Is it better to pay for a car in full or finance it?

[hhihe730]

I have what I think is a pretty straightforward question. You all know way more about finances than I do though so if I am missing anything let me know. I am basically just considering whether or not to pay for a car in full up front or finance it for 48 months at 1.9%. If I pay in full it will leave me a little over $25k in savings. I’m single, no kids, healthy. I’m just wondering if there are any cons to paying it off up front as I’ve never done this before. It seems like the best way to go. Thanks for any advice.

[TheAnonOne]

I have what I think is a pretty straightforward question. You all know way more about finances than I do though so if I am missing anything let me know. I am basically just considering whether or not to pay for a car in full up front or finance it for 48 months at 1.9%. If I pay in full it will leave me a little over $25k in savings. I’m single, no kids, healthy. I’m just wondering if there are any cons to paying it off up front as I’ve never done this before. It seems like the best way to go. Thanks for any advice.

Interest under return = better to finance.

That said, I can't "do" debt, except for a mortgage, I always end up draining my cash to pay for anything simply to have the freedom.

So my vote is to pay cash, or, finance and pay it off in 3-6 months.

[dandarc]

Or "buy a different, less expensive car" where financing may or may not be available at similar terms.

If you're definitely buying the $25K vehicle, it is likely that you'll do better on the numbers financing it at 1.9%. But 4 years isn't that long of a time period and therefore the range of likely returns is wider. Of course even if returns go against you, financing you keep more of your money liquid for longer and that has some value as well. Unless you're just getting started, $25K isn't that large a portion of your situation and the timeframe is short, so probably not a big deal either way unless you're likely to replace this car close to the end of the loan term and need to make a similar decision again - then it is more of an ongoing strategy question vs. a one-off.

For me, the "set it and forget it" nature of a car loan makes it similar enough to a mortgage that so long as I haven't bought far too much vehicle for us, it is the same in my head as the mortgage. Just set up auto pay and you're done until it is paid off. Cannot say the same for everything I've tried to get access to cheap money, but when in need of car, a car loan falls in this category. YMMV.

[RWD]

With a low interest rate financing is absolutely better. Especially at 1.9% when you can find risk-free savings accounts right now that return 2.0% and CDs at 3.0%. Or I-Bonds at 9.62%.

All assuming you would buy exactly the same price car if you were not financing. Just don't use financing to justify spending more on the car.

[reeshau]

All assuming you would buy exactly the same price car if you were not financing. Just don't use financing to justify spending more on the car.

This is exactly why car companies so often offer low-cost financing.  And leases.  If people focused on the sticker price of those new vehicles, they would be in shock.  Focusing on the payments shifts thinking into monthly budgeting, not cost vs. value.

You may also find that car dealers are given incentives to finance purchases, even at low interest rates.  I had a dealer try to raise the price of a car I was looking at by $1,500 because I was paying cash--even though that is illegal in TX.

[neo von retorch]

IF your savings is currently in < 1.9% and you do not plan to move it to higher interest-bearing accounts, or invest it, it's definitely better to pay off the car up front, in full.

IF you plan to invest it, it's a gamble, because 48 months is a short enough time period that investments could easily lose value rather than gain value. So it might have been better to pay off the car, or it might end up better to utilize the loan to move money into investments and get a better return.

IF it cripples your emergency fund or nest egg, it's probably not worth getting a new car (though the used car market does suck right now).

Like TheAnonOne, while I've taken out low interest car loans in the past, I usually get annoyed having that on my balance sheet, and start to pay it off aggressively well before the term ends. But depending on your personal situation, if a new car is your best option, and you won't spend more than you would otherwise when choosing financing, it could very well be a good situation for you. It's reversible - by selling the car, or by paying off the loan if you change your mind.

[sonofsven]

I financed $15k of my new truck even though I could pay it out of my $25k cash reserves because I like to use the cash to churn bank accounts for $$.
If I keep the loan for the full five year term the interest will total approximately $1k, which I can generally make easily in 6 months of churning.

