Car loans

[HPstache]

TL:DR ... but just in case it hasnt been mentioned, financed cars require more expensive insurance than the option of going with liability only insurance when you own in full.  It is arguably only $20/mo or so, but its worth considering.

Also, a 3-5 yr auto loan is not considered LONG term.  A lot of the assumptions here are saying you can earn 4-7% in the market... but thats a long term figure.  You could easily buy a car and experience a 3 year down turn in the market and lose the 3% in interest on the vehicles AND lose money on what you invested instead.

[runewell]

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.

Why not?  If you decide to pay $10,000 for a car, what difference does it make whether you fork over cash or finance it?  Suppose you crash it the next day and it's uninsured, you are out $10k regardless of financed it.  Maybe you don't look forward to more payments and no car but that's just being sentimental. 

The question is, how does the interest rate factor into your overall portfolio?

[runewell]

Also, a 3-5 yr auto loan is not considered LONG term.  A lot of the assumptions here are saying you can earn 4-7% in the market... but thats a long term figure.  You could easily buy a car and experience a 3 year down turn in the market and lose the 3% in interest on the vehicles AND lose money on what you invested instead.

That is true.  One way to think of it is, during how can many 5-yr periods in history would you come out ahead?  How often would you have come out ahead?  What were the best and worst case scenarios? 

[Tabaxus]

Also, a 3-5 yr auto loan is not considered LONG term.  A lot of the assumptions here are saying you can earn 4-7% in the market... but thats a long term figure.  You could easily buy a car and experience a 3 year down turn in the market and lose the 3% in interest on the vehicles AND lose money on what you invested instead.

That is true.  One way to think of it is, during how can many 5-yr periods in history would you come out ahead?  How often would you have come out ahead?  What were the best and worst case scenarios?

And the need to think through it at this level of detail is why I'd rather just pay in cash and be done with it, particularly given the psychic benefit of not having another loan hanging over my head.

[beastykato]

There is no need to think in that sort of detail though.  Why look at the short-term?  Over time it will achieve of the average market return, thus negating that whole train of thought entirely. 

If you're looking for short-term use of your money you probably shouldn't be investing in that manner. 

[ptgearguy]

From a pure economical perspective I think a low interest loan will bring you out ahead. The problem is with this is that it assumes you are 100% logical and simply not a human. Most people like to think of themselves as pure aspects of perfect self-control that are 100% reasonable and never are pulled or lured by animalistic desires. Now I believe a few of these demi-humans do probably exist on these forums and in this world but the rest of us are human and are victim to our own human weakness.

First off, loans are really nice for dealers because people will almost always spend more than if they had to pay cash. Add this or that little feature. Might as well get the floor mats because that will save money in the long run...etc. etc.

Two: If you have to pay cash you will have to save that cash up over time. This will likely give you time to fully research what you want and need as well as educate yourself on your purchase. Taking time to make a purchase usually helps you make the correct purchase. If you finance you are much more likely to buy a vehicle when you dont actually need one but more because "you would be stupid to miss out on these great finance options".

Three: I believe if you look at the people that pay cash vs. the people that finance, there would be a very clear winner with who comes out ahead with dealing with money. I could be wrong, but I bet more people get screwed with financing than buying cash. But I am sure, everyone here that has financed a vehicle is perfect with their money and are completely immune from the norm of society.

Just a few things to think about.

PS. I will always buy a used care with cash in my future

[inline five]

Guys again I think if you are factoring in the cost of a loan vs market returns you are purchasing cars well above the MMM threshold. IMO. You should really be talking about buying cheaper cars in the $6k-$8k range. IIRC the real MMM bought a Honda Fit for $6k.

[runewell]

Guys again I think if you are factoring in the cost of a loan vs market returns you are purchasing cars well above the MMM threshold. IMO. You should really be talking about buying cheaper cars in the $6k-$8k range. IIRC the real MMM bought a Honda Fit for $6k.

Yes but not everyone wants to duplicate the MMM lifestyle.  I for one am not the least bit interested in biking all over creation.

Also, I would be careful with that word "should".  Buying a car in the $6K - $8K price range is something that some people advocate.  Why shouldn't I spend $9K or $5K or $12K on a vehicle?

Finally you are assuming just because we are talking about financing a car that it must be expensive and new, but the same question applies to $6K or $8K cars: does it make better financial sense to pay cash or finance?  Old cars will almost certainly have higher interest rates making financing seem less attractive for someone trying to get a good return on their money, but I would have to see the numbers to make the decision.

