Car loans

[dignam]

I hear a lot around here to pay cash for a car if you can.  I have a simple question: why would I spend $8k cash on a depreciating asset, instead of getting a low interest loan (say 2-3%) and investing that $8k in an index fund that will get 8% in the long term?  Granted if your credit sucks and you can't get a decent rate that's one thing, but I would guess most of here have outstanding credit.

[Drifterrider]

Why?  Because:

At 8K you aren't buying a new car.  You are unlikely to get a used car loan at 2-3%.  While you may be able to get 8% return, that is 8% taxable.

Pay cash = no debt.  Many are debt averse.

So, discount that 8% you get by the (reasonably for a used car loan) 5% = 3% taxable.

Also, stop using "depreciating" when discussing personal property (this applies to everyone).  Depreciation is a non cash expenditure designed to spread the capital cost over a defined period of time.  You car/TV/lawn mower will lose value over time because they are no longer new.  They do not depreciate (and your residence is not an investment)

I just bought a new car.  I opted to leave my money in the bank but that is because I got a 0% interest rate.

[dignam]

OK, depreciation was the wrong term.  It loses value is what I meant.  I was able to write off home depreciation this year on my rental property, even though the value went up.

Being debt-averse is besides the point.  That is personal preference, not straight numbers.

Let's change the parameters then.  A few years ago I (stupidly) purchased a new car and financed $18k at 2.7%.  I was 28 at the time, and given my distance from retirement, 8% is a pretty safe bet return over 15-20 years on that cash.  I was able to pay cash if I wanted, but I didn't.  Was it a mistake?

EDIT: assume I NEED a car to function.

[NoStacheOhio]

OK, depreciation was the wrong term.  It loses value is what I meant.  I was able to write off home depreciation this year on my rental property, even though the value went up.

Being debt-averse is besides the point.  That is personal preference, not straight numbers.

Let's change the parameters then.  A few years ago I (stupidly) purchased a new car and financed $18k at 2.7%.  I was 28 at the time, and given my distance from retirement, 8% is a pretty safe bet return over 15-20 years on that cash.  I was able to pay cash if I wanted, but I didn't.  Was it a mistake?

EDIT: assume I NEED a car to function.

What's wrong with the 18k car you purchased new a few years ago? The devil you know and all that.

[dignam]

OK, depreciation was the wrong term.  It loses value is what I meant.  I was able to write off home depreciation this year on my rental property, even though the value went up.

Being debt-averse is besides the point.  That is personal preference, not straight numbers.

Let's change the parameters then.  A few years ago I (stupidly) purchased a new car and financed $18k at 2.7%.  I was 28 at the time, and given my distance from retirement, 8% is a pretty safe bet return over 15-20 years on that cash.  I was able to pay cash if I wanted, but I didn't.  Was it a mistake?

EDIT: assume I NEED a car to function.

What's wrong with the 18k car you purchased new a few years ago? The devil you know and all that.

The instant value loss as soon as you drive off the lot.  Maybe it's not as big a deal as I've made it out to be, but if I'm not mistaken, you can still get low rates on certified pre owned cars that don't plummet in value immediately.  Maybe a discussion for another thread though.

[lthenderson]

A couple advantages for paying cash. One, you can typically get a better deal. If you read the fine print on most financing deals, you can either take the finance deal or get an extra amount of money taken off the price of the car. Two, by paying cash you are assuming less risk. If something were to happen and you miss some payments on the loan, your car gets taken away and you lose the down payment and any payments you put on it. Also, a typical car loan is 5 years. If you are comparing apples to apples, you need to compare what money in the stock market would do over any five year increment and not an average 8% return over a 100 years of the market. There are many five year increments that could be found where you would not get a 2-3% return had you invested your money.

[NoStacheOhio]

OK, depreciation was the wrong term.  It loses value is what I meant.  I was able to write off home depreciation this year on my rental property, even though the value went up.

Being debt-averse is besides the point.  That is personal preference, not straight numbers.

Let's change the parameters then.  A few years ago I (stupidly) purchased a new car and financed $18k at 2.7%.  I was 28 at the time, and given my distance from retirement, 8% is a pretty safe bet return over 15-20 years on that cash.  I was able to pay cash if I wanted, but I didn't.  Was it a mistake?

EDIT: assume I NEED a car to function.

What's wrong with the 18k car you purchased new a few years ago? The devil you know and all that.

The instant value loss as soon as you drive off the lot.  Maybe it's not as big a deal as I've made it out to be, but if I'm not mistaken, you can still get low rates on certified pre owned cars that don't plummet in value immediately.  Maybe a discussion for another thread though.

Yes, but would you like to realize that loss by trading it? Sunk cost. Just minimize your driving in a car that's more reliable and didn't cost a ton of money relative to other new cars. Keep it for a long time, and spend as little as possible to keep it running well.

