating would take a hit, but it would recover as you paid down the cards, and you do get all sorts of points.  You could use the Cite Double, but I think they usually only give 9 months of no interest in the mailers I get.   2% in cash back would beat your 1% savings rate.

[iheartwings]

Thanks for the response. That makes it option 4, but I know my dealer will not take CC.

I have a couple cards still in their 0% interest periods until next year, but frankly, adding cards or floating the debt temporarily on my 0% cards just seems to make it more complicated.

I will definitely keep it in mind, though. Paying this off will leave student loans as my only debt. My job (and therefore, income stream) will remain stable for the next few years, with opportunity to have quarterly bonuses, so replenishing my stores may happen sooner than later.

[iced]

 If it were me, I'd go with option 3, but each situation is different.

All else being equal, you'll earn just over $500 per $10,000 in savings at 1% interest for the next 5 years and spend just over $600 in interest per $10,000 on a 1.99% loan. If you pay significantly over the minimum you can reduce the interest payments such that they would be less than the interest gained, but these are still pretty close. The question then becomes one of if you think it's worth keeping money in savings such that you're willing to pay a few hundred dollars in interest over the course of 5 years. It looks like you have also arrived at the same conclusion.

I also financed earlier this year with BMW (1.49% in my case), but in my case the money I could have spent on the car is in stocks instead of savings. Spending ~$550 over 5 years in interest to keep $30,000 in equities changes the math. Dividends alone would more than offset the interest, and the equity growth potential is much higher than savings. Had it all been in savings, I would have just paid cash for the car.

That said, I shouldn't have purchased it in the first place and my SO reminds me of that regularly. I made a mistake on my part because I rarely have need of a car (about 6000 miles a year) and it will cost me over $40,000 over the next 5 years. Your situation is different, of course, but my opinion/advice here is to make sure you think the car is really worth what it will cost to you. The real issue I see isn't whether you should pay cash or finance it, but rather do you think you'd rather have the ~$30,000 for the future or for a car that's fun to drive in for those occasional times when you're actually driving (which you yourself admit you didn't do nearly as much you thought).

[sccredit]

My general rule is that I can earn more on my money than the cost of financing then I go that route.  In this instance you'd pay 2% for money that you earning less than 1% on.  I agree, go with option 3 and then pay yourself back.  

[iheartwings]

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@iced wrote:

 If it were me, I'd go with option 3, but each situation is different.

All else being equal, you'll earn just over $500 per $10,000 in savings at 1% interest for the next 5 years and spend just over $600 in interest per $10,000 on a 1.99% loan. If you pay significantly over the minimum you can reduce the interest payments such that they would be less than the interest gained, but these are still pretty close. The question then becomes one of if you think it's worth keeping money in savings such that you're willing to pay a few hundred dollars in interest over the course of 5 years. It looks like you have also arrived at the same conclusion.

I also financed earlier this year with BMW (1.49% in my case), but in my case the money I could have spent on the car is in stocks instead of savings. Spending ~$550 over 5 years in interest to keep $30,000 in equities changes the math. Dividends alone would more than offset the interest, and the equity growth potential is much higher than savings. Had it all been in savings, I would have just paid cash for the car.

That said, I shouldn't have purchased it in the first place and my SO reminds me of that regularly. I made a mistake on my part because I rarely have need of a car (about 6000 miles a year) and it will cost me over $40,000 over the next 5 years. Your situation is different, of course, but my opinion/advice here is to make sure you think the car is really worth what it will cost to you. The real issue I see isn't whether you should pay cash or finance it, but rather do you think you'd rather have the ~$30,000 for the future or for a car that's fun to drive in for those occasional times when you're actually driving (which you yourself admit you didn't do nearly as much you thought).

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I agree every situation is different. A little under half of my savings are in a savings account earning 1% a year, while the remainder is invested in an index fund and short term bond fund. In the time I've put funds into my investments, they are earning far more than the cash sitting in this account. 

I agree it's really a matter of comfort. My SO thinks it's better to have a larger "nest egg". I think that it's better to let my $$$ to work for me. Therefore, if I have $$$ that is relatively underperforming compared to the interest rate I would pay to finance the vehicle, I am fine with paying it off. It will take me less than a year to replenish these stores (because I'll continue my current level of savings and also divert the $$$ I've been putting to car payments). My income is also projected to increase over the next couple of years, thus increasing options for saving. 