[ATtiny85]

We bought a new vehicle to displace a 25 year old one that was getting close to being fully done. 48 month 0.0% financing. No idea how the dealership makes that out to be a good deal. The quote was lower with financing than without. I mean, I know they made money off me somehow, but we were buying the vehicle with or without financing. It was hard to want to liquidate anything to pay it off. We will make payments for a bunch of months, then reassess when a couple CDs mature.

[plog]

It seems like the best way to go

Agreed. Squeezing nickels out of rocks isn't my idea of an enjoyable hobby.

I do things for fun that other people don't understand, so I get how people enjoy this consumer arbitrage.  Churning credit cards, chasing reward points  and borrowing for less than expected returns is an enjoyable and profitable hobby to lots here. But it holds no appeal to me. I'd rather focus my mental energy and time in other ways.

Buy the car with cash and be done with it.

[RWD]

Squeezing nickels out of rocks isn't my idea of an enjoyable hobby.

Assuming a 3% loan over 60 months and an expected 10% return on investments those "nickels" are worth $2,500 for every $10k borrowed (compared to paying cash).

[volleyballer]

My $0.02, take the cheap loan money and use the cash to buy I bonds.

[JLee]

I have what I think is a pretty straightforward question. You all know way more about finances than I do though so if I am missing anything let me know. I am basically just considering whether or not to pay for a car in full up front or finance it for 48 months at 1.9%. If I pay in full it will leave me a little over $25k in savings. I’m single, no kids, healthy. I’m just wondering if there are any cons to paying it off up front as I’ve never done this before. It seems like the best way to go. Thanks for any advice.

Interest under return = better to finance.

That said, I can't "do" debt, except for a mortgage, I always end up draining my cash to pay for anything simply to have the freedom.

So my vote is to pay cash, or, finance and pay it off in 3-6 months.

Why would you pay off sub-2% debt any faster than you have to with inflation at 9%?!

[bryan995]

It’s an emotional decision - and many get it wrong.

The logical decision is to use cheap leverage when it is available. It is a tool.
1.9% loan with >8% inflation would be considered cheap leverage.
Just don’t use the loan as an excuse to buy more car than you would otherwise.

[Dicey]

My $0.02, take the cheap loan money and use the cash to buy I bonds.

It’s an emotional decision - and many get it wrong.

The logical decision is to use cheap leverage when it is available. It is a tool.
1.9% loan with >8% inflation would be considered cheap leverage.
Just don’t use the loan as an excuse to buy more car than you would otherwise.

Ding! Ding! Ding!

[JupiterGreen]

It seems like the best way to go

Agreed. Squeezing nickels out of rocks isn't my idea of an enjoyable hobby.

I do things for fun that other people don't understand, so I get how people enjoy this consumer arbitrage.  Churning credit cards, chasing reward points  and borrowing for less than expected returns is an enjoyable and profitable hobby to lots here. But it holds no appeal to me. I'd rather focus my mental energy and time in other ways.

Buy the car with cash and be done with it.

I agree with this 100% There is a mental toll to having to track cancellations and whatnot.

That sounds like a lot for a new car. We bought a new (stock) truck for around that price last year, but I don't know what prices are doing now. If you can find a less expensive car do that, pay cash since you have it, and be done.

[JLee]

It seems like the best way to go

Agreed. Squeezing nickels out of rocks isn't my idea of an enjoyable hobby.

I do things for fun that other people don't understand, so I get how people enjoy this consumer arbitrage.  Churning credit cards, chasing reward points  and borrowing for less than expected returns is an enjoyable and profitable hobby to lots here. But it holds no appeal to me. I'd rather focus my mental energy and time in other ways.

Buy the car with cash and be done with it.

I agree with this 100% There is a mental toll to having to track cancellations and whatnot.

That sounds like a lot for a new car. We bought a new (stock) truck for around that price last year, but I don't know what prices are doing now. If you can find a less expensive car do that, pay cash since you have it, and be done.

What loans have you had where it's complicated?   Frankly it's easier to do a loan application and hand someone a check than it is to sell investments, transfer funds, get a bank check, and also do the subsequent tax stuff later.

[RWD]

It seems like the best way to go

Agreed. Squeezing nickels out of rocks isn't my idea of an enjoyable hobby.