Edit: unless it's something that costs a ton of money to run, which would be surprising on an 18k car.

[Gunny]

I never buy new cars.  Having said that, I will finance a good used car.  Case-in-point...I just bought an '08 4x4 pickup with 47k miles for $16k.  The same truck new would be $40k.  I was able to finance at 3.49%.  I did put $5k down to get the monthly payment under my budget, but left $10k in my account to earn hopefully more than 3.49%.  Plus the interest earned on the $10k earns future interest. The 3.49% is a flat one-time interest cost spread over the life of the loan.  All debt is not dumb (sorry Dave Ramsey fans).  The wise use of debt is much a financial tool as frugallifestyle.  BTW...I know my 4x4 is a very unmustachean vehicle, but you can't pull a bassboat with a Prius :-)

[dignam]

lthenderson - good point about getting a lower purchase price paying with cash, I hadn't considered that.  That may be the difference right there depending on how much.

NoStacheOhio - yep, definitely my plan.  I suppose it's not a big deal since I plan to drive it a long time and I don't put a ton of miles on it.  Still under warranty and has been in once for a common problem with the clutch in the manual transmission.

[FIPurpose]

I think it depends on where you are in your FIRE journey. I remember starting out a few years ago $10k was a lot of money because I wasn't even worth $10k. But eventually that $10k represent 50% of your total net worth, then 40%, 30%, 10%, 5%, etc.

If $10k is only 5% of your net worth, then you are adding paperwork and hassle to your life for a .25% potential increase in your net worth. Maybe that's worth it to you, but when you're nearing a million, (and I am not), and you're looking at decision to spend 4-5 hours of total work for a hopeful .05% increase in net worth, your time starts to look more and more valuable.

[runewell]

A couple advantages for paying cash. One, you can typically get a better deal. If you read the fine print on most financing deals, you can either take the finance deal or get an extra amount of money taken off the price of the car.

In another thread I explained to someone that they could have a saved over $5,000 by leaving their money invested and making payments at the low APR rate rather than paying all $25K upfront on a Prius.  This assumes a 7% rate of return.  I doubt that you are going to save that much on a car by paying cash.

Two, by paying cash you are assuming less risk. If something were to happen and you miss some payments on the loan, your car gets taken away and you lose the down payment and any payments you put on it. 

After buying a car outright you have a lot less cash available for other things.  If you are that cash poor maybe you are better off financing at a low rate anyway. 

Also, a typical car loan is 5 years. If you are comparing apples to apples, you need to compare what money in the stock market would do over any five year increment and not an average 8% return over a 100 years of the market. There are many five year increments that could be found where you would not get a 2-3% return had you invested your money.

So by this logic then you should not have any money invested in the stock market at all?

You are correct in that investing means taking risk.  Even if a 5-yr period does not turn out to be lucrative, longer-term periods typically have been so we do not attempt to do much market-timing and just invest our money.  Risk tolerance can change with age, that changes what we invest our money in.  Therefore, it is going to be a bit less attractive to do this when we are 60+

[FinancialWarrior]

A couple advantages for paying cash. One, you can typically get a better deal. If you read the fine print on most financing deals, you can either take the finance deal or get an extra amount of money taken off the price of the car. Two, by paying cash you are assuming less risk. If something were to happen and you miss some payments on the loan, your car gets taken away and you lose the down payment and any payments you put on it. Also, a typical car loan is 5 years. If you are comparing apples to apples, you need to compare what money in the stock market would do over any five year increment and not an average 8% return over a 100 years of the market. There are many five year increments that could be found where you would not get a 2-3% return had you invested your money.

This may depend on where you go. Oftentimes the dealer will earn a commission from the lender for referring a new customer, so depending on the circumstances it may be a better deal to finance and then pay off the loan immediately afterwards.

[inline five]

My car is so old it appreciates in value (inflation and all).

In 14 years of ownership I've put around $4k into it. Granted, I did swap the transmission myself using another parts car I bought for $250 so that saved a bundle.

If you guys are buying newer expensive cars I think you are missing the point of the MMM mantra. IMO. Stay cheap, keep your costs down, liability only insurance, low property taxes (if your state has that).

If I were buying another car now I'd probably spend $10k to get a later model good condition one but pay up front in full. I don't care about the loss in return on the money - that is purely hypothetical. I like owning my things outright, personally.

One thing to think about - soon there will be all sorts of self driving features on cars coming out. We're talking 2-3 years away tops. This stuff is happening. IMO I think cars will start to adapt the depreciation curve of technology. As of now there really isn't a huge difference in the 2017 vs 2016 vs 2015 model years except for styling.

[Much Fishing to Do]

Same reason I have a paid off house.  The money would not be costing me 2-3% and making me 8% because I'm not using money that would otherwise be in equities, rather the low yielding bonds/cash part of my diversified portfolio.  So that money costing me 2-3% would only be making me 2-3%. 

