Car purchase: Buy or Finance

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tiff
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Car purchase: Buy or Finance

Post by tiff »

Hi, I'm brand new to the forum so please bear with me.

My husband and I are shopping for a new car. We are one of those folks that keep cars for a long time and is only shopping because the car is on its death bed and we are expecting a baby on 4/15/15 :)

We have finally made up our mind and are 99% sure will be getting a new 2015 Subaru Outback Limited (btw $32k - $35k MSRP). 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.

We both have good credits - 778 for my husband and 785 for me. The best rate I can found is 0.74% for 36 months.

Appreciate any thoughts. Thanks for reading.
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JDCarpenter
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Re: Car purchase: Buy or Finance

Post by JDCarpenter »

Under similar circumstances, we took the < 1% financing on a 2009 civic for three years. Figured we'd earn more with the money even after taxes--and we had strong positive cash flow. OTOH, when I bought my 2012 Fit, the rates were closer to 2(?), so I bought it with credit car for the award points (and paid if off on the next payment date). Others will come to different conclusion. Bottom line, in the position you have put yourselves in, neither choice is likely to have substantial negative consequences. (I'm assuming "definitely have enough money" means that you have adequate emergency fund even if you pay cash.)

If a dealer/subaru loan, make sure that you negotiate the price before you start to talk financing....

EDIT: CONGRATS on the expected addition to the family! :-)
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ChicagoMedStudent
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Re: Car purchase: Buy or Finance

Post by ChicagoMedStudent »

I'd be interested in hearing what pro's and con's of each strategy you and your husband have come up with.
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Dmanse02
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Re: Car purchase: Buy or Finance

Post by Dmanse02 »

Hi tiff,

I am in a similar situation and currently looking for a car. If you are willing to share, I am curious who is offering those good financing options. My credit score is not quite as high as yours, but I think I could qualify for similar terms.
As for my two cents - with a rate that low, I would recommend financing the car and let inflation play to your advantage. (However, this would mean less equity in your car if you were to trade it in under 3 years, but it appears you intend to drive a car to its very end.) This would free up more cash in the near term with a child on the way - Congrats and best wishes! Also, you could invest the difference and use that time to let compounding work (best option for more money in the long run). Many investment options would likely beat 0.74% over 3 years. Conservatively, you could even find CDs currently with higher interest rates than your loan.
I am by no means a finance guru, but this is how I would think through your situation. And as I am in a similar situation, I will be interested in hearing comments from others as well. Good luck!
rrouse
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Re: Car purchase: Buy or Finance

Post by rrouse »

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.
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jeffyscott
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Re: Car purchase: Buy or Finance

Post by jeffyscott »

tiff wrote: The best rate I can found is 0.74% for 36 months.
I assume that is some kind of promotional rate from the manufacturer. Typically this is going to be in exchange for giving up a rebate (or dealer incentive).

If it is a rebate of $2000, for example, then you can use a loan calculator to figure out what the true interest rate is based on paying, say, $30,000 cash after rebate vs. financing $32,000 at 0.74%.

If it is a dealer incentive, then it depends on if the dealer is willing to pass that on to you in the form of a lower discounted sale price.
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tiff
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Re: Car purchase: Buy or Finance

Post by tiff »

Thanks everyone for your replies! They definitely provided us with more food for thoughts. Please keep them coming!

Regarding the 0.74% for 36 months loan, it's actually from a place called Western Credit Union https://www.western.org/auto-loan-promo
When my husband called yesterday, they said the rate applies for anyone with credits of 740 and higher. The Subaru dealer's lowest rate is 1.49%
sls239
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Re: Car purchase: Buy or Finance

Post by sls239 »

What fees in addition to interest are associated with the financing?

I tend to think if you absolutely know you are buying brand new, that financing is often reasonable.

Where paying cash can really save you money is in getting a used car (because used car rates are higher).