I do things for fun that other people don't understand, so I get how people enjoy this consumer arbitrage.  Churning credit cards, chasing reward points  and borrowing for less than expected returns is an enjoyable and profitable hobby to lots here. But it holds no appeal to me. I'd rather focus my mental energy and time in other ways.

Buy the car with cash and be done with it.

I agree with this 100% There is a mental toll to having to track cancellations and whatnot.

That sounds like a lot for a new car. We bought a new (stock) truck for around that price last year, but I don't know what prices are doing now. If you can find a less expensive car do that, pay cash since you have it, and be done.

What loans have you had where it's complicated?   Frankly it's easier to do a loan application and hand someone a check than it is to sell investments, transfer funds, get a bank check, and also do the subsequent tax stuff later.

+1. It's just a little more paperwork upfront and then you just set the loan on autopay. Basically set it and forget it.

[dandarc]

Yeah - car loans and mortgages (without escrow ideally) are super easy to deal with. Was harder to get the sales guy to just realize we were an easy sale the last time we bought a car with a loan.

[JupiterGreen]

It seems like the best way to go

Agreed. Squeezing nickels out of rocks isn't my idea of an enjoyable hobby.

I do things for fun that other people don't understand, so I get how people enjoy this consumer arbitrage.  Churning credit cards, chasing reward points  and borrowing for less than expected returns is an enjoyable and profitable hobby to lots here. But it holds no appeal to me. I'd rather focus my mental energy and time in other ways.

Buy the car with cash and be done with it.

I agree with this 100% There is a mental toll to having to track cancellations and whatnot.

That sounds like a lot for a new car. We bought a new (stock) truck for around that price last year, but I don't know what prices are doing now. If you can find a less expensive car do that, pay cash since you have it, and be done.

What loans have you had where it's complicated?   Frankly it's easier to do a loan application and hand someone a check than it is to sell investments, transfer funds, get a bank check, and also do the subsequent tax stuff later.

Agreed loans aren't like juggling CC churning etc. But loans add to my mental labor (people from poverty will understand this). So I try not to hold debt, that's just how I roll. The only loans I've held are mortgages and student loans debt otherwise, I've never had any other type of loan. I generally know if we need a car so we just put it in the budget and save. We bought a new truck last year, paid in cash and now we just own it. I'm not opposed to it and I would make the effort if it was a substantial amount of money but 1.9% vs 2% for my savings eh, I'd pass. 

[dandarc]

That's kinda the wrong interest rate to compare it to. Unless savings account really is the alternative - and in that case some soul searching around what risk / safety really mean to you.

I'd be looking at more like 8 to 10% vs. 1.9% because in a very direct way paying cash for the car vs. borrowing would reduce investments for me. That being said, cars are usually relatively small potatoes in the grand scheme, so this isn't as big a deal as the pre-pay the mortgage vs. don't question.

[clarkfan1979]

It’s an emotional decision - and many get it wrong.

The logical decision is to use cheap leverage when it is available. It is a tool.
1.9% loan with >8% inflation would be considered cheap leverage.
Just don’t use the loan as an excuse to buy more car than you would otherwise.

Mathematically this logic wins out. However, to get a 1.9% loan, that's usually a new car that cost at least $25,000. After 5 years, that car will be worth around $10,000. After 10 years, that car will be worth around $5,000.

Pay $5,000 cash for a 10 year old car with 100,000 miles. Drive it for 5 years and sell it for $3,000. That's the MMM formula.

[RWD]

It’s an emotional decision - and many get it wrong.

The logical decision is to use cheap leverage when it is available. It is a tool.
1.9% loan with >8% inflation would be considered cheap leverage.
Just don’t use the loan as an excuse to buy more car than you would otherwise.

Mathematically this logic wins out. However, to get a 1.9% loan, that's usually a new car that cost at least $25,000. After 5 years, that car will be worth around $10,000. After 10 years, that car will be worth around $5,000.

Pay $5,000 cash for a 10 year old car with 100,000 miles. Drive it for 5 years and sell it for $3,000. That's the MMM formula.

I had a ~$10k loan on a used car for sub-2%. Currently my credit union is offering rates as low as 2.49% for used cars.

[JLee]

It’s an emotional decision - and many get it wrong.

