Why pay cash for a car?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
User avatar
DaftInvestor
Posts: 3897
Joined: Wed Feb 19, 2014 10:11 am

Re: Why pay cash for a car?

Post by DaftInvestor » Fri Nov 17, 2017 7:38 pm

Personally I don't get the folks who turn down a 0% loan because they don't want a monthly payment. Put the money in the bank earning 1.3% and set it on autopay.
If you have monthly bills for various utilities (total of 5 for me), insurance, cell phone, streaming service, etc. what's one more.

SlowMovingInvestor
Posts: 601
Joined: Sun Sep 11, 2016 11:27 am

Re: Why pay cash for a car?

Post by SlowMovingInvestor » Fri Nov 17, 2017 7:45 pm

DaftInvestor wrote:
Fri Nov 17, 2017 7:38 pm
Personally I don't get the folks who turn down a 0% loan because they don't want a monthly payment. Put the money in the bank earning 1.3% and set it on autopay.
If you have monthly bills for various utilities (total of 5 for me), insurance, cell phone, streaming service, etc. what's one more.
I certainly wouldn't pass up a 0% loan, but how common are 0% loan for sales (not leases) without a corresponding rebate (either explicit manufacturer or hidden) ? It's clear from comments made by people here that it does happen (the additional discount for taking a 0% loan that one member cited), but is that common ?

User avatar
grabiner
Advisory Board
Posts: 21921
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: Why pay cash for a car?

Post by grabiner » Fri Nov 17, 2017 8:02 pm

DaftInvestor wrote:
Fri Nov 17, 2017 7:38 pm
Personally I don't get the folks who turn down a 0% loan because they don't want a monthly payment. Put the money in the bank earning 1.3% and set it on autopay.
If you have monthly bills for various utilities (total of 5 for me), insurance, cell phone, streaming service, etc. what's one more.
Even a 0% loan may not be a benefit. The lender will probably require you to have a $500 deductible on collision and comprehensive insurance, which may be much lower than you want; the cost of the insurance could be more than the interest savings.

Conversely, the loan could be a benefit for unrelated reasons. If you have mediocre credit and this is your only installment loan, taking out a car loan now could save you in lower interest when you take out a mortgage later.
Wiki David Grabiner

User avatar
DaftInvestor
Posts: 3897
Joined: Wed Feb 19, 2014 10:11 am

Re: Why pay cash for a car?

Post by DaftInvestor » Fri Nov 17, 2017 10:13 pm

grabiner wrote:
Fri Nov 17, 2017 8:02 pm
DaftInvestor wrote:
Fri Nov 17, 2017 7:38 pm
Personally I don't get the folks who turn down a 0% loan because they don't want a monthly payment. Put the money in the bank earning 1.3% and set it on autopay.
If you have monthly bills for various utilities (total of 5 for me), insurance, cell phone, streaming service, etc. what's one more.
Even a 0% loan may not be a benefit. The lender will probably require you to have a $500 deductible on collision and comprehensive insurance, which may be much lower than you want; the cost of the insurance could be more than the interest savings.

Conversely, the loan could be a benefit for unrelated reasons. If you have mediocre credit and this is your only installment loan, taking out a car loan now could save you in lower interest when you take out a mortgage later.
I've taken out 3 0% loans - never was asked about insurance coverage.

capsaicinguy
Posts: 48
Joined: Thu Sep 29, 2016 9:00 am

Re: Why pay cash for a car?

Post by capsaicinguy » Fri Nov 17, 2017 11:01 pm

scrabbler1 wrote:
Sun Nov 12, 2017 8:04 pm
What about telling the car salesman you plan to get a loan but at the last minute, after agreeing on a price, tell him you plan to pay cash? Would that work?

Put me down for paying cash anyway for the reasons others have already stated.
This is exactly what I did when we bought our used van. Told them I already got approved at our bank for xyz and said I couldn't go over xyz + trade-in, which was of course lower than their sticker. Got them to go up on trade-in and down on price and got it for the price I wanted. Ymmv.

Longtermgrowth
Posts: 524
Joined: Thu Nov 26, 2015 1:59 pm

Re: Why pay cash for a car?