I see my paid off assets, whether they are appreciating or depreciating, as a sort of piece of the less risky part of my overall investment plan (i.e my actual portfolio, not looking at my house/cars, is heavier in equities than it otherwise would be b/c given no car/house payments needed the risk/volatility is easier to take.

If my goal was to always be as all in in equities as possible, than yes, I'd get the loan.

[MrsPete]

- I am highly debt-averse.  I grew up financially insecure, and I feel better knowing that my house and my car are MINE.  Yes, this is an opinion, but all the math in the world won't make me sleep better at night.  Knowing that every brick and all four tires belong to me, me, me removes a significant amount of stress from my life. 

- Buying a car outright, you're more focused on the total amount ... whereas, if you make payments, it's easier to fall into the "it's only a few more dollars each month" mindset, which makes it easier to say, "I think I will get the heated seats or fancy stereo or whatever". 

- It's easier to buy a car outright rather than financing it.  No financing paperwork, no waiting for credit checks, no making payments each month.  Just less hassle.  When you're paying cash, you feel more in control of the sale -- you're not waiting for them to check credit (even though you KNOW you're perfectly good) or anything else; whereas, if you finance, it feels like you're asking their approval /permission to spend your own money. 

- No possibility of missing a payment or having the bank fail to credit a payment.  It'd only take once for this to wipe out any potential savings. 

- I personally wouldn't buy a car that would deplete my on-hand cash to the point that it would matter in terms of interest earned. 

[J Boogie]

Also, stop using "depreciating" when discussing personal property (this applies to everyone).  Depreciation is a non cash expenditure designed to spread the capital cost over a defined period of time.  You car/TV/lawn mower will lose value over time because they are no longer new.  They do not depreciate (and your residence is not an investment)

What?? Depreciation is, per the dictionary, a reduction in the value of an asset with the passage of time, due in particular to wear and tear. 

I find it equally strange that you would reprimand someone for using the dictionary definition of depreciation instead of your preferred GAAP definition, and that no one here would bat an eyelash.

I think it's strange and, to be honest, quite obnoxious for us to tell people in conversation that their house isn't an investment* .  It very well may be, if they purchased it hoping it will appreciate.  It might be a bad investment, but it's still, by dictionary definition, an investment.

Just because a group is good with money doesn't mean they get to decide what money-related words mean. 


*Yes, I know JL Collins did in the title of an article he wrote on the internet - often people write articles with provocative titles to get a wider audience.  This is why MMM doles out the "face punches" while addressing anonymous consumerist behavior while Pete likely approaches in-person conversations about the same topic with more tact and diplomacy.

[coppertop]

My car is so old it appreciates in value (inflation and all).

In 14 years of ownership I've put around $4k into it. Granted, I did swap the transmission myself using another parts car I bought for $250 so that saved a bundle.

If you guys are buying newer expensive cars I think you are missing the point of the MMM mantra. IMO. Stay cheap, keep your costs down, liability only insurance, low property taxes (if your state has that).

If I were buying another car now I'd probably spend $10k to get a later model good condition one but pay up front in full. I don't care about the loss in return on the money - that is purely hypothetical. I like owning my things outright, personally.

One thing to think about - soon there will be all sorts of self driving features on cars coming out. We're talking 2-3 years away tops. This stuff is happening. IMO I think cars will start to adapt the depreciation curve of technology. As of now there really isn't a huge difference in the 2017 vs 2016 vs 2015 model years except for styling.

Agreed.  There are a lot of people on this forum who miss the point of MMM entirely.  I am surprised anyone is even on here discussing buying pricey new cars, much less financing them. 

[Dave1442397]

- I am highly debt-averse.  I grew up financially insecure, and I feel better knowing that my house and my car are MINE.  Yes, this is an opinion, but all the math in the world won't make me sleep better at night.  Knowing that every brick and all four tires belong to me, me, me removes a significant amount of stress from my life. 

One of the things I find very strange about America is that you never own your home, and you never will. You might pay off the bank, but unless you keep paying rent to Uncle Sam in the form of property taxes, they'll kick you out and take it from you.

[marielle]

My car is so old it appreciates in value (inflation and all).

In 14 years of ownership I've put around $4k into it. Granted, I did swap the transmission myself using another parts car I bought for $250 so that saved a bundle.

If you guys are buying newer expensive cars I think you are missing the point of the MMM mantra. IMO. Stay cheap, keep your costs down, liability only insurance, low property taxes (if your state has that).

If I were buying another car now I'd probably spend $10k to get a later model good condition one but pay up front in full. I don't care about the loss in return on the money - that is purely hypothetical. I like owning my things outright, personally.