I don't drive a ton, but I do drive nearly every day. Driving this vehicle still gives me great joy.

[iheartwings]

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@sccredit wrote:

My general rule is that I can earn more on my money than the cost of financing then I go that route.  In this instance you'd pay 2% for money that you earning less than 1% on.  I agree, go with option 3 and then pay yourself back.  

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Seems like the most reasonable approach, but just wanted to make sure I wasn't missing something.

Thanks much for everyone's opinions. 

[pipeguy]

Personally I'd go with option 1 or at least look to finance it for 48 months, some credit unions offer very low rates on used cars (1.74 for new at DCU, I'd have to check their used rates). If you get a loan for 1.99% and you are earning 1.00% on that money you are paying less than 1% to borrow and it leaves you more liquid should you need it. You can make $1000 payments or if you'd be replacing the $30+ K within a year, you can just use those funds to make $2500 or $3000 payments and pay it off in a year while maintaining a good cash fall back position - if you come up short one month, you'll be so far paid ahead you can skip a payment. I think if you look at the math you'll pay very little in interest and this way anytime you decide to pay it off, you always have that option.

If you can pay it in full and still have a good solid cash position that you can fall back on, say at least 6 months, better 12 months for all expenses, okay option 3.  

[pipeguy]

Personally I'd go with option 1 or at least look to finance it for 48 months, some credit unions offer very low rates on used cars (1.74 for new at DCU, I'd have to check their used rates). If you get a loan for 1.99% and you are earning 1.00% on that money you are paying less than 1% to borrow and it leaves you more liquid should you need it. You can make $1000 payments or if you'd be replacing the $30+ K within a year, you can just use those funds to make $2500 or $3000 payments and pay it off in a year while maintaining a good cash fall back position - if you come up short one month, you'll be so far paid ahead you can skip a payment. I think if you look at the math you'll pay very little in interest and this way anytime you decide to pay it off, you always have that option.

If you can pay it in full and still have a good solid cash position that you can fall back on, say at least 6 months, better 12 months for all expenses, okay option 3.  

Edit / Add - just looked DCU will give you upto 65 months at 1.74% new or used  - Doing the math you come out ahead if in fact you pay it off in 12 months.

$32,803 @ 1.74% paid back in 12 months (finance for 60 months, but pay off in 12 which charges you simple interest on the unpaid balance)

Payments are $2759.42 per month for a total of $33113 ($310 total interest paid to the loan)

Saving the $32,803 at 1% ($328) for a total of $33131 ($328 earned interest is subjected to income tax)

Net interest earned $18  (this is simple interest not compounded so actual interest earned would be slightly higher).

By paying the $32803 up front there is a loss of $328 interest, payments to replace this amount in savings would require $2733.58 per month and there would be interest earned on the amount replaced in savings (1% on $2733 + 1% on 2733+$2733 + 1% on $2733+2733+2733 etc) plus earned interest would be taxed as earned income.

IF the funds are replaced within 12 months you are ahead IMO of paying up front based on an earned rate of 1% and a paid rate of 1.74%

[Anonymous]

I'm a firm believer in cash-reserve/nest egg maintenance, myself - but, that being said, I'd totally take number 3.

Assuming you are in a solid, predictable position to replenish at least most of these funds by the end of one year, you win on both ends - less "lost" interest on the cash than you would pay out in a year on the loan amounts, and a car to which you hold clear title immediately.

If a disaster struck, heaven forbid, in addition to liquidating funds and having at least a partially-rebuilt savings account (an account which, as you pointed out earlier, would not have a zero balance after taking out the car money, in the first place) you'd have an asset which could be used as collateral for a loan or could be sold if the situation was dire.  And, if life just carries on as expected, you'll have clear title, you'll rebuild your savings to pre-car-purchase level, and you'll still have the car you love at the end of the year.

Being conscious of savings and trying to maintain them long-term is financially healthy, but you are in a position to buy yourself out of needing a loan/paying interest and have a solid plan for replacing the funds in a short period of time.  And, if something was to happen, you have reserves and availble credit to handle that if/when the time comes.  I don't really see any need to incur a new loan in your situation.