I'd also suggest putting at least enough down so that you won't need / want gap insurance.
seamonkey
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Re: Car purchase: Buy or Finance

Post by seamonkey »

Assuming no other debts to indicate living your lifestyle on credit, and an adequate cash cushion for expected and unexpected expenses, I think it's reasonable to take the low interest rate to finance some part of the vehicle purchase.
Trader Joe
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Re: Car purchase: Buy or Finance

Post by Trader Joe »

We only purchase cars in full, using cash.
Grt2bOutdoors
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Re: Car purchase: Buy or Finance

Post by Grt2bOutdoors »

Prior to purchasing my Subaru, I emailed several local dealers indicating the type of car including the options package I wanted requesting an out the door price quote. After I received the quotes, I responded that I would come in to test drive the car and if I liked it would purchase it the same day, but if they pulled any sheningans like failing to honor the price quote, I would walk. Well, we went to a dealer close to home and sure enough they tried to pull the ole switch-e-roo on the emailed price quote and tried to jack the price up by $800, we walked. We went to a second dealer who let us test drive the car, honored the price quote and threw in some extra option for the same price - in and out in about an hour.

So if you haven't started shopping yet, try emailing around for price quotes - our original email was a bit more curt than above - more like "give me quote, don't @#$% with me and I'll buy the car if I like how it drives".
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dave415
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Re: Car purchase: Buy or Finance

Post by dave415 »

Hi Tiff,

I think there are two considerations here:

1. What would you do with the cash if you did not spend it on the car?
If you don't use the cash on the car, will it still just end up sitting in a bank account or will you be investing it. If it is likely going to be sitting in a back account earning close to nothing then you might as well pay cash on the car, else if you plan on using the cash to invest, then there is a good chance the investment will least do as well as the .75% that the loan costs you (assuming you follow normal boglehead strategies). In that case taking out a loan is not too bad.

2. Do you think you will need this cash for something else in the future?
If you need this cash as an emergency fund or if you have plans to purchase something in the future like a house where this cash might come useful, then you should consider getting a loan so that the cash is still available to you.
If you don't see yourself needing the cash in the future then using it for the car would be fine.

So looking at these two considerations should help you decide whether to get the loan or not. Hope it is helpful.
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jeffyscott
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Re: Car purchase: Buy or Finance

Post by jeffyscott »

Grt2bOutdoors wrote:After I received the quotes, I responded that I would come in to test drive the car and if I liked it...
This seems backwards to me, what's the point of getting a quote without first deciding what car you want? I'd always drive and decide what car first, before getting to a final price.

Anyway, these days it seems pretty easy to get a good price from one source or another. Last car in our family was purchased about a year ago, we used Costco to get a price which local dealer matched (Costco dealer was about 1.5 hours away and in another state). Costco price was only $100 or $200 below what things like trucar showed.
livesoft
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Re: Car purchase: Buy or Finance

Post by livesoft »

About 8 months ago, I bought a used certified-pre-owned car from a dealer. I intended to pay cash and negotiated the price downwards with that in mind. As I had my checkbook out, the sales guy said, "How about a loan?". I responded, "Sure, if the interest rate is right. What do I qualify for?" A quick trip to the finance guy resulted in a 0% interest no down payment loan with the first payment about 6 weeks after purchase. So I financed. Even if I left the money in my checking account paying 0.01% interest, I come out ahead.

The loan payment is set up as a recurring payment in auto bill pay, so I don't have to think about it at all.

This may be the last car I need to buy because it should last another 20 years or so.
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Farmboyslim83
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Re: Car purchase: Buy or Finance

Post by Farmboyslim83 »

My take is the dealer MAY settle on a lower price, if financed. So finance it, a make a payment, then pay it off, if you're so inclined.
mesaverde
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Re: Car purchase: Buy or Finance

Post by mesaverde »

I bought a new Honda Fit. At the time I had the cash to buy it invested in a Vanguard taxable account.
After getting the price right, they offered financing... a 60 month loan at .9%, their best rate at the time.
So I decided to keep my money invested with Vanguard.
The dividends alone from the investment pay close to 4% each year, and this money can be used in an emergency if needed.