One thing to think about - soon there will be all sorts of self driving features on cars coming out. We're talking 2-3 years away tops. This stuff is happening. IMO I think cars will start to adapt the depreciation curve of technology. As of now there really isn't a huge difference in the 2017 vs 2016 vs 2015 model years except for styling.

Another reason to not buy a new car in the next few years. Look at the Nissan Leafs as an example. The 2012 are DIRT cheap used right now because the new models are so much better. So cars of today might lose value even faster than normal because great affordable electrics are just around the corner. Granted, gas is pretty cheap so it won't be significant, but it will definitely affect the early electrics like the 2012s Leafs and Volts.

[Spork]

A couple advantages for paying cash. One, you can typically get a better deal. If you read the fine print on most financing deals, you can either take the finance deal or get an extra amount of money taken off the price of the car. Two, by paying cash you are assuming less risk. If something were to happen and you miss some payments on the loan, your car gets taken away and you lose the down payment and any payments you put on it. Also, a typical car loan is 5 years. If you are comparing apples to apples, you need to compare what money in the stock market would do over any five year increment and not an average 8% return over a 100 years of the market. There are many five year increments that could be found where you would not get a 2-3% return had you invested your money.

This may depend on where you go. Oftentimes the dealer will earn a commission from the lender for referring a new customer, so depending on the circumstances it may be a better deal to finance and then pay off the loan immediately afterwards.

In general (and I am sure there are exceptions), if the loan is part of the negotiation, you're probably paying extra.  In other words, if they bring out the 4 square worksheet and start moving numbers around like Penn & Teller doing cups and balls... you are probably not coming out ahead.

Paying cash allows you to negotiate one and only one term.  No trade in.  No monthly price.  Nothing.  Car only.

Paying cash also allows you to insure the car for only liability.  If you finance the car, you'll have to fully insure it until the loan is paid off.

Paying cash also forces you to buy what you can afford.  Sure, you can still buy an inexpensive car and finance it... but most people don't.  If you can't afford to pay cash for a car, wreck it on the way home and buy another just like it -- you are buying more car than you can afford.  I believe the vast majority of people I see are doing just that.

[Laserjet3051]

Why?  Because:

At 8K you aren't buying a new car.  You are unlikely to get a used car loan at 2-3%.  While you may be able to get 8% return, that is 8% taxable.

Pay cash = no debt.  Many are debt averse.

So, discount that 8% you get by the (reasonably for a used car loan) 5% = 3% taxable.

Also, stop using "depreciating" when discussing personal property (this applies to everyone).  Depreciation is a non cash expenditure designed to spread the capital cost over a defined period of time.  You car/TV/lawn mower will lose value over time because they are no longer new.  They do not depreciate (and your residence is not an investment)

I just bought a new car.  I opted to leave my money in the bank but that is because I got a 0% interest rate.

Not true. I have been pre-approved from my credit union for a 1.99% auto loan, that is applicable for both new and USED autos. I called t confirm this loan earlier this morning and it is valid.

[ketchup]

Why?  Because:

At 8K you aren't buying a new car.  You are unlikely to get a used car loan at 2-3%.  While you may be able to get 8% return, that is 8% taxable.

Pay cash = no debt.  Many are debt averse.

So, discount that 8% you get by the (reasonably for a used car loan) 5% = 3% taxable.

Also, stop using "depreciating" when discussing personal property (this applies to everyone).  Depreciation is a non cash expenditure designed to spread the capital cost over a defined period of time.  You car/TV/lawn mower will lose value over time because they are no longer new.  They do not depreciate (and your residence is not an investment)

I just bought a new car.  I opted to leave my money in the bank but that is because I got a 0% interest rate.

Not true. I have been pre-approved from my credit union for a 1.99% auto loan, that is applicable for both new and USED autos. I called t confirm this loan earlier this morning and it is valid.

How used though?  Could you go buy a $4k 2008 Toyota with that?

[Laserjet3051]

Why?  Because:

At 8K you aren't buying a new car.  You are unlikely to get a used car loan at 2-3%.  While you may be able to get 8% return, that is 8% taxable.

Pay cash = no debt.  Many are debt averse.

So, discount that 8% you get by the (reasonably for a used car loan) 5% = 3% taxable.

Also, stop using "depreciating" when discussing personal property (this applies to everyone).  Depreciation is a non cash expenditure designed to spread the capital cost over a defined period of time.  You car/TV/lawn mower will lose value over time because they are no longer new.  They do not depreciate (and your residence is not an investment)

I just bought a new car.  I opted to leave my money in the bank but that is because I got a 0% interest rate.

Not true. I have been pre-approved from my credit union for a 1.99% auto loan, that is applicable for both new and USED autos. I called t confirm this loan earlier this morning and it is valid.

How used though?  Could you go buy a $4k 2008 Toyota with that?

Yes. Their definition of used is 2008 through 20016.