[boarder42]

Guys again I think if you are factoring in the cost of a loan vs market returns you are purchasing cars well above the MMM threshold. IMO. You should really be talking about buying cheaper cars in the $6k-$8k range. IIRC the real MMM bought a Honda Fit for $6k.

the math is the math whether is a 100k tesla or a 7k prius.  you still will make more money in the long run doing the financing based on historic market returns. 

[inline five]

Guys again I think if you are factoring in the cost of a loan vs market returns you are purchasing cars well above the MMM threshold. IMO. You should really be talking about buying cheaper cars in the $6k-$8k range. IIRC the real MMM bought a Honda Fit for $6k.

the math is the math whether is a 100k tesla or a 7k prius.  you still will make more money in the long run doing the financing based on historic market returns.

You're not financing over a 10, 20, 30 year period. Historic returns are for many years. Plus, the difference is negligible on a small amount over a few years.

[dignam]

Guys again I think if you are factoring in the cost of a loan vs market returns you are purchasing cars well above the MMM threshold. IMO. You should really be talking about buying cheaper cars in the $6k-$8k range. IIRC the real MMM bought a Honda Fit for $6k.

the math is the math whether is a 100k tesla or a 7k prius.  you still will make more money in the long run doing the financing based on historic market returns.

You're not financing over a 10, 20, 30 year period. Historic returns are for many years. Plus, the difference is negligible on a small amount over a few years.

True, but let's take the worst 5 year period in recent history of 2008-2013.  Even over that period through the recession you have a positive return (although not considering inflation) afterwards.

Also to consider is if you're the type to finance 1 car, you'll probably do it again, especially if you're young.  To me, it's always worth the risk to plop the money in an index fund instead.  If you get unlucky and do it during a recession, chances are it won't happen during the next 5 year period.

[lthenderson]

Everyone here has been talking about average STOCK MARKET returns but one should really look at average INVESTOR returns. The 30 year average investor return ending 2013 was only 1.9%!

http://www.forbes.com/sites/advisor/2014/04/24/why-the-average-investors-investment-return-is-so-low/#121b579163a4

Of course, we are all above average investors on here!

[daschtick]

From a purely mathematical standpoint, a low interest loan will generally come out ahead of paying with cash.

However, human behavior often ruins the best intentions.  Here are few additional reasons:

• You will often spend more when financing than you would buying with cash.  Studies show that people buy more than they need when using credit, than when purchasing with cash.  Extended warranties, protection packages, and insurance sell much easier when the car is financed.
• If you keep your cash available by obtaining a loan, you may be tempted to spend a portion of it on other 'needs', thereby blowing the whole 'greater gains'

The real issue is that if you are spending so much on a car that there is a significant difference between cash or financing, you are completely missing the obvious- You are losing significantly more on depreciation than these factors even matter!  Penny wise, dollar foolish.

[semiretired31]

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.

Just bought a 2014 Mazda6 for $12,800 on a 1.49% 3 year loan through my credit union. I'd rather have the $12,800 invested IMO. This is coming off running a Mazda Protege for 15 years and 235,000 miles.

[runewell]

Everyone here has been talking about average STOCK MARKET returns but one should really look at average INVESTOR returns. The 30 year average investor return ending 2013 was only 1.9%!

http://www.forbes.com/sites/advisor/2014/04/24/why-the-average-investors-investment-return-is-so-low/#121b579163a4

Of course, we are all above average investors on here!

You have GOT to be kidding.  One guy cherry-picked a single 30-yr period so he could sell his own investment.  Total nonsense.

[accolay]

I'll throw in my two cents.

Everything is on a case-by-case basis. There are a lot of variables. For the record, MMM even had to take out a car loan for the new Leaf. It made sense because of credits.

I don't think car loans are the worst thing in the world if you can pay it off quickly. Some people might have good income, but not necessarily 5-15k in cash around if they really need a car, especially if they are just starting their mustacian journey. And unfortunately a lot of people still really need cars. Additionally, many may find that they have to negotiate and compromise with a less than mustachian partner.

Full disclosure- I took out a car loan last year. Payed a total of $61.02 in interest while paying it off quickly. I would have rather saved for a little longer to save the 60 bucks and possibly get a better deal, but I'm not the only decision maker around here.

[NorthernBlitz]

I'll throw in my two cents.

Everything is on a case-by-case basis. There are a lot of variables. For the record, MMM even had to take out a car loan for the new Leaf. It made sense because of credits.

I don't think car loans are the worst thing in the world if you can pay it off quickly. Some people might have good income, but not necessarily 5-15k in cash around if they really need a car, especially if they are just starting their mustacian journey. And unfortunately a lot of people still really need cars. Additionally, many may find that they have to negotiate and compromise with a less than mustachian partner.

