Author Topic: Used car loan vs cash  (Read 6980 times)

jjcamembert

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Used car loan vs cash
« on: August 25, 2015, 03:31:34 PM »
I'm looking into purchasing a used car soon, and have seen that interest rates are typically below 3% now. In that case, am I correct in thinking that it's better to choose a longer loan (48 or 60 month) period as long as it's still under 3%? Yes, I'd pay more in the long run, but I'd also have extra cash each month that I can save and invest at a >3% return. I could buy the car in cash, but at these rates it's looking more worthwhile to get the loan. Thoughts?

Thinkum

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Re: Used car loan vs cash
« Reply #1 on: August 25, 2015, 03:41:38 PM »
That is what I did about 2 years ago only my rate was/is 1.99%. Not sure what current rates are, but check out local credit unions if you haven't already.

r3dt4rget

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Re: Used car loan vs cash
« Reply #2 on: August 25, 2015, 04:21:16 PM »
I'm looking into purchasing a used car soon, and have seen that interest rates are typically below 3% now. In that case, am I correct in thinking that it's better to choose a longer loan (48 or 60 month) period as long as it's still under 3%? Yes, I'd pay more in the long run, but I'd also have extra cash each month that I can save and invest at a >3% return. I could buy the car in cash, but at these rates it's looking more worthwhile to get the loan. Thoughts?
Don't forget to factor in the cost of comprehensive insurance that is required with the auto loan. The downside of financing is that it typically leads people to buy a more expensive car than they would if they needed to pay with cash. The more expensive the car, the higher the insurance, the more taxes you pay, and the higher the depreciation cost. How you pay for it really doesn't matter since the biggest factor in the cost is going to the purchase price. Keep that as low as possible to make the most money.

RunHappy

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Re: Used car loan vs cash
« Reply #3 on: August 25, 2015, 05:04:57 PM »
That is what I did.  I got a 1.9% auto loan for 5 years.  My plan is to pay it off 3 years before the loan maturity date, because I hate having a loan hanging over my head.

KMMK

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Re: Used car loan vs cash
« Reply #4 on: August 25, 2015, 05:44:05 PM »
I did get a loan as it was 0.9% when just my savings account was paying 1.9%.

RWD

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Re: Used car loan vs cash
« Reply #5 on: August 25, 2015, 07:42:04 PM »
Keep in mind that the published lowest financing interest rates are typically for a perfect situation (~$XX,XXX dollars borrowed, less than 80% loan-to-value, good credit, car a certain age or newer, etc.). The car you want to buy may not qualify for the lowest rate even if you have great credit.

Argyle

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Re: Used car loan vs cash
« Reply #6 on: August 25, 2015, 07:44:36 PM »
My thought is that if you need a loan, you are trying to buy more car than you can afford.

Thinkum

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Re: Used car loan vs cash
« Reply #7 on: August 25, 2015, 08:40:07 PM »
My thought is that if you need a loan, you are trying to buy more car than you can afford.

Did you miss the part where he said he could pay cash for the car? The same holds true for me, yet I still carry a loan since it's the financially savvy thing for me to do.

Rosy

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Re: Used car loan vs cash
« Reply #8 on: August 25, 2015, 08:51:50 PM »
We started out looking for a used car and found a better deal on a new car at 0% for 4yrs. We made a big down payment and we now have a car for at least 15 yrs. It was a good move for us.

jjcamembert

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Re: Used car loan vs cash
« Reply #9 on: August 26, 2015, 12:23:22 PM »
Thanks for all the advice! Yeah I haven't thought about insurance yet, but that's a good point. Rates are generally lower for new cars but I think the car would depreciate more than the interest-rate savings.

So as an example Pentagon Federal offers:

1.99% - 36mo
2.49% - 48mo
2.99% - 60mo

So if I compare the smallest and largest with $15000:

1.99% = $465 interest, $430/mo payments for 36 mos
2.99% = $1168 interest, $269/mo payments for 60 mos

The difference in payments is $161/mo for 36 mos, so if I save and invest the difference every month at 5% interest, I get a total of $6092 saved. However, I've still got 24 months to keep paying, so that's -$6456 remaining. Meanwhile, my $6092 grows to $6456 at 5% for 24 months. So in this scenario, I break-even.

Anyone interested in following my math? Am I making sense? Or does lowest rate always win?


Jeremy E.

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Re: Used car loan vs cash
« Reply #10 on: August 26, 2015, 01:45:28 PM »
Math looks good to me, since they seem to be about equal I'd go for the 36 month loan, you will own your car sooner and also be able to change the coverage on your insurance sooner.

frugaliknowit

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Re: Used car loan vs cash
« Reply #11 on: August 26, 2015, 02:47:23 PM »
Pay cash for piece of mind.  The higher rate that you MIGHT earn is not a guarantee.  If you lose your job, the payment will seem like $1,000 per month...

jjcamembert

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Re: Used car loan vs cash
« Reply #12 on: August 27, 2015, 10:45:09 AM »
Nice spreadsheet Jeremy, thanks! Good point about the insurance too; I didn't know there was a minimum requirement.