[ketchup]

Why?  Because:

At 8K you aren't buying a new car.  You are unlikely to get a used car loan at 2-3%.  While you may be able to get 8% return, that is 8% taxable.

Pay cash = no debt.  Many are debt averse.

So, discount that 8% you get by the (reasonably for a used car loan) 5% = 3% taxable.

Also, stop using "depreciating" when discussing personal property (this applies to everyone).  Depreciation is a non cash expenditure designed to spread the capital cost over a defined period of time.  You car/TV/lawn mower will lose value over time because they are no longer new.  They do not depreciate (and your residence is not an investment)

I just bought a new car.  I opted to leave my money in the bank but that is because I got a 0% interest rate.

Not true. I have been pre-approved from my credit union for a 1.99% auto loan, that is applicable for both new and USED autos. I called t confirm this loan earlier this morning and it is valid.

How used though?  Could you go buy a $4k 2008 Toyota with that?

Yes. Their definition of used is 2008 through 20016.

Wow, that's actually incredible; I've never seen rates that low for something more than a few years old.  My main beef then would be them surely requiring full coverage insurance.

[boarder42]

paying cash in today's rate environment is incorrect mathematically.  And for those saying you get a better rate paying cash yeah right.  you negotiate the price of the car. you also shop for financing outside of them.  once the price is determined you either use your outside lender or they match it ... simple as that. 

The only way i think you can argue a mathematical advantage to paying cash depends on how you will carry insurnace on it.  since with a loan you have to have full coverage.  but give me 3% interest rates or lower all day. 

[boarder42]

A couple advantages for paying cash. One, you can typically get a better deal. If you read the fine print on most financing deals, you can either take the finance deal or get an extra amount of money taken off the price of the car. Two, by paying cash you are assuming less risk. If something were to happen and you miss some payments on the loan, your car gets taken away and you lose the down payment and any payments you put on it. Also, a typical car loan is 5 years. If you are comparing apples to apples, you need to compare what money in the stock market would do over any five year increment and not an average 8% return over a 100 years of the market. There are many five year increments that could be found where you would not get a 2-3% return had you invested your money.

This may depend on where you go. Oftentimes the dealer will earn a commission from the lender for referring a new customer, so depending on the circumstances it may be a better deal to finance and then pay off the loan immediately afterwards.

In general (and I am sure there are exceptions), if the loan is part of the negotiation, you're probably paying extra.  In other words, if they bring out the 4 square worksheet and start moving numbers around like Penn & Teller doing cups and balls... you are probably not coming out ahead.

Paying cash allows you to negotiate one and only one term.  No trade in.  No monthly price.  Nothing.  Car only.If you arent negotiating this way anyways you're doing it wrong

Paying cash also allows you to insure the car for only liability.  If you finance the car, you'll have to fully insure it until the loan is paid off. This is one instance i agree needs to be evaluated case by case.

Paying cash also forces you to buy what you can afford.  Sure, you can still buy an inexpensive car and finance it... but most people don't.  If you can't afford to pay cash for a car, wreck it on the way home and buy another just like it -- you are buying more car than you can afford.  I believe the vast majority of people I see are doing just that.this is a fundamental problem of spending and has nothing to do with the math decision of why a low fixed rate loan will be better.

[dogboyslim]

I purchased a 2015 used at 2.25% for 60 months.  The loan was for just under 40k though...Large family plus boat over 7k lbs = Clown-car.  We had the money but decided to borrow instead due to the low rate.  To date we've earned $3,700 on that 40k, and paid $607.44 in interest.  So far it was a good move.

The reason lots of people don't do that though is because the 2.25% is risk free.  No matter what you have to pay it, so by not borrowing, you are essentially investing at a risk free rate of 2.25%.  The return on the market is variable and may be negative.  So those wishing to pay cash are in essence saying they value stability over eventual return.

Different strokes, neither answer is "wrong."

[ETwagon]

Also, stop using "depreciating" when discussing personal property (this applies to everyone).  Depreciation is a non cash expenditure designed to spread the capital cost over a defined period of time.  You car/TV/lawn mower will lose value over time because they are no longer new.  They do not depreciate (and your residence is not an investment)

I just bought a new car.  I opted to leave my money in the bank but that is because I got a 0% interest rate.

Finger waving and a long winded scolding that "applies to everyone" using the word depreciating, ends with the hollow simplistic statement "I opted to leave my money in the bank but that is because I got a 0% interest rate".
 A talking point direct from the dealer staff training book to keep the focus on the 0% carrot on a stick and away from the total big picture of the deal.   
     

[lthenderson]

Also, a typical car loan is 5 years. If you are comparing apples to apples, you need to compare what money in the stock market would do over any five year increment and not an average 8% return over a 100 years of the market. There are many five year increments that could be found where you would not get a 2-3% return had you invested your money.

So by this logic then you should not have any money invested in the stock market at all?