The logical decision is to use cheap leverage when it is available. It is a tool.
1.9% loan with >8% inflation would be considered cheap leverage.
Just don’t use the loan as an excuse to buy more car than you would otherwise.

Mathematically this logic wins out. However, to get a 1.9% loan, that's usually a new car that cost at least $25,000. After 5 years, that car will be worth around $10,000. After 10 years, that car will be worth around $5,000.

Pay $5,000 cash for a 10 year old car with 100,000 miles. Drive it for 5 years and sell it for $3,000. That's the MMM formula.

I have 1.49% on a (at the time) 6yo used car.  Before that I had a 1.99% loan on a 12yo used car (under $10k).

Also, I don't think you're aware of current vehicle prices. The cheapest 2016-2017 Prius (without salvage or crash history, under 112k miles) within 200 miles of me is a 2017 Prius Two with 94,515 miles for $20,600.  A new Prius starts at $25,075.  The cheapest 2011-2013 under 112k is a 2013 Prius Three with 104,575 miles for $13,900.

I propose an alternate strategy - if you can pay $5,000 cash for a 10 year old car with 100,000 miles, do it, flip it, and repeat. You'll be rich in no time!

[HPstache]

That's kinda the wrong interest rate to compare it to. Unless savings account really is the alternative - and in that case some soul searching around what risk / safety really mean to you.

I'd be looking at more like 8 to 10% vs. 1.9% because in a very direct way paying cash for the car vs. borrowing would reduce investments for me. That being said, cars are usually relatively small potatoes in the grand scheme, so this isn't as big a deal as the pre-pay the mortgage vs. don't question.

Except, as pointed out above, 8-10% ROI is a number we use for long periods of time.  4 years is a short period of time that you really can't make similar assumptions about.

[dandarc]

That's kinda the wrong interest rate to compare it to. Unless savings account really is the alternative - and in that case some soul searching around what risk / safety really mean to you.

I'd be looking at more like 8 to 10% vs. 1.9% because in a very direct way paying cash for the car vs. borrowing would reduce investments for me. That being said, cars are usually relatively small potatoes in the grand scheme, so this isn't as big a deal as the pre-pay the mortgage vs. don't question.

Except, as pointed out above, 8-10% ROI is a number we use for long periods of time.  4 years is a short period of time that you really can't make similar assumptions about.

And there's a lot less interest to save by paying it in full. I tend to think more in general strategies that should work. This year it might be a car you're buying. A few years from now solar panels or a second mortgage to just raise some extra funds to invest. 10 years another car. We actually get to make these kinds of decisions where low-cost financing might work out more often than we might think.

This particular car purchase may or may not work out, but on average over our lifetime we'll do better to apply this strategy. I also personally have a bare minimum of $10,000 as a "give a damn" level on these things - will just pay for it if under that, might consider financing if terms are good and the cost is over that. And a minimum loan repayment time of at least several years. Tried this with CC balance transfers thinking I could roll em over indefinitely and lets just say that is more stress than I want to put up with - the availability of promotional offers just went away across the board in 2020, for example.

[Psychstache]

Agreed loans aren't like juggling CC churning etc. But loans add to my mental labor (people from poverty will understand this). So I try not to hold debt, that's just how I roll. The only loans I've held are mortgages and student loans debt otherwise, I've never had any other type of loan. I generally know if we need a car so we just put it in the budget and save. We bought a new truck last year, paid in cash and now we just own it. I'm not opposed to it and I would make the effort if it was a substantial amount of money but 1.9% vs 2% for my savings eh, I'd pass.

????? I grew up in poverty (family constantly scraping by, evictions/repos during my childhood/young adulthood). I have gotten 2 new car loans in the last 12 months (0.9% and 1.9%) and am not planning on paying 1 penny early. Neither that nor my mortgage add to my mental labor and rarely even cross my mind. as someone else said, set it and forget it autopay and move on with life.

[bryan995]

It’s an emotional decision - and many get it wrong.

The logical decision is to use cheap leverage when it is available. It is a tool.
1.9% loan with >8% inflation would be considered cheap leverage.
Just don’t use the loan as an excuse to buy more car than you would otherwise.