Post by Longtermgrowth » Fri Nov 17, 2017 11:28 pm

If buying new, a lot of times there are incentives/rebates that take thousands off MSRP paying cash. When offers like that are around, usually 0% APR is the alternative if financing.
The last vehicle I bought had a 4k rebate, so that combined with negotiating below invoice, I didn't think I could make more than 4k on the balance of the vehicle cost financing...

A440
Posts: 134
Joined: Mon Sep 02, 2013 7:46 am
Location: NJ

Re: Why pay cash for a car?

Post by A440 » Sat Nov 18, 2017 6:30 am

I like getting the car title in my hand and not having to wait until my 0% loan is paid off :D

basspond
Posts: 981
Joined: Wed Nov 27, 2013 4:01 am

Re: Why pay cash for a car?

Post by basspond » Sat Nov 18, 2017 8:10 am

A car I bought had an incentive to finance. I told the dealer I wanted to pay it off quickly and suggested I pay it off after 3 months which is what I did. That was 13 years ago. Like others have mentioned, car loans invite lifestyle creep or unnecessarily trading in expenses before you start really getting the advantage of using the item payment free.

likegarden
Posts: 2558
Joined: Mon Feb 26, 2007 5:33 pm

Re: Why pay cash for a car?

Post by likegarden » Sat Nov 18, 2017 10:32 am

We are retired and did not want any loan or lease, had the cash and paid cash. Perhaps we got a better price paying cash.

indexonlyplease
Posts: 975
Joined: Thu Apr 30, 2015 12:30 pm
Location: Pembroke Pines, FL

Re: Why pay cash for a car?

Post by indexonlyplease » Sat Nov 18, 2017 12:07 pm

Most of the people that are against paying cash for a car don't have the money to pay cash. So they make payment. Most will not save for the next car so they have to pay interest.

Then you have the people that buy more car then they can afford, so they have to pay interest.

OnTrack2020
Posts: 173
Joined: Mon Mar 20, 2017 10:24 am

Re: Why pay cash for a car?

Post by OnTrack2020 » Sat Nov 18, 2017 12:26 pm

We bought a new car recently--it was a 2016 that had 20 miles--and there were specific insurance requirements that we had to meet when we took out a loan.

hudson
Posts: 1374
Joined: Fri Apr 06, 2007 9:15 am

Re: Why pay cash for a car?

Post by hudson » Sun Nov 19, 2017 9:19 am

Maybe 3 schools of thought here...many with strong opinions.
1. I always finance cars especially with low interest rates.
2. Sometimes I finance, sometimes, I pay cash. It depends.
3. I always pay cash.

Most folks reading this have a strong opinion; they also are not "monthly payment" buyers; so it likely doesn't matter.

I knew 3 people that on payday got in the car and paid bills in person; that seemed crazy to me...but both their way and my way got the bills paid on time. It doesn't matter.

Personally, I'm tempted to take on a monthly payment...but I've had my fill of that; I hated monthly payments.
My new personal rule is no more debt. I think that's the Boglehead way; but it looks like half of the forum would disagree.

Spirit Rider
Posts: 7818
Joined: Fri Mar 02, 2007 2:39 pm

Re: Why pay cash for a car?

Post by Spirit Rider » Sun Nov 19, 2017 12:23 pm

Sometimes I wonder if this aversion to car loans isn't rooted in biases based on historical rates.

There were times when car loan rates where significantly higher than mortgages and in some cases 2 -3 times higher. In this situation, if you had the available funds, It was clearly advantageous to pay cash. However, in much of this millennium, the car loan rates have been lower than mortgages and in some cases 2 times lower. In this situation, even if you have the available funds, It may be advantageous to finance.

It seems like the thinking of all debt = bad, paying cash for everything = good has permeated this forum.

When debt is really just another tool, like investing is a tool in your personal finance toolbox. Personal finance should be about using the best tools available at the appropriate time. It seems rather ironic to me in a forum with the basis premise of the efficient use of personal finance assets, that so many participants will not even consider the particular financial pros and cons of vehicle financing.

They do a great disservice to all members, but especially new members trying to find their personal finance footing.

andypanda
Posts: 49
Joined: Sun Nov 12, 2017 9:11 pm
Location: Richmond, Virginia

Re: Why pay cash for a car?