Absolutely not. One should invest money in the stock market because the lifetime average is 8%. The average for the next five years will very likely not be 8%. It may be higher and it may be lower. But that is the risk one assumes when financing a car and investing the "saved" money in the stock market.

[retired?]

A couple advantages for paying cash. One, you can typically get a better deal. If you read the fine print on most financing deals, you can either take the finance deal or get an extra amount of money taken off the price of the car. Two, by paying cash you are assuming less risk. If something were to happen and you miss some payments on the loan, your car gets taken away and you lose the down payment and any payments you put on it. Also, a typical car loan is 5 years. If you are comparing apples to apples, you need to compare what money in the stock market would do over any five year increment and not an average 8% return over a 100 years of the market. There are many five year increments that could be found where you would not get a 2-3% return had you invested your money.

My strategy is to use a loan and then pay it off within 1-3 months.  The dealership gets a cut by selling via loan and is often willing to lower the price by say $200 figuring they will make $400 on the loan.  You get a lower price and never pay that interest.  Just a thought.  It's why almost all dealers 'force' you to visit their financing dept even if you can pay with cash.

Also, 'depreciate' is not solely an accounting term.  It is often used to mean "loses value over time", mr pickypants.

http://www.dictionary.com/browse/depreciate

[katsiki]

If anyone is actually looking at this thread who wants a car loan, I just had a great experience with LightStream.  They have good rates and terms.  Also, they do an unsecured loan (ie no lien) if your credit and assets meet their requirements. 

I put in the application on a Sunday evening and was approved & e-signing by Noon the next day.  They do same-day wire for funding if you do the paperwork by early afternoon, or ACH by the next day.  I chose ACH because I was not in a rush.  Funds hit my CU by that Tuesday morning.  It was a very easy experience.

[dignam]

OK good, I thought I was the only one who thought drifterrider was a little over the top and long winded.

As far as "depreciation", sure I suppose it depends on the definition.  Colloquially, people equate it to "loses dollar value over time".  IRS has a slightly different definition I'm sure, since I was able to deduct depreciation on a rental property that actually increased in value (not a realized increase of course).

[FIreDrill]

We have cheaper vehicles and "self insure" by only purchasing liability insurance.  If you have a car loan, the lender usually requires that you purchase full coverage to insure the loan will be paid off if the vehicle is totaled.  In our case, full coverage is 2x as much as liability.  Liability coverage saves us nearly 800/year in insurance premiums.

Too many people leave out the cost of insurance when looking at vehicle purchases.... Don't be one of those people....

[marielle]

We have cheaper vehicles and "self insure" by only purchasing liability insurance.  If you have a car loan, the lender usually requires that you purchase full coverage to insure the loan will be paid off if the vehicle is totaled.  In our case, full coverage is 2x as much as liability.  Liability coverage saves us nearly 800/year in insurance premiums.

Too many people leave out the cost of insurance when looking at vehicle purchases.... Don't be one of those people....

This. A new car could have $2000-$3000 a year in just full coverage insurance. That's enough to buy a cheap car every year. But in reality a car that cheap will usually last you longer than that, so even if you get one lemon occasionally you'll still save money in the long run. I guess the fancy bells and whistles and heated/cooled seats are worth the thousands in insurance and car payments each year...

[runewell]

Paying cash allows you to negotiate one and only one term.  No trade in.  No monthly price.  Nothing.  Car only.

You don't have to commit early on to paying either way.  You could tell them you intend to pay cash for the car with cash and then change your mind and decide to finance.

Paying cash also allows you to insure the car for only liability.  If you finance the car, you'll have to fully insure it until the loan is paid off.

Paying cash also forces you to buy what you can afford.  Sure, you can still buy an inexpensive car and finance it... but most people don't.  If you can't afford to pay cash for a car, wreck it on the way home and buy another just like it -- you are buying more car than you can afford.  I believe the vast majority of people I see are doing just that.

By that logic, you need to have TWICE your car payment in cash - if you don't plan on insuring it - so you can turn right around and buy another.  Again, just because you are willing take on a payment doesn't mean you can't afford the car.  You could pay cash outright for a car and then be cash poor and unable to afford other things.

A SMART shopper buying a new car should act as if he intends to pay cash.  But when the price is determined, the difference between actually paying in cash and looking at the financing options is an issue that deserves more consideration. 

But I DEFINITELY will agree with you that a lot of people get sucked in and overspend as their negative equity gets swallowed into an even bigger payment.

Heh Boarder seems to have basically beaten me to these very sentiments.

[inline five]

This. A new car could have $2000-$3000 a year in just full coverage insurance. That's enough to buy a cheap car every year. But in reality a car that cheap will usually last you longer than that, so even if you get one lemon occasionally you'll still save money in the long run. I guess the fancy bells and whistles and heated/cooled seats are worth the thousands in insurance and car payments each year...

