Any reason to finance a car if you have the cash?

[panamajack]

@Fish

It’s an interesting theory but, according to the book, the car salesman glossed over an important fact. There’s nothing stopping you from buying the car today with your savings and putting that $250/mo car payment in the bank anyway.

Where does that magical monthly money for the car payment come from? If you’ve paid cash for the car, you can no longer put that money in the bank. It doesn’t seem to have much to do with the problem.

The worked examples above started from a position of $0, but this assumes that you already have the cash (maybe an inheritance or some such).

Looking at mere numbers, you do end up paying more on the loan unless you can get a better return on your investment than the loan (and in some cases, you can). Probably you have to take into account a higher price for financing it, but you still might beat the loan if you’re good enough.

Economically speaking, it’s almost always better to have the money with you now than later. Depends on your circumstances.

[Kent_Clark]

@vetbridge

My little brother has gotten great deals on cars by being knowledgeable and paying cash. He would walk into a dealership and point out the car he wanted. He would then sit down with the salesman and count out money onto the desk. That was how much he was willing to pay for the car, and he knew that he could get the car for that much. If the salesman tried to dicker, my brother would pick up the cash and walk. Nine times outa ten the salesman would stop him and agree to the sale.

The last time he did this was the late 90s, I dunno if it would fly today.

Something similar happened to me when the dealer tried a bait and switch to a model full of dealer packs. I had already agreed to a purchase price and walked in with a cashier’s check from the bank. Everytime the salesman (and eventually his boss) tried to tell me what a great deal they were giving me on the pinstripes and paint sealant, I tapped the cahsier’s check and said “this is the price we agreed on. If you can’t get me the model at this price, then give me my deposit back.”

Yeah, you have to be comfortable playing harball at that point.

[Fish]

@panamajack

Where does that magical monthly money for the car payment come from? If you’ve paid cash for the car, you can no longer put that money in the bank. It doesn’t seem to have much to do with the problem.

The worked examples above started from a position of $0, but this assumes that you already have the cash (maybe an inheritance or some such).

So does the OP, as I read it.

The problem in 200% of Nothing was one where the author had the $15K cash saved up already. The car salesman told him not to pay cash, but to leave the cash in the bank so it could accumulate interest. The salesman then said the author could pay $250/mo out of his paycheck to pay off the loan.

The author’s solution was to pay for the car in cash at the listed price, and continuing to take $250/mo out of his paycheck per month as if he were making payments. Basically, he was repaying his now-depleted savings account at the same rate as the car payments would’ve been.

There is no magical money.

[Xema]

@kunilou

I had already agreed to a purchase price and walked in with a cashier’s check from the bank. Everytime the salesman (and eventually his boss) tried to tell me what a great deal they were giving me on the pinstripes and paint sealant, I tapped the cahsier’s check and said “this is the price we agreed on. If you can’t get me the model at this price, then give me my deposit back.”

It’s a very common ploy - and you handled it properly.

A variant is when they find a bunch of extra fees, taxes, “paperwork charges” etc… I was pretty well out the door before they decided they’d honor the total price we’d explicitly agreed on a few days earlier.

[SmackFu]

I suppose a better, more realistic way I could have phrased the question is: should I pay the minimum down payment or the maximum I can afford? But the answers are basically the same.

[Little_Nemo]

a wise investor could make more money by taking out a car loan and investing the money.

Which would be fraud in most cases. If you borrow money from a lender with the declared purpose of buying a car, you’re expected to buy a car with the money. Not decide to spend the money on some other investment.

Nobody has mentioned another good reason for paying up front for a car - insurance. If there is a lienholder on the car, like a bank or credit company, you’re required to insure your car to its full value to protect their property. If you’re the sole owner you can assume the risk and pay for less insurance if you want.

[VernWinterbottom]

The way a former boss once explained the benefits of credit to me was this: Today’s cash has more buying power than tomorrow’s will have, so you’ll be paying back your loan with dollars that are relatively less valuable than the ones you borrowed.

Also, if you have $20,000 now AND someone’s willing to loan you another $20,000 to finance a car, you’ll have the benefit today of driving a $20,000 while still have your own $20,000 in the bank.

[Little_Nemo]

The way a former boss once explained the benefits of credit to me was this: Today’s cash has more buying power than tomorrow’s will have, so you’ll be paying back your loan with dollars that are relatively less valuable than the ones you borrowed.

Also, if you have $20,000 now AND someone’s willing to loan you another $20,000 to finance a car, you’ll have the benefit today of driving a $20,000 while still have your own $20,000 in the bank.

Did anyone ever explain the concept of interest to your former boss?

[Dr_Paprika]

I did lease my current car when I could have paid cash.

My accountant insisted I do so. This is since I am self-employed, and require a car for my business needs. Apparently our tax and deduction laws make leasing advantageous despite the additional costs.

[qubed]

As others have said, if you can invest the money you keep by taking a low-interest loan into something with higher interest, it may be better. Also, sometimes they may give you cash rebates for doing financing with the dealership.

In fact, my father once took the loan simply because of the cash rebate. He then planned on paying off the loan immediately. But after looking at it, the interest rate was low enough that he kept the loan and put his money elsewhere.
Of course, to get a low-interest loan, you pretty much have to have solid credit. You’ll note the 0.0% financing involves the fine print for approved customers only.

[KP]

@panamajack

Where does that magical monthly money for the car payment come from? If you’ve paid cash for the car, you can no longer put that money in the bank. It doesn’t seem to have much to do with the problem.

