Author Topic: Don't need an auto loan, but at 1.99% should I get an auto loan?  (Read 6025 times)

Credaholic

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The subject says it all. My credit union is offering 1.99% financing on used vehicles (which includes financing my existing car) and I'm wondering if at that rate I should do a loan and put the money to better use elsewhere.

Edited to clarify, I would not be buying a new car. I would just take whatever they'd give me on my existing car which is worth about $10K.
« Last Edit: August 07, 2014, 11:06:31 AM by Credaholic »

viper155

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Re: Don't need an auto loan, but at 1.99% should I get an auto loan?
« Reply #1 on: August 06, 2014, 09:44:39 PM »
No

GGNoob

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Re: Don't need an auto loan, but at 1.99% should I get an auto loan?
« Reply #2 on: August 06, 2014, 09:44:59 PM »
Keep in mind that if you have a loan, the bank will require you have full coverage insurance on your car. So if the car is cheap and you only wanted liability, you will now be paying interest plus more for insurance.

sideways

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Re: Don't need an auto loan, but at 1.99% should I get an auto loan?
« Reply #3 on: August 06, 2014, 09:54:41 PM »
I say no. If the dealer knows you're going to pay with cash, they'll work a bit harder to make you happy. There's less waiting, less paperwork, less of a chance of something falling through.

Fun story: we negotiated for a used car and were happy with the price. When we went to pay, they refused our check, because it didn't have our current address printed on it. So I offered to pay by credit card, and they said ok!  Better than losing the deal. Got some cash back on that purchase!

sedura

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Re: Don't need an auto loan, but at 1.99% should I get an auto loan?
« Reply #4 on: August 06, 2014, 11:20:18 PM »
I'll go against the grain here. 1.99% is cheap money. I prefer the liquidity of keeping cash, and it also allows me to invest in other (hopefully) higher paying investments.

Is this purchase a new or used car?  Would you have full coverage insurance regardless of whether you have a loan?

I bought a new Odyssey, and I financed the difference between my trade in and the cost of the new car. They were offering .9%. I would fully insurance the new car whether or not I had to with a 30k purchase, so that was not part of the equation for me.

rmendpara

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Re: Don't need an auto loan, but at 1.99% should I get an auto loan?
« Reply #5 on: August 07, 2014, 06:31:32 AM »
Assuming it doesn't affect other costs (i.e. insurance would be same, maintenance, whatever else), then it's just up to you.

Personally, I think it's just more trouble than it's worth.

Pure numbers suggest you may come out ahead, but it will be by a small margin, if any. The term (even at 5 years) won't be enough to make a huge dent one way or another.

If you really want the compounded inflation to devalue the debt, you can only do this through a mortgage, which at 15-30 years, can really seem much less after even a decade (even at 2% annual inflation, it will likely be 20%+ less in real dollar terms after 10 years).

ragnathor

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Re: Don't need an auto loan, but at 1.99% should I get an auto loan?
« Reply #6 on: August 07, 2014, 07:07:22 AM »
I say yes, but depends on the value of your loan/car. If it's a 10k loan, assuming you can get 6% in the market thats $400 per year (and less each year as you pay it down), although this is offset somewhat by the increased insurance costs. That's not insignificant.

shotgunwilly

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Re: Don't need an auto loan, but at 1.99% should I get an auto loan?
« Reply #7 on: August 07, 2014, 07:29:56 AM »
I would get the loan.

pagoconcheques

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Re: Don't need an auto loan, but at 1.99% should I get an auto loan?
« Reply #8 on: August 07, 2014, 07:49:48 AM »
I say no. If the dealer knows you're going to pay with cash, they'll work a bit harder to make you happy.

My experience is to the contrary.  Dealerships often make more money on the loan than on the car itself.  In a typical 3-part transaction (new car, trade in, loan), the highest profit is on the trade-in, then the loan, then the new car.  In addition, individual salespeople at the dealership often get bonuses for getting customers to sign loans. 

If you want to experience a low-leverage buyer experience at a dealership, tell them you are a cash buyer with no trade in.  It can be very difficult to get a low price on the car unless you are ordering a car that is not yet built or maybe one in the pipeline that is not on the lot yet as the dealer hasn't had to pay interest on the floor plan loan for that vehicle.

frugaliknowit

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Re: Don't need an auto loan, but at 1.99% should I get an auto loan?
« Reply #9 on: August 07, 2014, 08:21:37 AM »
I would only consider taking the loan if paying cash would draw down my cash reserves too low for comfort.