Mathematically this logic wins out. However, to get a 1.9% loan, that's usually a new car that cost at least $25,000. After 5 years, that car will be worth around $10,000. After 10 years, that car will be worth around $5,000.

Pay $5,000 cash for a 10 year old car with 100,000 miles. Drive it for 5 years and sell it for $3,000. That's the MMM formula.

I have 1.49% on a (at the time) 6yo used car.  Before that I had a 1.99% loan on a 12yo used car (under $10k).

Also, I don't think you're aware of current vehicle prices. The cheapest 2016-2017 Prius (without salvage or crash history, under 112k miles) within 200 miles of me is a 2017 Prius Two with 94,515 miles for $20,600.  A new Prius starts at $25,075.  The cheapest 2011-2013 under 112k is a 2013 Prius Three with 104,575 miles for $13,900.

I propose an alternate strategy - if you can pay $5,000 cash for a 10 year old car with 100,000 miles, do it, flip it, and repeat. You'll be rich in no time!

Yes the days of the $5000 magnificently maintained 100,000 mile Honda Accord are over.

The cost of the car also means absolutely nothing. Look at the total-cost-of-ownership. We are in some weird times with inflation, gas prices, EV tax credits, record demand and low inventory.

Buying new can still make sense and could provide similar or even lower TCO over used.

[solon]

You guys wouldn't know a mustache if it took up residence on your lip. I think comments like these are what "facepunch" was invented for.

Here's a sample from craigslist. If I was in the market for a car right now, these are the ones I'd go look at.

[JLee]

You guys wouldn't know a mustache if it took up residence on your lip. I think comments like these are what "facepunch" was invented for.

Here's a sample from craigslist. If I was in the market for a car right now, these are the ones I'd go look at.

Good for you.  The claim was 10 years old, 100k, $5k.

Here's your list:

1) 170k miles and 50% over $5k
2) 201k miles, rebuilt title, airbag light
3) 143k miles, body damage, interior damage
4) 128k miles, 56% over $5k
5) 135k miles, 20% over $5k, went "limp" 2 months ago without diagnosis
6) 123k miles, 20% over $5k, broken back window
7) 141k miles, 40% over $5k, about to be 78% over $5k
8) 80% over $5k

[RWD]

You guys wouldn't know a mustache if it took up residence on your lip. I think comments like these are what "facepunch" was invented for.

Here's a sample from craigslist. If I was in the market for a car right now, these are the ones I'd go look at.

Good for you.  The claim was 10 years old, 100k, $5k.

Here's your list:

1) 170k miles and 50% over $5k
2) 201k miles, rebuilt title, airbag light
3) 143k miles, body damage, interior damage
4) 128k miles, 56% over $5k
5) 135k miles, 20% over $5k, went "limp" 2 months ago without diagnosis
6) 123k miles, 20% over $5k, broken back window
7) 141k miles, 40% over $5k, about to be 78% over $5k
8) 80% over $5k

And don't forget that because of the way model years work a 2012 is almost certainly over 10 years old by now. I did an advanced search on Autotrader and only found 81 vehicles nationwide for sale between $3k - $5k, under 100k miles, and 2012 or newer. Most of these have obvious body damage in the lead picture or are listed by a salvage auction company. There are several that look like price typo or scam (2017 Porsche Macan with 39k miles for $4k!). A quick skim through the listings I only see about a dozen that look legit and don't need serious repairs. In the entire nation.

Link

[solon]

You guys wouldn't know a mustache if it took up residence on your lip. I think comments like these are what "facepunch" was invented for.

Here's a sample from craigslist. If I was in the market for a car right now, these are the ones I'd go look at.

Good for you.  The claim was 10 years old, 100k, $5k.

Here's your list:

1) 170k miles and 50% over $5k
2) 201k miles, rebuilt title, airbag light
3) 143k miles, body damage, interior damage
4) 128k miles, 56% over $5k
5) 135k miles, 20% over $5k, went "limp" 2 months ago without diagnosis
6) 123k miles, 20% over $5k, broken back window
7) 141k miles, 40% over $5k, about to be 78% over $5k
8) 80% over $5k

No, the claim was you-should-just-get-a-new-Prius-because-5-year-old-Priuses-are-only-slightly-less-expensive. Extremely unmustachian. I was showing some mustachian options.