Full disclosure- I took out a car loan last year. Payed a total of $61.02 in interest while paying it off quickly. I would have rather saved for a little longer to save the 60 bucks and possibly get a better deal, but I'm not the only decision maker around here.

I've always bought with cash in the past because it was easier and I had the cash on hand. I'm not opposed to loans on principle.

My guess is that car loans are like credit cards. There is danger involved, but if you keep your head you can probably finish out ahead.

[runewell]

I don't think car loans are the worst thing in the world if you can pay it off quickly.

Unless there is some short term incentive, what is the point of getting a car loan then?

Two good reasons to get a car loan:
1) You need a car, you are low on cash, you plan on being able to make the payments.
2) You need a car, you have loads of cash, the interest rate is a bargain and your money will generate higher wealth elsewhere.

[runewell]

My guess is that car loans are like credit cards. There is danger involved, but if you keep your head you can probably finish out ahead.

If you have the $20K to buy the car today, but you choose to finance it at 2% and invest the money, there is some risk.  Put the money in a more conservative account that is more likely to generate 4%-5% with less variation.  If you aren't willing to finance a car and have money in the stock market because of risk, perhaps you should get out of the stock market completely and buy CD's.

[boarder42]

I'll throw in my two cents.

Everything is on a case-by-case basis. There are a lot of variables. For the record, MMM even had to take out a car loan for the new Leaf. It made sense because of credits.

I don't think car loans are the worst thing in the world if you can pay it off quickly. Some people might have good income, but not necessarily 5-15k in cash around if they really need a car, especially if they are just starting their mustacian journey. And unfortunately a lot of people still really need cars. Additionally, many may find that they have to negotiate and compromise with a less than mustachian partner.

Full disclosure- I took out a car loan last year. Payed a total of $61.02 in interest while paying it off quickly. I would have rather saved for a little longer to save the 60 bucks and possibly get a better deal, but I'm not the only decision maker around here.

what was you interest rate and at what point did you pay it off. b/c there is almost a 100% chance you would have done way better in the market. vs paying basically cash for that car.

[MissGina]

- 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.

This is all the reasons I bought cash for both my cars and house.
I just can't with all the paper work and time wasted checking my credit asking me to send tax documents (for a mortgage) bank statements and all the other questions they ask you.

Then you have to make the payment each month or make sure the automatic payments are actually made! One time I had set up payments for Bank of America and they switched something and I had to re enter my banking information and all that mess almost cause me to make a late payment.

Too much hassle. Take this cash( bank check) and I'm moving on with the rest of my day.

You guys can take 4 extra hours of paper work for 2% or whatever amount you are making on not paying cash when you legit have the cash to spend.

This comment is not for those that don't have the actual cash to spend.

[dude]

Was prepared to pay cash for our last vehicle until I got an e-mail from Subaru of America offering 0.99% financing on Certified Pre-Owned vehicles.  Considering the $60+k we have in our cash equivalent account had been paying out a steady 3.5% for three straight years, it was a no-brainer to take the financing.

[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. 

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.

That doesn't really mean we don't OWN our homes.  Anyway, my taxes on my city house AND my farm are less than $1000/year. 

[MrsPete]

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?!?

I'm paying about 2K to insure a house, a farm and three cars. 

[FIPurpose]

- 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.

That doesn't really mean we don't OWN our homes.  Anyway, my taxes on my city house AND my farm are less than $1000/year.

Many people have taxes far in excess of that, but just because something is taxed, doesn't mean that the government owns the property. It means that properties are connected to a government that are connected to paying for the shared needs of a community. Property taxes (as well as regular car taxes, which similarly do not mean you don't own your car) are a part of your upkeep. They pay for city and state services that actively provide and protect the land you own. The same is for and car taxes that states issue. Paying tax on a car or sales tax on gas is not buying your car back from the government or buying gas from the government, it is paying for the whole system that allows your car to be useful in the first place.

[RangerOne]

I think the only real issue with borrowing money for most, is that it is a signal that you are buying a car that is too expensive. It encourages overspending because most of us can afford a good size payment. And as you interest is ultra low. I have a car loan for around $10k at 1.8% new. Over the lifetime of the loan if I were to keep it, it would cost me like $500 extra...

I took the loan planning to pay it off in another year after I clear the last $5k of student loans, while leaving my emergency and house savings untouched.

To the credit of the recommendations on this site I probably did overspend. I bought a 2017 Elantra. I am happy with it and have a great warranty. The base cost of the car was $16k, $18k after tax and tag. First overspend portion. I got the car with two base option packages. I could have shaved off $1,500 and gotten more than I need.