Well, consider this: You have $20K or whatever, which isn’t much in the investment world, and won’t get you the best return. Sure, it isn’t terribly hard to beat the apparent interest rate on a car loan, but that rate is a bit phony: as noted, the price generally goes down appreciably when you pay cash, so it’s like you’re paying few year’s interest up front, and then interest on that interest. You need to beat the real interest-equivalent compared to your best cash deal, and somehow factor in a) your own time, b) your consumer impulses (if you just spend that cash on some other depreciating asset, needless frivolity, service or nondurable goods, you aren’t really getting a payback at all; you’re just paying interest) and last but not least : c) real world risk which accompany any high return investment.

I know lots of people who lost big money on their portfolios when the tech bubble burst ca 1999/2000. Not all of them were invested in tech stocks. There were ripple effects – and money tied up in an investment isn’t money in the bank, if you need it, so an ‘investor’ loses much of the benefit of money in the bank.

OR you can pay *les (so you start off with a few thousand in the bank) and put all those car payments in your own pocket, in effect paying yourself the interest you’d have paid the financer, with little risk and no effort.

Why do financial institutions with enough liquid assets to get the top rates and best investments. CHOOSE to make car loans instead? Maybe a few are in it for the community, but it’s no accident that our skylines are owned by financial institutions happily lending money to schlubs who think they are ahead of the game because they can “outperform the loans”. I don’t know what percentage of people think they’re making a shrewd move, but I can guaranteee you that a tiny percentage will actually be getting richer off their car loans.

Yet a few years after every downturn, people start again convincing themselves, with the same old/new logic, that more debt = more money for nothing.

[MsRobyn]

@alanak

As others have said, if you can invest the money you keep by taking a low-interest loan into something with higher interest, it may be better. Also, sometimes they may give you cash rebates for doing financing with the dealership.

In fact, my father once took the loan simply because of the cash rebate. He then planned on paying off the loan immediately. But after looking at it, the interest rate was low enough that he kept the loan and put his money elsewhere.
Of course, to get a low-interest loan, you pretty much have to have solid credit. You’ll note the 0.0% financing involves the fine print for approved customers only.

My MiL did this earlier this year. She got a car loan to take advantage of some GM and Buick rebates being offered for her car. She then tried to pay off the loan, but each time she did so, she got a bunch of doubletalk and a “rebate” of several hundred dollars applied to the loan. She finally got a payoff amount about two weeks later.

Robin

[scotandrsn]

@SmackFu

I suppose a better, more realistic way I could have phrased the question is: should I pay the minimum down payment or the maximum I can afford? But the answers are basically the same.

Again, unless you’re trying to build credit, you should finance as little as humanly possible.

If you have the financial self-discipline, you should try Debaser’s plan of building up the money through interest savings over time. You’ll save money.

Barring that, put as large a down payment as you can reasonably afford, or buy a cheaper car. Here’s an extreme example I whipped up in MS Excel, although it’s not by any means outside of reality. A $20,000 car, and a five year loan at 23% fixed annual interest.

Down Payment/Principal and Interest Paid over five years
$0.00/$33,192.38
$1,000.00/$32,532.76
$2,000.00/$31,873.14
$3,000.00/$31,213.52
$4,000.00/$30,553.90
$5,000.00/$29,894.28
$6,000.00/$29,234.66
$7,000.00/$28,575.05
$8,000.00/$27,915.43
$9,000.00/$27,255.81
$10,000.00/$26,596.19
$11,000.00/$25,936.57
$12,000.00/$25,276.95
$13,000.00/$24,617.33
$14,000.00/$23,957.71
$15,000.00/$23,298.09
$16,000.00/$22,638.48
$17,000.00/$21,978.86
$18,000.00/$21,319.24
$19,000.00/$20,659.62
$20,000.00/$20,000.00

[VernWinterbottom]

@Little Nemo

Did anyone ever explain the concept of interest to your former boss?

His thought may have been about buying on credit vs. saving up until you have enough to pay cash.

In any event, when he told me this, he was making monthly mortgage payments of around $240 on a three bedroom house he’d bought twenty years earlier. I was paying twice that much to rent a tiny one bedroom apartment. He was also making twice as much money as I was and his $240 a month payment amounted to an increasingly smaller percentage of his income with each passing year.

[Ficer67]

The reason you finance even if you have the cash is because of interest rates. One car dealership may be offering 1% financing. Money in the bank could be getting 3% interest. Hence it makes financial sense to go with the financing. Better read the fine print though, the dealerships are into selling cars, and they are probably going to stick you with finance charges, or other charges to offset that wonderful interest rate.

[ProTem]

All financing is a heavy loss, especially leasing, but buying as well.
I always buy new cars outright if I have the dough, or at least pay 70% with a one year loan.
If you do the math, you’d never ask the question. Just add up all the payments and subtract the price, and you’ll see the interest. But now imagaine that interest not as fees but as real hundred dollar bills. Imagine yourself tossing them one by one out your car window. You would never do that, but that’s exactly what the loan does.

[Xema]

@Ficer67

One car dealership may be offering 1% financing. Money in the bank could be getting 3% interest… Better read the fine print though, the dealerships are into selling cars, and they are probably going to stick you with finance charges, or other charges to offset that wonderful interest rate.

As you imply, car dealers tend to know what money is worth. When they offer a lower-than-market interest rate, they well understand what this costs. So it’s a strong signal that if you offer cash, they will sell you the car for a lower price.

[N9IWP]

Note that cars don’t ALWAYS depriciate - I could have sold my Toyota Prius for more than I bought it for (list) 6 months later. But admitedly a special case.

brian