[sonofsven]

You guys wouldn't know a mustache if it took up residence on your lip. I think comments like these are what "facepunch" was invented for.

Here's a sample from craigslist. If I was in the market for a car right now, these are the ones I'd go look at.

Good for you.  The claim was 10 years old, 100k, $5k.

Here's your list:

1) 170k miles and 50% over $5k
2) 201k miles, rebuilt title, airbag light
3) 143k miles, body damage, interior damage
4) 128k miles, 56% over $5k
5) 135k miles, 20% over $5k, went "limp" 2 months ago without diagnosis
6) 123k miles, 20% over $5k, broken back window
7) 141k miles, 40% over $5k, about to be 78% over $5k
8) 80% over $5k

No, the claim was you-should-just-get-a-new-Prius-because-5-year-old-Priuses-are-only-slightly-less-expensive. Extremely unmustachian. I was showing some mustachian options.

I'd say you should get a new Prius if a five year old Prius is only slightly less expensive, for all the obvious reasons.

[JLee]

You guys wouldn't know a mustache if it took up residence on your lip. I think comments like these are what "facepunch" was invented for.

Here's a sample from craigslist. If I was in the market for a car right now, these are the ones I'd go look at.

Good for you.  The claim was 10 years old, 100k, $5k.

Here's your list:

1) 170k miles and 50% over $5k
2) 201k miles, rebuilt title, airbag light
3) 143k miles, body damage, interior damage
4) 128k miles, 56% over $5k
5) 135k miles, 20% over $5k, went "limp" 2 months ago without diagnosis
6) 123k miles, 20% over $5k, broken back window
7) 141k miles, 40% over $5k, about to be 78% over $5k
8) 80% over $5k

No, the claim was you-should-just-get-a-new-Prius-because-5-year-old-Priuses-are-only-slightly-less-expensive. Extremely unmustachian. I was showing some mustachian options.

Excuse me?

Pay $5,000 cash for a 10 year old car with 100,000 miles. Drive it for 5 years and sell it for $3,000. That's the MMM formula.

This was subsequently refuted.

[JupiterGreen]

Agreed loans aren't like juggling CC churning etc. But loans add to my mental labor (people from poverty will understand this). So I try not to hold debt, that's just how I roll. The only loans I've held are mortgages and student loans debt otherwise, I've never had any other type of loan. I generally know if we need a car so we just put it in the budget and save. We bought a new truck last year, paid in cash and now we just own it. I'm not opposed to it and I would make the effort if it was a substantial amount of money but 1.9% vs 2% for my savings eh, I'd pass.

????? I grew up in poverty (family constantly scraping by, evictions/repos during my childhood/young adulthood). I have gotten 2 new car loans in the last 12 months (0.9% and 1.9%) and am not planning on paying 1 penny early. Neither that nor my mortgage add to my mental labor and rarely even cross my mind. as someone else said, set it and forget it autopay and move on with life.

Maybe it's not that, perhaps the psychology is just a little different for me. It could have to do with the fact that I do ALL the financial stuff in my household and I am not a "mathy" person so I find this labor really stressful. I don't want to keep track of another account (that I could just as easily avoid). I went through the mortgage crisis and had my loan in limbo for a while (it was unclear who owned it), it was stressful. I haven't owned that many cars and I've never owned a new one aside from the one we bought last year (that my partner drives). The only reason we bought new was it was cheaper (supply chain issues). My strategy to buying cars has been to throw some extra money at my emergency fund (it is held in a 2.15% interest saving account) and then just pay my emergency fund back (if there ends up being a difference). It all happens in less than a year so I'm wondering what short term product people are putting this car money into? The truck we bought was the most we've ever paid, my car (used) was about 6k and even if my next one is 12k, it seems to still makes sense for me to pull the $ out of my liquid fund. But I'm not closed to the strategy you're recommending, if I felt it was a decent amount of money I'd use it. Perhaps it is simply that my ability at mental juggling is subpar so I prefer to streamline if I see the gain as minimal.