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finance a car or pay cash?

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Anonymous
Not applicable

finance a car or pay cash?

I f I have the money to pay cash for a new car and I also have excellent credit score, should I pay cash for a new car or finance it"

Message 1 of 5
4 REPLIES 4
Appleman
Valued Contributor

Re: finance a car or pay cash?

Welcome to the forums.

 

Honestly not enough information here to give an answer.

 

It will be cheaper to pay cash for the vehicle overall.

 

However, if it is all the money you have it might be nice to keep some in reserve as an emergency fund.

 

Do you need to diversify your credit (meaning the only credit you have comes from credit cards)?

 

Let us know any details you feel comfortable sharing and we will always be glad to tell others how to spend their money! (meaning do what is best for you)

Message 2 of 5
andyaycw
Frequent Contributor

Re: finance a car or pay cash?

Given how low interest rates are for auto loans, I would finance the vehicle and use that cash in the stock market (or some other type of investment). That's the logic I used when purchasing my vehicle. 

 

Simple but crude example: You have $100,000. You buy the car free and clear. You pay $0 interest, but you also have nothing left in the bank to purchase stocks/mutual funds.

 

Same scenario where you have $100,000, except now you finance the car. $100,000 loan at 2% interest. You retain your $100,000 and invest it in stocks, mutual funds, etc. that gain 5%. Yes, you'll be paying 2% interest, but you're also gaining 5%. Your net gain is 3%, whereas if you had purchased the car free and clear, you'd arguably be losing 3% since you no longer have the cash to invest in the stock market. 


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Message 3 of 5
awp317
Frequent Contributor

Re: finance a car or pay cash?

Back before I leased cars (started leasing because I get bored quickly) I would pay cash unless the manufacturer was offering bonus money back for using their financing. When I bought a bmw x5 I was fully intending on paying cash, but BMW financial was offering 1500 more off if I used them. So I negotiated a price, then said I wanted to use BMW to pay for it, additional 1500 off there. Then before the first statement even cut I paid it off with a credit card no less and got points too haha, then just paid that off. 

 

 

I know people talk about investments and such and using money. Really everybody's opinion and circumstance is different here but if you're in a position to pay cash for a car you should have a healthy portfolio making money already anyway. On a car which is a depreciating asset I find it's best to just own it out right (or lease). The investment logic only works on a house. Like for instance my house is financed at 3.5% and my stocks net me 6-8% currently. Over 30 years that's going to make a huge difference and over 30 years the house should be worth at the very least what you paid for it (and paid for by then if not sooner). so in 30 years we sell the big house since kids will be gone and put the money in investments then and buy a smaller house for cash and retire healthy.

 

 But a car loan is 4-5 years most and in 4-5 years when you're looking to trade should be worth about 25% of what you paid (maybe more), and you could be making a "car payment" into a savings account over that time period that coupled with the equity in the car, you could use to pay for the new car in cash, it's better to just not have a car payment IMHO if you can afford not to. To finish off, a car loan and car isn't a long enough life commitment to really matter in the long haul whether it's invested or loaned to you. Again all this is IMO and your situation might be different. 

 

 

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Message 4 of 5
Anonymous
Not applicable

Re: finance a car or pay cash?


@andyaycw wrote:

 

 

Same scenario where you have $100,000, except now you finance the car. $100,000 loan at 2% interest. You retain your $100,000 and invest it in stocks, mutual funds, etc. that gain 5%. Yes, you'll be paying 2% interest, but you're also gaining 5%. Your net gain is 3%, whereas if you had purchased the car free and clear, you'd arguably be losing 3% since you no longer have the cash to invest in the stock market. 


 

Your gross gain would be 3%. Your net would be less, as you get taxed on income Smiley Happy

 

 

And you didn't "lose 3%", you lost the opporuntiy to make 3%. There is a difference....

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