The icing on the cake is that I could sell the car for slightly more than the loan balance. There's quite a bit of demand for used Honda Fits. I could also pay the loan off at any time, but choose not to do so....
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Toons
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Re: Car purchase: Buy or Finance

Post by Toons »

Without a doubt,Pay cash,we always do :happy
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Watty
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Re: Car purchase: Buy or Finance

Post by Watty »

Appreciate any thoughts.
Unless you put the money into something with a fair amount of risk there is a very limited upside after taxes to keeping the money and investing it. If you can somehow clear 1% after taxes on $30,000 that is only $300. That is better than a kick in the pants but when you consider the monthly payments you would be committing to it hardly seems like a compelling trade off.
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JDaniels
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Re: Car purchase: Buy or Finance

Post by JDaniels »

My vote is to pay cash. Something that might be helpful, car dealerships make more money with their finance departments than the actual sales of the cars. So of course, they want you to choose financing. That is, unless you go to the dealership on the last day/weekend of the month. They're trying to hit their month end numbers so they are looking for a large cash infusion. You can usually negotiate your best deals during that time. Good luck!
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fanmail
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Re: Car purchase: Buy or Finance

Post by fanmail »

If you can find a 3 year CD that pays more after tax than 0.76 (I'm sure you can), then go ahead and take the free money arbitrage.
Walleyewhacker
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Re: Car purchase: Buy or Finance

Post by Walleyewhacker »

I don't like debt, even if it looks like a good deal. Last three cars we have purchased, we pay cash. 20 yrs ago, we could not afford to pay cash so we had to finance vehicles. Funny part is the dealers look at you like your an oddity just writing a check….like why would you do that?? Why would the dealers care if I write a check or finance. Anyways, I avoid debt if I can. Opinions may vary on this subject. Enjoy that new car!!
JoeJohnson
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Re: Car purchase: Buy or Finance

Post by JoeJohnson »

JDaniels wrote:Something that might be helpful, car dealerships make more money with their finance departments than the actual sales of the cars. So of course, they want you to choose financing.
Just because dealers make money off financing doesn't mean it's bad. In fact, if they're getting enough of a cut on the loan, they're probably going to be willing to share a little bit of that cut with you.

There's no absolute right/wrong answer. It's all about opportunity cost. In this environment, paying cash is rarely the correct financial choice. Emotionally maybe!

And whoever said to put down payment so you don't feel obligated to get GAP: Don't make the down payment and keep it earning interest. The whole point of financing when you have the ability to pay with cash is arbitrage. If the person can afford a $30k car in cash, they're going to be able to handle being underwater on the car loan in the highly unlikely event the car is totaled and upside down. Moral of the story is don't buy insurance you don't need!
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Re: Car purchase: Buy or Finance

Post by grabiner »

JoeJohnson wrote:
JDaniels wrote:Something that might be helpful, car dealerships make more money with their finance departments than the actual sales of the cars. So of course, they want you to choose financing.
And whoever said to put down payment so you don't feel obligated to get GAP: Don't make the down payment and keep it earning interest. The whole point of financing when you have the ability to pay with cash is arbitrage. If the person can afford a $30k car in cash, they're going to be able to handle being underwater on the car loan in the highly unlikely event the car is totaled and upside down. Moral of the story is don't buy insurance you don't need!
The lender may insist on gap insurance, to protect its interests. Similarly, the lender will likely demand low deductibles on collision and comprehensive insurance; if you would prefer a higher deductible or no coverage, that is an extra cost for taking a loan.
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iflyjetzzz
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Re: Car purchase: Buy or Finance

Post by iflyjetzzz »