In comparing rates of return, you need to compare "apples to apples".  Not having the loan is a risk free rate of return of 1.99% (after tax).  What other risk free rate of return exceeds 1.99%?  In the 25% tax bracket, it would have to be around 2.49%.

Then, there is the administrative hassle of having a loan on the books and the psychological cost.

minimustache1985

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Re: Don't need an auto loan, but at 1.99% should I get an auto loan?
« Reply #10 on: August 07, 2014, 10:24:41 AM »
I would take the loan if you're at a place where you're comfortable with the debt if your investment doesn't go well (since car loans are short term) AND if it doesn't affect your other costs like insurance and sale price.

Keep in mind cash can sometimes get you a better deal, especially when a dealership is trying to hit their numbers.  They might want to sell for X, but it's really hard to turn down a check written for Y sitting right in front of them as long as Y is reasonable.

frugalnacho

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Re: Don't need an auto loan, but at 1.99% should I get an auto loan?
« Reply #11 on: August 07, 2014, 10:43:00 AM »
Yes I would take it.  As others pointed out you do have to consider the insurance.  If the loan will force you to have full coverage that you otherwise would not have, then it may not make sense.  If you plan to insure the car the same either way then for sure do it.

I'll second that by paying cash you lose some leverage.  The dealer is willing to lose a little more on the car if they think they can make it up in financing.  The op said his credit union was offering the financing though.  Don't tell the dealership that though until AFTER you negotiate the price.  Let them think you are going to finance through them, then after the price is negotiated you can negotiate the financing separately.  If they beat the CU then take it, if not then you have 1.99% locked in with the credit union.

The administrative hassle of having a loan on the books is negligible.  You can set it up to auto pay every month and never have to worry about it again.  I currently have an auto loan at 1.7%.  It does suck looking at my net worth and seeing a debt on it, but it was a conscious decision that I think will benefit me overall so I deal with it.

I also disagree that financial gain is negligible.

If you assume you can get 4% in the market, and the loan is costing you 2%, then you are effectively losing 2% of returns.  Ie a $10k loan will cost you about $500 over 5 years, but the opportunity cost will be twice that.  Is it worth an extra $500 over the next 5 years to keep a loan on the books? I think so.  Of course the market could do better or worse, but I am assuming a 4% return over the life of the loan for simplicity.

$500 is nothing to sneeze at.  $500 should be respected.  After all, a millionaire is made $10 at a time.  http://www.mrmoneymustache.com/2011/08/01/a-millionaire-is-made-ten-bucks-at-a-time/


eccdogg

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Re: Don't need an auto loan, but at 1.99% should I get an auto loan?
« Reply #12 on: August 07, 2014, 10:51:57 AM »
I recently had this decision and took the loan.  Went to carmax with cash but sub 2% was too good to pass up.

Dividend yield on S&P 500 is close to 2% so you can make back the interest rate just in dividends. 

FrugalSpendthrift

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Re: Don't need an auto loan, but at 1.99% should I get an auto loan?
« Reply #13 on: August 07, 2014, 12:19:30 PM »
I took an auto loan at 1.3%, that I didn't need to.  The bank started sending me letters stating that I needed to lower my insurance deductible.  That was enough of an annoyance that I promptly paid off the loan.  Another bank that I don't need to be dealing with.

Dicey

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Re: Don't need an auto loan, but at 1.99% should I get an auto loan?
« Reply #14 on: August 07, 2014, 12:44:40 PM »
Credaholic, I was going to shout HELL NO, just based on your handle. Since you edited your post, I'm going to change my answer. Assuming you are not in a butt-load of consumer debt. (I'm guessing not since your car is paid for.) And IF your insurance coverage is adequate, and the interest rate is fixed, I'd go for it. You can either pay off something more expensive or better still, invest the proceeds. Besides being a source of cheap money, it could also boost your credit score, which is more important pre-FIRE than post. I did it once (and wrote about it here) and everything worked out fine.