Anyone over 25 paying anywhere close to $2k-$3k to insure your car?!?

[Much Fishing to Do]

This. A new car could have $2000-$3000 a year in just full coverage insurance. That's enough to buy a cheap car every year. But in reality a car that cheap will usually last you longer than that, so even if you get one lemon occasionally you'll still save money in the long run. I guess the fancy bells and whistles and heated/cooled seats are worth the thousands in insurance and car payments each year...

Anyone over 25 paying anywhere close to $2k-$3k to insure your car?!?

Yikes.  I pay about $700/year for me & my wife to insure our two cars.  But I have a 15 year old and this just scared the hell out of me...

[Spork]

Paying cash also forces you to buy what you can afford.  Sure, you can still buy an inexpensive car and finance it... but most people don't.  If you can't afford to pay cash for a car, wreck it on the way home and buy another just like it -- you are buying more car than you can afford.  I believe the vast majority of people I see are doing just that.

By that logic, you need to have TWICE your car payment in cash - if you don't plan on insuring it - so you can turn right around and buy another.  Again, just because you are willing take on a payment doesn't mean you can't afford the car.  You could pay cash outright for a car and then be cash poor and unable to afford other things.

Um.  Yeah.  That was my point.  If you can't afford to shell out 2x the price of a car in cash, you probably can't afford the car.  Note that while I do pay for cars in cash and I answered the question "why should you..." in no way to I mean to infer you MUST.  If you *CAN* pay for 2x the value in cash and you finagle a 0.3% interest rate, more power to you. 

If you aren't able to shell out the cash, you should be looking at cheaper cars (again: regardless of whether you get a loan or not).

[englishteacheralex]

Mathematically the original point about car loans is probably correct.

For us, over the past 20 years we exclusively buy cheap cheap cheap used cars from the owner. Never bought a car for more than 4k. Hard to find a car that cheap at a reputable dealership, and if you do, it is usually cheaper to buy it from the owner.

We could get a low rate bank loan and invest the difference (wouldn't be as low as what you can get from dealerships, though!). But we prefer to just shell out a couple grand and be done with it.

Short of a bus pass or a good bike, this is the cheapest form of transportation, as far as we've been able to ascertain. People think a sub 5k car is an unreliable hassle, but I've never found that to be the case. Our old-ass Toyotas have been very good to us.

No interest, and a car that costs as much as the downpayment for most cars. And we keep investing!

[dignam]

Mathematically the original point about car loans is probably correct.

For us, over the past 20 years we exclusively buy cheap cheap cheap used cars from the owner. Never bought a car for more than 4k. Hard to find a car that cheap at a reputable dealership, and if you do, it is usually cheaper to buy it from the owner.

We could get a low rate bank loan and invest the difference (wouldn't be as low as what you can get from dealerships, though!). But we prefer to just shell out a couple grand and be done with it.

Short of a bus pass or a good bike, this is the cheapest form of transportation, as far as we've been able to ascertain. People think a sub 5k car is an unreliable hassle, but I've never found that to be the case. Our old-ass Toyotas have been very good to us.

No interest, and a car that costs as much as the downpayment for most cars. And we keep investing!

My first vehicle was 1996 Jeep Cherokee that I paid $3k for, about 12 years ago.  I beat the ever living crap out of that thing (I'm talking driving through a pond, blasting through snow drifts, just to name a couple) and had no major issues whatsoever over the 4 years I had it.  Biggest problem was I fried the alternator driving through the aforementioned pond.  Still regret selling that thing...

It's amazing how "cheap" cars can somehow be super reliable.  My theory is all the quirks have been worked out over the first 50k miles.

[NoStacheOhio]

This. A new car could have $2000-$3000 a year in just full coverage insurance. That's enough to buy a cheap car every year. But in reality a car that cheap will usually last you longer than that, so even if you get one lemon occasionally you'll still save money in the long run. I guess the fancy bells and whistles and heated/cooled seats are worth the thousands in insurance and car payments each year...

Anyone over 25 paying anywhere close to $2k-$3k to insure your car?!?

1200/yr for full coverage on two 2014 cars

[SpareChange]

If anyone is actually looking at this thread who wants a car loan, I just had a great experience with LightStream.  They have good rates and terms.  Also, they do an unsecured loan (ie no lien) if your credit and assets meet their requirements. 

I put in the application on a Sunday evening and was approved & e-signing by Noon the next day.  They do same-day wire for funding if you do the paperwork by early afternoon, or ACH by the next day.  I chose ACH because I was not in a rush.  Funds hit my CU by that Tuesday morning.  It was a very easy experience.

Curious...does Lightstream require full coverage insurance? 

[katsiki]

If anyone is actually looking at this thread who wants a car loan, I just had a great experience with LightStream.  They have good rates and terms.  Also, they do an unsecured loan (ie no lien) if your credit and assets meet their requirements. 