You guys sound like you've handled your money very well and likely have a fairly large nest egg saved up.
Personally, I no longer take out loans on cars. The last time I had a car loan was more than 15 years ago; once I was able to pay for cars cash, I did. It's made me more reflective on purchases. I'd recommend that you do the same, rather than be tied down with a car loan, even if it is only for 36 months.
Johno
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Re: Car purchase: Buy or Finance

Post by Johno »

Just on the technicalities of figuring out whether the .74% 36 months is below what you could earn on the money, keep in mind that it's not actually a 3yr loan but around 1.5 year average life. The average of best 1 and 2 yr CD rates on bankrate.com right now is around 1.29. But that's taxable and the car loan interest isn't tax deductible. Our combined fed/state marginal rate on CD's is around 30%, so 1.28=.9% after tax. Assuming 80% down in 32k car, that's ~$64 present value savings to do the loan and put the money in the CD('s) v just paying cash.

I had the spreadsheet set up for this because I did same analysis before buying a car recently, when it appeared I could get a 0% 36 month deal (from PenFed). But that offer ran out before I was ready to buy, and anyway was only worth a couple $100 v the CD rates I was seeing (on a ~$45k car). So I paid cash as usual. And the other thing is the possibility that financing might even slightly reduce your bargaining power to get a better price on the car; $64 isn't much in that regard unless one is very sure that's not true at all, besides other indirect costs a loan may cause as already mentioned (perhaps require more insurance than you otherwise need, etc).

As others have noted, it's confused thinking to compare the car loan rate to what you think the stock market may return.
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Re: Car purchase: Buy or Finance

Post by fanmail »

Could you explain the 1.5 year average life on the loan aspect to me?
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Re: Car purchase: Buy or Finance

Post by stan1 »

tiff, I remember your portfolio post a few days ago and that you are saving about $150K each year. Pay cash for the new car and be done with it for 10 more years.
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Johno
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Re: Car purchase: Buy or Finance

Post by Johno »

fanmail wrote:Could you explain the 1.5 year average life on the loan aspect to me?
The loan has a level monthly payment. If the rate was zero you would pay 1/36 of the principal each month, so on average after 1.5 yrs. Since there's a small interest rate, the initial payments contains slightly less than 1/36 of principal repayment and the later ones slight more, but the principal repayments still occur just slightly more than 1.5 yrs out on average. Thus it's not realistic to compare the rate to what you could get on a 3yr CD where 100% of the money is tied up for the whole 3yrs.
mikep
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Re: Car purchase: Buy or Finance

Post by mikep »

I would just dump the difference into a reward checking account such as Consumers CU that pays 5.09% now while it lasts.
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Re: Car purchase: Buy or Finance

Post by fanmail »

mikep wrote:I would just dump the difference into a reward checking account such as Consumers CU that pays 5.09% now while it lasts.
Think you're off by a decimal there.
HIinvestor
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Re: Car purchase: Buy or Finance

Post by HIinvestor »

If the cash price is the same price as charging the car, I'd charge it on a cash-back credit card that gives you 2% back on every $ you spend. If that car is $30,000, that's $600 right way off the price of your car. We get a final price, charge and then pay it of in full before the balance is due so no finance charges and no interest. We're likely buying a car in the near future--H's first new car in the 30+ years we've known each other! That's how we're planning to pay.
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Re: Car purchase: Buy or Finance

Post by placeholder »

fanmail wrote:
mikep wrote:I would just dump the difference into a reward checking account such as Consumers CU that pays 5.09% now while it lasts.
Think you're off by a decimal there.
It's pretty easy to check these things:
http://www.myconsumers.org/personal/che ... cking.html
Note that like most of these offers there are a number of qualifying steps to earn the best rate.
ThankYouJack
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Re: Car purchase: Buy or Finance

Post by ThankYouJack »

First, great car :) -- I'm buying the same one but with the option 23 package (eyesight for safety and some other nice features)

I'm probably going to finance and get 1.49% for 65 months instead of the loan that you're considering -- viewtopic.php?f=2&t=153597&newpost=2303729