Pay cash for piece of mind.  The higher rate that you MIGHT earn is not a guarantee.  If you lose your job, the payment will seem like $1,000 per month...

Point taken, the market could go down for the next 3 years, it's only very long-term views where you can hope for an increase. In the case of losing my job though, I'd rather have the lower 60 month payment with the extra cash in my account though.

Argyle

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Re: Used car loan vs cash
« Reply #13 on: August 27, 2015, 07:30:54 PM »
My older, paid-off car costs $14 a month for insurance.  How much will your new car's insurance cost?  The difference between them is also cash in the account.

Thinkum

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Re: Used car loan vs cash
« Reply #14 on: August 27, 2015, 07:37:26 PM »
My older, paid-off car costs $14 a month for insurance.  How much will your new car's insurance cost?  The difference between them is also cash in the account.

$14/month is great, but it seems to be pretty light on coverage. I'd rather pay a little more insurance to get a lot more coverage. All depends on where you live I suppose. Dallas has shitastic drivers and hail, so yeah.

Argyle

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Re: Used car loan vs cash
« Reply #15 on: August 27, 2015, 07:40:55 PM »
Well, at this point my car (1994 Toyota with 75,000 miles on it, nice and basic, stick shift, no radio, no air conditioning not that they don't work, they were just never installed in the first place) probably wouldn't sell for more than $1000, so how much coverage do I need?  But assuming I don't get in an accident, it will probably last me the rest of my life.

Thinkum

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Re: Used car loan vs cash
« Reply #16 on: August 27, 2015, 08:00:46 PM »
It's not so much for the car, but rather for the possible accident. That is one area I am somewhat conservative, after hearing about and being in, bad accidents.

Argyle

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Re: Used car loan vs cash
« Reply #17 on: August 28, 2015, 10:18:28 AM »
$14 a month covers up to something like $225,000 for accidents, and anyway I have umbrella insurance ($120 a year) for other reasons, which would cover costs above that.

Thinkum

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Re: Used car loan vs cash
« Reply #18 on: August 28, 2015, 11:25:51 AM »
Very nice indeed. Texas has some outrageous insurance costs all around from home to auto.

JLee

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Re: Used car loan vs cash
« Reply #19 on: August 28, 2015, 11:46:00 AM »
Well, at this point my car (1994 Toyota with 75,000 miles on it, nice and basic, stick shift, no radio, no air conditioning not that they don't work, they were just never installed in the first place) probably wouldn't sell for more than $1000, so how much coverage do I need?  But assuming I don't get in an accident, it will probably last me the rest of my life.
Higher insurance coverage limits are generally for liability, not coverage to your own vehicle.

Argyle

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Re: Used car loan vs cash
« Reply #20 on: August 28, 2015, 12:32:52 PM »
Well, the agent was trying to sell me on more expensive insurance.  "Your deductible is $750!  For only $20 more a month we can lower that to $200!"  I said, "How much are you going to give me for my 20-year-old car?"  Basically if the car is totalled, it's a write-off.  Even if I had it expensively insured for full value, full value is now so low (according to what they'll pay) that it's not worth the money to insure it.  I pay insurance for the liability, and if the car is totalled, I'm out of luck.  Meanwhile, though, I'm saving a ton on both insurance and car, so I wager I'll come out ahead. 

Jeremy E.

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Re: Used car loan vs cash
« Reply #21 on: August 28, 2015, 12:39:05 PM »
Well, the agent was trying to sell me on more expensive insurance.  "Your deductible is $750!  For only $20 more a month we can lower that to $200!"  I said, "How much are you going to give me for my 20-year-old car?"  Basically if the car is totalled, it's a write-off.  Even if I had it expensively insured for full value, full value is now so low (according to what they'll pay) that it's not worth the money to insure it.  I pay insurance for the liability, and if the car is totalled, I'm out of luck.  Meanwhile, though, I'm saving a ton on both insurance and car, so I wager I'll come out ahead.
You're only out of luck if it's an accident you cause, if someone else causes the accident, they're insurance will pay to fix your car, or buy you another car of equal value. Liability is the way to go if you are a good driver, insurance companies aren't trying to sell you more insurance to help you save money.

Kaikou

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Re: Used car loan vs cash
« Reply #22 on: August 28, 2015, 12:40:12 PM »
Pay cash. Seems like to much time is being wasted on the "numbers". How much do you value your time at?

JLee

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Re: Used car loan vs cash
« Reply #23 on: August 28, 2015, 12:49:17 PM »
Well, the agent was trying to sell me on more expensive insurance.  "Your deductible is $750!  For only $20 more a month we can lower that to $200!"  I said, "How much are you going to give me for my 20-year-old car?"  Basically if the car is totalled, it's a write-off.  Even if I had it expensively insured for full value, full value is now so low (according to what they'll pay) that it's not worth the money to insure it.  I pay insurance for the liability, and if the car is totalled, I'm out of luck.  Meanwhile, though, I'm saving a ton on both insurance and car, so I wager I'll come out ahead.
Ah yes, that makes sense. :)

I generally read "more coverage" as a higher overall limit, i.e. 50/100/50 coverage vs 100/300/100, etc.