My car is getting pretty long in the tooth and I would like to get a new one. I have a good deal of cash right now and could easily pay in cash, but I am worried about the current economic climate. My job isn’t particularly in jeopardy, but one never knows. Would it make any sense to finance some or all of the car instead of paying cash?
Thanks,
Rob
My credit union has car loans below 4% so at that rate financing does not cost very much at all. If you are not a credit union member try to join one if you can their car loan rates are always very good.
I think I’d probably pay cash for the car. For starters you immediately just saved having to pay any interest for borrowed money. Even 4% on a $20,000 car over 4 years is $1,675.
Secondly, after the purchase your car will always be worth more than what you owe on it ($0) eliminating the risk of being upside-down (car is worth less than what you still owe).
Thirdly, since you eliminated a monthly car payment from your budget you can immediately begin saving again to build a safety net. If things get really bad you can always sell the car on which you owe $0.
Don’t forget that you can invest the money you don’t spend on car payments up until you pay each payment. If you put enough money down - 20% or more - you won’t be upside down.
If you buy a brand new car, and have impeccable credit, a lot of dealers offer 0% financing. In that case, you’ll earn more by investing the cash and making car payments.
If you buy a used car, 1-year old or less, you’ll reduce the upside-down risk or eliminate it so your car is worth more than the loan for at least a few years.
When I bought my '98 Mustang in '99, I drove it for 2 years and sold it for the same amount ($12,500) that I bought it. So I was out the 2 years worth of payments. If I had paid in cash originally I wouldn’t have been out anything for it. Can’t do that with a new car.
If you own your car outright, if you lose your job all you have to do is make the insurance payments, registration payments, routine maintenance and gas … you wont have to walk to job interviews because you cant afford to make payments. In a pinch, all you absolutely NEED is to be legal - insured and registered, and gas, most maintenance on a new car is pretty minimal [oil changes, assorted fluids]
You can as was pointed out upstream imediately start socking money away aain while you are still employed.
Actually the best thing to do in a depression is own everything you possibly can so you HAVE it and dont have to worry about repossession because of nonpayment. The farm is now paid off, so all we have to scrounge is the taxes on it. Beats $1000 a month as was previous. The cars are both now paid off, so I have changed from full coverage to a reasonable decrease, and saved us another $150 a month for the insurance, and $450 for the car payments. The maintenance us current for the mileage, so all we need to do is gas them up and do routine oil changes and other assorted light maintenance when it is time. All the bills are current, and I have decreased my cell service and changed my phone so I dont have to have constant internet, saving me almost $100 a month.
This big thing in my mind that decides the finance vs pay cash is emergency savings. I personally would want to have enough money to live off of for 9 months to 1 year after I paid cash for the car. If I did not have enough money to do that I would finance. If you use up all your savings on the car and then loose your job you are in trouble. If instead you get a loan and loose your job you have money to live on until you can get a new job.
My thinking follows what gazpacho said. In an uncertain time, you’re better off financing the car and having savings available for a worst-case scenario.
Also, I don’t know what the OP’s credit rating is, but having and paying off debt is a good way to improve it. Buying a car with cash won’t help your credit.
Be debt-free. I got laid off two weeks ago, and I have a year’s worth of my modest expenses in the bank, and no debt, and the peace of mind that this gives me is immeasurable. I can breathe more easily for a month or so while I get new systems up and running, and I have a little time to explore options.
In the OP’s case, I would buy a good mechanically-sound used car, not worrying about style, if there was sufficient money in the bank for the living expenses. If the OP does have to find a new job, would it be in a field or area where this is relatively easy?
Welcome to the club. I’ve been laid off since before Christmas. It is really starting to lick.
The stock market has returned 10% in every rollying 20-year period since 1929. Stocks are cheap now. Why would you take a 4% or 0% return on your money (i.e., the amount of interest you don’t pay by financing) instead of getting a 10% return (which may be higher since we’re in a down cycle)? Financing seems like a no-brainer to me here.
This assumes you have sufficient cash/assets/credit for your reasonably foreseeable future needs.
You can get 0% financing on quite a few cars. You could bank the rest and make a profit.
Now, even if not, there’s nothing wrong with owing some money on a capital asset like a car. Just as long as you owe less than it’s actually worth.
A couple of points to ponder…
GM is offering a payment protection plan now. They’ll cover your payments for 9 months if you lose your job.
In a recent appearance, financial guru Suze Orman said she changed up her advice about debt during this economic downturn. People were asking if they should take their severance packages and pay off debt and she actually said no. Cash on hand is more important right now. If you have cash you have room to keep yourself afloat for longer by being smart about how you are paying bills. If you put all your cash into paying off your debt now that’s good for now, and you have a car that you own, but you can’t eat a car or heat your home with a car.
Just some thoughts.
Car prices are not independent of the dealer financing. In a lot of cases the price if you pay cash right then is lower than if you take the 0% deal. It gets even more complicated if you have a trade in as well.
On the other hand, sometimes the dealer makes money when you get financing, so they’ll offer a lower price with financing than without.
In that case, the thing to do is make sure the loan has no pre-payment penalty, get the loan - and pay it off next month. 
Nobody finances a car for 20 years, so it doesn’t directly compare. You are assuming that the market maintains that +10% every year. What if the market is dropping by 5% all four years that he would have been financing his car.
Are you kidding me?
Financing a mere 15,000 dollars at 4% for 4 years will cost you about $3,300.
That’s more than 20% over the amount you financed. That’s not an insignificant amount. That money would do better in your pocket than the loan company’s.
Check your math bear_nenno
I calculate $15k at 4% for 4 years is $1257 interest not $3300.
I know what you’re saying is true on average and over time, but I still think it is terrible advice for individual who are data points, not trends. There are years in which you don’t make 10%, you lose 50%. There have been decades where the markets works just to recover its losses. In fact, taking on debt to invest in the stock market is the same leveraging strategy that partly caused the current financial mess. Money invested in stocks has to be money you can afford to lose.
I would counsel paying cash. You can quickly rebuild your emergency fund because you won’t be making car payments. If your job is in jeopardy, then either keep your car or look for a less expensive model. There’s no one saying you have to use your entire savings for a car.
Yea, I just plugged it in to an online loan calculator. It looks like I put in 10% by mistake. I was so sure your math was wrong that I did it by hand:
15000 ( 0.04/ 12 )
------------------------------ X 48 - 15,000
-48
(1 - ( 1 + 0.04/ 12 ) )
(Which took me forever to do, BTW) And you’re right. Don’t mind me, I don’t think I’ve ever posted a helpful answer when there’s math involved.