We are saving up for a new car or minivan. We’d like to get something this fall. We figure by then we will have about $5000 set aside.
Is it financially smarter to make the biggest down payment we can, OR, make the smallest down payment we can, and invest the remainder?
I know the answer should be quite simple (I hope) but my brain just can’t figure it out right now.
If it matters, by the fall there is a chance I will be unemployed and we could be a single income family until I find a new job.
(The vehicle doesn’t have to be new, but we wouldn’t want anything more than 2 years old).
I’m no financial expert but I’ll help get this started - how is your credit? How low of an interest rate do you think you will get?
If you would be getting a 10% interest rate on your loan, and could only get as much as say 7.5% from an investment, the money would best be put towards downpayment on the loan.
But if you’d be getting a low, say 4.75%, interest rate on the loan and could get 7.5% on an investment, the money is better off being invested.
Of course like I said I am not an expert at these things, but the anticipated APR on the loan is a big factor I think.
A new car loan will cost you about 6-7% if you have good credit and put about 20%
down. A secure investment for a few thousand will only return you about 4%, so it
would likely be better to put a bigger down payment.
Having said that, you should have some savings to protect against the unexpected.
6-12 months of your take home pay is recommended, although few people have that
much you still should have a couple thousand.
Don’t forget the transfer costs (taxes, registration) in buying a new car, these can be
sizable in some U.S. states, I don’t know about Canada. You will also be required to
carry collision insurance on a financed auto, this is an expense many forget.
Shop for a loan before you shop for a car, have the financing in place so that all is
needed is final approval on the vehicle of your choice. In the U.S. a credit union is
usually the best bet. Leasing is a bad deal for most people, I’d avoid it like the
Couple more points.
If you buy used you should ALWAYS have the vehicle inspected and evaluated by a shop, or mechanic, of your choice, not someone recommended by the seller. Even if you buy new I’d suggest that the vin. number be run through carfax, as there are scams run on supposedly new vehicles also.
If your shopping for used, you might consider one of the rental car companies, but I would only buy from them if they can furnish a maintenance record on the vehicle.
A three or four year old vehicle may be a good buy, if you have it check out before buying.
Excuse the devil’s advocate if you will.
Consider whether or not you actually HAVE to finance.
Could you save for another six months and pay cash?
Could you make do with a $5000 vehicle?
Remember, used domestic minivans depreciate like MAD.
You can pay for a LOT of preventive maintenance, repairs and rental cars with the money you’d save by buying a car you can afford and then saving what you would be putting into payments.
Your share of the banker’s profits on your loan is zero.
Aside from that, remember that the highest APR you’ll find for a SAFE investment is 5% or so. If you get a higher APR than that, remember to mentally discount the return on investment by the risk that your investment will lose value.
As to leasing: these are not for people who need to worry about where their money is going. If your economic situation is one where the size of a down payment is a concern, then you are not in the tiny category of people who should consider leasing.