SnackDog

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Re: Don't need an auto loan, but at 1.99% should I get an auto loan?
« Reply #15 on: August 07, 2014, 01:17:46 PM »
If you have that much equity in the car, sell it, put the cash to work and buy something much cheaper.  There is another thread here on 50 mpg cars for cheap.  If you have $10,000 in the car, it could appreciate to $12,500 well invested, vs depreciating to $6,000 in three years.
« Last Edit: August 07, 2014, 01:19:29 PM by SnackDog »

Credaholic

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Re: Don't need an auto loan, but at 1.99% should I get an auto loan?
« Reply #16 on: August 07, 2014, 06:41:52 PM »
I edited above to clarify that I wouldn't be buying a new car (just refinancing my existing car) but wanted to say I agree with those who have said you get a better deal if they think you're financing. In my experience, you should always act like you're going to use the financing that the dealership is offering while you're negotiating the deal. Then, once the deal is hammered out you can pull out your check book (or your credit card - done this too, take the rewards! :) and then pay it off, of course.)

I'm fully insured because I have an umbrella policy which requires high coverage on my autos, so liability insurance isn't an option for me either way.

I agree, a millionaire is made $10 at a time. I always take advantage of bank account offers, like right now I have $15K sitting at Chase for 3 months for a guaranteed $400. And this auto loan also comes with a $100 cash back bonus for opening it!

Credaholic, I was going to shout HELL NO, just based on your handle. Since you edited your post, I'm going to change my answer.

No, I am not in a butt-load of consumer debt! :) We have a mortgage on our house and a mortgage on our rental, and I do currently have a $2K loan on this car which will be paid off very soon, but that sums up all of our debts. The Credaholic handle is because I'm addicted to 1) maximizing credit card rewards, and 2) maximizing our credit scores. Both of these hobbies pay off nicely!

SnackDog, you may have a point, and it's something I've considered. I drive so little that my awesome gas mileage is really wasted on me.
« Last Edit: August 07, 2014, 06:50:11 PM by Credaholic »

Dicey

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Re: Don't need an auto loan, but at 1.99% should I get an auto loan?
« Reply #17 on: August 07, 2014, 07:50:20 PM »
LOL, Cred. Thanks for the clarification.

We have the same deal with Chase. Did you know if you open a CC with them and spend 1k you can get another $200, for a total of $600? Not sure if you have to do it all at the same time. We were so over WF (we called them WtF? So many stupid mistakes and all of them a PITA to fix). When Chase opened a branch nearby, we began the long slog of switching banks. Chase has been great so far. The thing that makes me laugh is that every time they see our balance, they want me to talk to their "private" banker. No thanks. We just sold a house and we have plans for that money that don't include retail-priced, high-fee investments, thankyouverymuch.

Based on your additional details, especially the extra Benjamin, I still say go for it. Some folks see credit as evil, others use it as a tool. Looks like we're on the same page.

And, yeah, I understand the mileage thing. We considered a hybrid, but we just don't drive enough to warrant the additional cost. And no, I'm not going to drive a POS car just because someone in a totally different financial situation says I should.

frugalnacho

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Re: Don't need an auto loan, but at 1.99% should I get an auto loan?
« Reply #18 on: August 07, 2014, 07:52:13 PM »
Fuck banks in general.  I will never belong to another bank.  Credit unions only for me from now on.

TomTX

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Re: Don't need an auto loan, but at 1.99% should I get an auto loan?
« Reply #19 on: August 08, 2014, 05:41:44 AM »
My local credit union offers 1.59% on car loans. I was considering getting a car loan on my existing, paid off and using it toward solar panels, as that was the cheapest loan money I could find.

Unfortunately, with no state/local/utility incentives and power at $0.10/kwh, I couldn't really make the payback work out well enough even with 1.59% money.

Admittedly, with the S&P dividend at 1.96% and a 15% tax bracket - I can really see the temptation to go ahead and do it anyway. Risk is pretty darn low, and the upside potential is really interesting.

Only current debt is a 2.50% mortgage.

Joggernot

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Re: Don't need an auto loan, but at 1.99% should I get an auto loan?
« Reply #20 on: August 08, 2014, 06:32:20 AM »
We were so over WF (we called them WtF? So many stupid mistakes and all of them a PITA to fix).
We gave up on  WF also, and moved to our Credit Union.  Cheap money using the CDs as collateral when the need arises, plus, they no longer even check our credit rating.  Nice to work with local people at the Credit Union.