tiff wrote:We definitely have enough cash to buy the car outright, but want to hear the wisdom on this forum about whether we should finance the car instead.
Mathematically it can be shown that if you can get a return on your money that is higher than what you are paying in interest, you would be better off financing.
For example, you might think that the stock market is going to go up 8% next year and you can get a car loan for 2%. If you invested $30K in the market and borrowed $30K for the car, you would earn $2400 on your investment while paying $600 in interest, making you $1800 better off, pre-tax.
However, that isn't the whole story -- you need to adjust for risk. Any investment that has higher than the "risk free" rate of return (which is almost zero today) is by definition, risky. You could lose money. So in the example above, if the market went down 10%, you would have lost $3000 plus paid $600 in interest. Also, by borrowing you are creating a cash flow obligation. If you lose your job, you still need to make those payments. If the market was down, you might have to sell those assets at a lower price to meet that obligation.
Also, in my experience, financing tends to cloud people's judgment. For some reason many people would be extremely reluctant to shell out $30K up front for a car, but have no qualms about making a monthly payment on a $40K car even though it can be easily shown that they are worse off for it.
My advice is to pay cash for the car and sleep better at night.