Second I probably could have gone used with 30k miles for around $12000 probably $13,500 after tax and tag. So in reality I overspent at least about $4500. But to me I think its worth it since I also get an extra 30k miles of bumper to bumper warranty which should be about another 3-4 years of driving for me. The car has enough electronic comforts and is fuel efficient so it should be a nice ride for the next 10 years or so.

So if you take a loan you will almost always overspend. I definitely wasn't frugal, but I manage to waste a lot less than most car hungry buyers. An $18k car for me is about 13% of my gross so I am still pretty close to the 1/10th car buying rule.

[BoonDogle]

I'll throw in my two cents.

Everything is on a case-by-case basis. There are a lot of variables. For the record, MMM even had to take out a car loan for the new Leaf. It made sense because of credits.

I don't think car loans are the worst thing in the world if you can pay it off quickly. Some people might have good income, but not necessarily 5-15k in cash around if they really need a car, especially if they are just starting their mustacian journey. And unfortunately a lot of people still really need cars. Additionally, many may find that they have to negotiate and compromise with a less than mustachian partner.

Full disclosure- I took out a car loan last year. Payed a total of $61.02 in interest while paying it off quickly. I would have rather saved for a little longer to save the 60 bucks and possibly get a better deal, but I'm not the only decision maker around here.

what was you interest rate and at what point did you pay it off. b/c there is almost a 100% chance you would have done way better in the market. vs paying basically cash for that car.

I would add that it is not always as cut and dry as you try to make it sound when these issues come up.  First, how long is the car loan?  5 years - that is not a long time and whether you come out ahead is highly influenced by sequencing of returns.  Second, as mentioned before full coverage vs liability could easily offset any additional gains from the market.  Third, many people are not going all in on US stocks and opt instead for a mix of bonds / stocks.  Pay the car off with the bonds portion, invest the stock portion.

I would pay cash for the simple reason that it would force me to buy something of less value and I wouldn't have to fork over full coverage to the insurance company.

[Hotstreak]

I paid $6k for my car.  When I bought it, I couldn't find secured financing because it was 7 years old and had over 110,000 miles on it.  At the time, 7 years was generally the max age for vehicle financing and 100k was generally the max mileage.  I financed it using my unsecured LOC at 9%, then immediately transferred the balance to a Chase Slate card (0%, 18 months, $0 transfer fee).  I paid 4-5 days interest on the LOC, then paid it off before the 0% period on the credit card ended.  Financing was DEFINITELY worth it.


If I were to buy a car today, it would be in the same general age/mileage range as the last one I bought.  I think I could get secured financing this time since banks have relaxed their collateral requirements in the past few years...  To determine whether I would want the loan I would add up the increased insurance cost, loan fee's, title fee's, etc., and balance that against average market returns for the same period of time.  I would NOT pay a higher purchase price because of financing, or add warranty, or any of the other additional costs people sometimes get roped in to.

[caracarn]

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?!?

Yes, 46 and close.  Add some teenage drivers to your policy.  It's these things that the high falutin MMM viewpoint fails to see.  I want to see those articles when little MMM gets to be driving age.  The only option in our state is to not get them a license at all.  Once you get the license they are required to be insured even if they never drive a car.  It has to be a wonderful business.

[Cranky]

Car insurance varies enormously - we gave my dd & son-in-law a (used) car and continued paying the insurance on while they were in grad students (as our parents did for us.) The insurance more than doubled when they moved from Ohio to Chicago, and it was close to $2k/year.

Given the option, I pay for things in cash. I'm debt adverse, and I have moral issues with interest anyway.

When we bought our last car, we agreed on a price and then said we were paying cash, and they actually lowered the price then and there. It was interesting.

[accolay]

what was you interest rate and at what point did you pay it off. b/c there is almost a 100% chance you would have done way better in the market. vs paying basically cash for that car.

Yeah, I may have gained a little bit more in the market vs paying for a 14k newer used car at a low interest rate over three months, but it's immaterial, as I covered here:

I'm not the only decision maker around here.

We needed the car. We payed more for a newer lower mileage car that will last us a long time (Honda Fit- hence the price). There were none on Craigslist at the time that weren't under 100k miles or didn't have a salvage title. That will be the primary car for the lady. That she feels comfortable that wont break down. That was more expensive than I would have liked. And we didn't want to exhaust our emergency fund. Done deal.

My point is that the stock market isn't and can't always be the end all decision maker. If I have to work an extra week at the end of my working life to make up for that shortfall, so be it.