I put in the application on a Sunday evening and was approved & e-signing by Noon the next day.  They do same-day wire for funding if you do the paperwork by early afternoon, or ACH by the next day.  I chose ACH because I was not in a rush.  Funds hit my CU by that Tuesday morning.  It was a very easy experience.

Curious...does Lightstream require full coverage insurance?

They have no insurance requirements if it is unsecured loan.  It has not hit my credit report yet but I assume it reports more like a personal loan.

[MisterTwoForty]

I dont take loans out on depreciating assets.   You are also leaving out the risk factor as well.  Theres no guarantee of any market returns, plus you now have a monthly payment to make. 

[Tabaxus]

I know it's not the most efficient way to go, but I am ok with giving up optimization on a modest car purchase for the certainty and simplicity of not having another bill.  I haven't owned a car for 10 years, but I'm finally planning to buy one.  No idea what I will buy--it will almost certainly be more expensive than I need, but it will definitely be used--but the one thing I do know for certain is that there is 0% chance I will take out any loan on it.

[beastykato]

I definitely disagree with a lot of the people on here.  It's crazy to not get a loan on a car when rates are as low as they are right now. 

Someone above said you're unlikely to get a used rate of 2-3%.  They must not be looking around.  If you get anything more than 4% on a used car loan right now you're doing something wrong or your credit flat out sucks.  I just refinanced my vehicle for 1.99% on a 2009 truck. 

I'll definitely slap my money in the index fund long before I pay cash for a vehicle.  Now once rates starting going to 4-5%+ and nearing the market average returns things would start to shift in favor of paying cash. 

Also, when negotiating on a car the loan has absolutely no bearing at all, none, not even a slight little bit, nada, zilch on what you pay for the vehicle.  I have always negotiated my price for a car and then after all was done went on to the financing.  If you let the dealer take control and start raping you and talking about discounts for financing, that's on your lack of negotiating skills,  it's not a knock against financing.

[marty998]

I see the merit in borrowing to buy a car at a low interest rate, provided you do actually use the cash you would otherwise pay for productive investment purpose (mot people don't).

OK good, I thought I was the only one who thought drifterrider was a little over the top and long winded.

As far as "depreciation", sure I suppose it depends on the definition.  Colloquially, people equate it to "loses dollar value over time".  IRS has a slightly different definition I'm sure, since I was able to deduct depreciation on a rental property that actually increased in value (not a realized increase of course).

Can I point out that generally that it is the land value that appreciates. The buildings do decline in value in value over time. Most houses at some point will need to be demolished and rebuilt, or at least renovated.

[Spork]

Can I point out that generally that it is the land value that appreciates. The buildings do decline in value in value over time. Most houses at some point will need to be demolished and rebuilt, or at least renovated.

Is that really true?  (I don't really know the answer here.)  I have certainly seen a lot of well maintained 100+ year old houses.  If you go to Europe, they'll scoff at the "new" 100 year old house.  (It's totally possible I'm suffering from selection bias.)

It certainly is true that if you do nothing... houses will eventually fall apart.  I know when my Dad died we sold his house -- in not-so-great shape, in the wrong part of town, for approximately what he paid for it 50 years ago (adjusted for inflation).

[MoneyMage]

Personal example here... I bought a used Camry for $4500 in 2007, commuted with it for almost 9 years and then sold it for $1500 at the end of 2015 (it had good tires but needed engine work and had not had the full 120k-mile tune-up). If you do the math the cost to me of paying cash for that car was $333.33 per year.

[marty998]

Can I point out that generally that it is the land value that appreciates. The buildings do decline in value in value over time. Most houses at some point will need to be demolished and rebuilt, or at least renovated.

Is that really true?  (I don't really know the answer here.)  I have certainly seen a lot of well maintained 100+ year old houses.  If you go to Europe, they'll scoff at the "new" 100 year old house.  (It's totally possible I'm suffering from selection bias.)

It certainly is true that if you do nothing... houses will eventually fall apart.  I know when my Dad died we sold his house -- in not-so-great shape, in the wrong part of town, for approximately what he paid for it 50 years ago (adjusted for inflation).

"Maintaining" infers spending on upkeep. Either repairing or incurring capital costs. In both cases it is fixing something that has fallen into such a state (depreciated in value) that it requires you to spend money on it, which will hopefully increase the value of the building by more than the repair/renovation. But over time this improvement will decline in value until the next renovation is needed.

It's all semantics about decline in value vs depreciation. I get the point that was being made earlier but it's not clear or helpful to the average person who is not schooled in archaic accounting and tax terminology.

Unless there is some form of contamination (radioactivity etc) land IMO will always have value. A building could indeed have negative value on a property if the cost of maintaining it grows too high.