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.
This is what stuck out to me. Where is the cash coming from? If you've had it in your checking/money market account, I would pay cash because that money hasn't been earning much. If you've had it in your portfolio, I myself am financing it because I think that my portfolio will return more than the interest of the loan.
fanmail
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Re: Car purchase: Buy or Finance

Post by fanmail »

placeholder wrote:
fanmail wrote:
mikep wrote:I would just dump the difference into a reward checking account such as Consumers CU that pays 5.09% now while it lasts.
Think you're off by a decimal there.
It's pretty easy to check these things:
http://www.myconsumers.org/personal/che ... cking.html
Note that like most of these offers there are a number of qualifying steps to earn the best rate.
I googled consumers credit union and found about 27 websites like that. I didn't find that specific one, though, thank you. Either way, that is a lot of hoops to jump through to earn that rate on max of 20,000.
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Re: Car purchase: Buy or Finance

Post by mickeyd »

A few years ago I bought a Toyota Corolla and was prepared to pay cash for it and asked about any last second deal that they could offer me to seal it. They mentioned a 0% 36 month for those with a great FICO score. I took that and kept my cash. Just finished paying it off; now I have a bunch of $ left over each month!
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ERISA Stone
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Re: Car purchase: Buy or Finance

Post by ERISA Stone »

I just bought a new car yesterday with 0.9% for 36 months. I normally pay cash but that's too good of a deal for me. Also, we have the cash saved aside so that if something goes wrong, we can simply pay the car off.

Check out www.truecar.com if you haven't yet. It provides some data on the car purchase price in your area. They will also provide you with a guaranteed haggle-free (my term) price. I'm not a big fan of haggling on something expensive like a car because I don't really know what the bottom line is so this was a good benefit for me. It saved a lot of time too.
leonard
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Re: Car purchase: Buy or Finance

Post by leonard »

Pay cash. Dealing with a finance company simply isn't worth the headache to service the loan.

Also, consider an excellent condition, low mileage version of the car you want, rather than get hit with the new car premium.
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Re: Car purchase: Buy or Finance

Post by Ron »

FWIW, my wife just picked up a 2015 Subaru Legacy 2.5 Limited today, replacing her 2002 Olds Aurora which she purchased used (5 years old at the time), paid cash, and ran it for eight years. While she traded her prior car (an Olds Cutlass Ciera) which she bought new and had for 18 years, she felt that the minor problems she started to have (after 13 years on the road) along with wanting an AWD vehicle (and not an SUV) was justification for another car to replace her Aurora.

It's Christmas, isn't it? :mrgreen:

Anyway, she paid cash. She/me have a line item in our respective budgets for vehicle replacement so getting a loan is out of the question. For the little you get for a non-risk investment (e.g. CD) neither of us want to play around with trying to come out ahead by playing the numbers. As far as we're concerned, we're ahead by not having any debt.

FWIW,

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Hector
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Re: Car purchase: Buy or Finance

Post by Hector »

Finance it.
ThankYouJack
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Re: Car purchase: Buy or Finance

Post by ThankYouJack »

I was in the "finance it" camp, until I started to read some of the strings attached with the low rates. Now I'm in the camp "If your portfolio is much greater than the amount of the loan, don't waste the time financing it"
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Re: Car purchase: Buy or Finance

Post by surfstar »

You can play with rewards checking and other such things (mango money is one I'm trying) for up to ~5% interest.
Isn't it money ahead whenever you can get a loan for under the inflation rate, and invest for a greater return than the loan amount?

It is "free" money you're leaving on the table, but sounds like a few hundred dollars wouldn't affect your bottom line, so its all personal preference at this point.
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jeffyscott
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Re: Car purchase: Buy or Finance

Post by jeffyscott »

HIinvestor wrote:If the cash price is the same price as charging the car, I'd charge it on a cash-back credit card that gives you 2% back on every $ you spend.
Dealers usually limit on the amount that you can put on a credit card, I think it's typically around $3000-5000.
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