New Car! Do I take a loan or pay in full?

[aes421]

Hi all,
We have finally got to the point where my husband's 1999 4runner keeps breaking down.  At this point we're putting more into it than it's worth I feel.  Since we have the money I figured it's time to upgrade him to something nicer.  Between the two of us we make about 110,000k which is fairly high for the area we live in (median household income is $49k here).  We have fairly low living expenses, max out my 401k and both IRA's, so we are not hurting for money.  We're looking at a used VW Jetta 1.8 T around 14-15k.  I'd love to go lower than that, but my husband is picky, so unfortunately type of car is not negotiable (trust me, I wish it were).

So my question is do I take a loan or pay in full?  We have the money to buy it up front, but we also have very good credit scores and I'm wondering if I can get an loan with a rate less than 3% (Orion says as low as 1.79%) if it makes more sense to put the cash in the stock market and pay monthly?

[boarder42]

thats such a terrible car to get the small increased savings you'd have from investing will be offset by the maint costs of a VW.

[HPstache]

I know you're not asking advice about this, but I would stay far away from a Volkswagen, that's just my "car guy" opinion... I rarely hear people say they are happy with their VW's. 

Regarding the loan, I am surprised you can get such a low interest rate on a used car.  How long would the loan be and would you be buying from a dealer or private party?  I am sure that the canned answer you will hear from here is that it is mathematically superior to take the loan and invest instead.  Reason being over long periods of time your investments can bring in 7-8% on average.  However, if it's a short loan such as 3 years, there is a much greater chance that you will return less than 3% or even return negative on your investments which would mean it would have been better to buy the car in full.  I believe the statistic is that around 50% of the 3 year periods return less than 4%, someone who has access to more powerful tools than I do could verify that. 

Me personally?  I prefer being debt free so I would pay in cash.  I would also buy from a private party with my cash because from my experience cash gets you a better deal with a private party than you would with a dealer.  Seems like dealers these days either refuse to take cash and certainly won't give you a better deal if you're a cash buyer.  I would not blame you if you wanted to take the loan either, there are obvious benefits to that as well... just don't let anyone tell you that you will return a certain amount over a short amount of time.

[charis]

We have a VW and I say, never again! Very expensive to maintain and repair and parts of the electric system started failing pretty early on.   I wouldn't take a loan unless I had tax-advantaged space left to fill or it would deplete the ER fund.  And if that were the case, I'd probably be looking for a less expensive car and to pay off the loan as quickly as possible.

[RelaxedGal]

For us, deciding between "sell stock and pay cash" or "take 2.25% loan" we went with the loan.

As v8rx7guy said, stocks might not do better than 4% over the next 3 years so that is a consideration, but generally the math says loan.

[Another Reader]

A Volkswagen turbo will likely cost you as much to repair as the 1999 4 Runner over a few years of ownership.  How old is this car and how many miles?  Volkswagens generally have problems starting at about three years and 45k miles.  I would not buy this car.  Have your husband do the research on the reliability of this model and the costs of repair, especially the cost of dealing with a turbo failure.  The car might not even last until the loan is paid off.

Maybe a Honda Civic Si would be something to consider instead.  Sort of sporty and a lot more reliable.

[HPstache]

I know you're not asking advice about this, but I would stay far away from a Volkswagen, that's just my "car guy" opinion... I rarely hear people say they are happy with their VW's. 

Regarding the loan, I am surprised you can get such a low interest rate on a used car.  How long would the loan be and would you be buying from a dealer or private party?  I am sure that the canned answer you will hear from here is that it is mathematically superior to take the loan and invest instead.  Reason being over long periods of time your investments can bring in 7-8% on average.  However, if it's a short loan such as 3 years, there is a much greater chance that you will return less than 3% or even return negative on your investments which would mean it would have been better to buy the car in full.  I believe the statistic is that around 50% of the 3 year periods return less than 4%, someone who has access to more powerful tools than I do could verify that. 

Me personally?  I prefer being debt free so I would pay in cash.  I would also buy from a private party with my cash because from my experience cash gets you a better deal with a private party than you would with a dealer.  Seems like dealers these days either refuse to take cash and certainly won't give you a better deal if you're a cash buyer.  I would not blame you if you wanted to take the loan either, there are obvious benefits to that as well... just don't let anyone tell you that you will return a certain amount over a short amount of time.

I am correcting myself because I found a resource.  And it looks to be closer to 40% (but I am also interpolating from a chart).  Still the point remains that you can't be sure of anything over a short amount of time.

[Jrr85]

Hi all,
We have finally got to the point where my husband's 1999 4runner keeps breaking down.  At this point we're putting more into it than it's worth I feel.  Since we have the money I figured it's time to upgrade him to something nicer.  Between the two of us we make about 110,000k which is fairly high for the area we live in (median household income is $49k here).  We have fairly low living expenses, max out my 401k and both IRA's, so we are not hurting for money.  We're looking at a used VW Jetta 1.8 T around 14-15k.  I'd love to go lower than that, but my husband is picky, so unfortunately type of car is not negotiable (trust me, I wish it were).

So my question is do I take a loan or pay in full?  We have the money to buy it up front, but we also have very good credit scores and I'm wondering if I can get an loan with a rate less than 3% (Orion says as low as 1.79%) if it makes more sense to put the cash in the stock market and pay monthly?

I say loan.  You certainly don't have the strong likelihood of coming out ahead over the course of a 3 year car loan like you would over the course of a thirty year mortgage.  However, since it's six of one, half dozen of the other, I like seeing the monthly cash flow so I have a better feeling of my actual spending. 

Kind of a stupid reason, but I have had a couple of paid off cars and am going to have to replace both of them in the next few years.  It's making me realize that I haven't been doing as well on limiting spending as I thought, because I was ignoring depreciation costs.  For me, having a monthly draw as opposed to a one time hit will help me be award of how much the car is really costing me.

[HPstache]

One other factor that hasn't been mentioned yet is that you'll be required to have full coverage insurance if you have a loan on your vehicle.  I am not sure if you would want to be liability-only for a $13k-$15k vehicle, depending on your risk tolerance, but it's worth taking into consideration.

[Khaetra]

Stay away from VW's.  You think you're throwing money at what you own now?  Heh, just wait until things start to go wrong with one of those as they tend to be very expensive money-pits.  For that kind of money I would look at the old reliables like Honda/Toyota and pay cash.  As v8rx7guy said, with a loan you need full coverage for insurance vs. just PIP and Liability (or whatever your state may require) so you could end up paying more than you'd like to there as well (VW's cost a bit more to insure than Honda/Toyota too).

[LittleWanderer]

We're looking at a used VW Jetta 1.8 T

Run far, far away from this car.  I had a 1.8T VW Jetta and I will never, ever buy a Volkswagen again.  It was nothing but trouble and costed me a ton of money in repairs. 

[hoodedfalcon]

Ditto to everyone who says to run away from that car. I had issues with mine from year 1, check engine lights, turbo issues, electrical issues....it never ended. Bought a used Prius and sold the VW for pennies and couldn't be happier!

[Trying2bFrugal]

Best thing is to buy in cash. I say this from insurance perspective. if you are tending to keep full insurance, then get it financed from credit union.
My favorite is dcu.org, which gave 1.75% for many of my friends.

Personally, I would avoid VW.

[JLee]

What's wrong with your 4Runner?

If you're scared of 3rd gen 4Runner maintenance, a VW is not the car for you.