Post by andypanda » Sun Nov 19, 2017 12:53 pm

"It seems like the thinking of all debt = bad, paying cash for everything = good has permeated this forum."

It's one of the reasons I joined. I'm not afraid of debt, I simply do not like it. It's just the way I was raised (which was in a rowhouse in Baltimore fwiw.)

Fwiw, when I bought my old, empty, mistreated, now-historical home in early 1980, I got a conventional 30-year mortgage, put down 26% and paid one point. The interest rate was 12.75%. I worked hard to get rid of that sucker. I later refinanced it for 15 years @ 9.25% and later for a straight 7% for 15 years with no points. I paid it off in '97. There were people telling me not to pay it off, that it wasn't a smart move financially and that I could use the money to make money while continuing to make payments. In one ear, out the other. :)

LynnC
Posts: 795
Joined: Thu Mar 01, 2007 7:01 pm
Location: California

Re: Why pay cash for a car?

Post by LynnC » Sun Nov 19, 2017 3:24 pm

Sandtrap wrote:
Sun Nov 12, 2017 6:26 pm
I prefer No monthly payments on anything. Zero Debt.
Very old school perhaps but I like the sleep factor.
+1. It may be old school, but the freedom factor is priceless

LynnC

sschoe2
Posts: 255
Joined: Fri Feb 24, 2017 4:42 pm

Re: Why pay cash for a car?

Post by sschoe2 » Sun Nov 19, 2017 4:16 pm

The last time I bought a car I had no choice. My dad's 95 Saturn excrement-box finally reached the not worth repairing stage and the muffler literally fell off from rust. This was late Jan 2009.

I had a 770 credit score and was looking to buy a base Fit. Up2Drive turned me down, one of the large banks turned me down and P'ed me off so much I closed my accounts with them, the dealer offered 7% through BoA and I finally said enough and wrote a check for the Fit. A few days later BoA sent me a rejection letter for the 7% loan.

User avatar
Sandtrap
Posts: 4394
Joined: Sat Nov 26, 2016 6:32 pm
Location: Hawaii😀 Northern AZ.😳

Re: Why pay cash for a car?

Post by Sandtrap » Sun Nov 19, 2017 8:46 pm

Spirit Rider wrote:
Sun Nov 19, 2017 12:23 pm
Sometimes I wonder if this aversion to car loans isn't rooted in biases based on historical rates.

There were times when car loan rates where significantly higher than mortgages and in some cases 2 -3 times higher. In this situation, if you had the available funds, It was clearly advantageous to pay cash. However, in much of this millennium, the car loan rates have been lower than mortgages and in some cases 2 times lower. In this situation, even if you have the available funds, It may be advantageous to finance.

It seems like the thinking of all debt = bad, paying cash for everything = good has permeated this forum.

When debt is really just another tool, like investing is a tool in your personal finance toolbox. Personal finance should be about using the best tools available at the appropriate time. It seems rather ironic to me in a forum with the basis premise of the efficient use of personal finance assets, that so many participants will not even consider the particular financial pros and cons of vehicle financing.

They do a great disservice to all members, but especially new members trying to find their personal finance footing.
Maybe it's a difference between generations across "Bogleheadville".
The one demographic is "old school", avoid all debt, no payments, "don't owe nobohdy notion'", save for a rainy day, save up and pay cash for a running junker is better than financing a new debt mobile. Save up to get that used Plymouth Valiant with the straight six.
The middle demographic is in between.
The other end demographic is spreadsheet everything, work out the numbers, fiddle the financing, to end up okay.
Possible.
Maybe.

smitcat
Posts: 1255
Joined: Mon Nov 07, 2016 10:51 am

Re: Why pay cash for a car?

Post by smitcat » Mon Nov 20, 2017 7:32 am

Sandtrap wrote:
Sun Nov 19, 2017 8:46 pm
Spirit Rider wrote:
Sun Nov 19, 2017 12:23 pm
Sometimes I wonder if this aversion to car loans isn't rooted in biases based on historical rates.

There were times when car loan rates where significantly higher than mortgages and in some cases 2 -3 times higher. In this situation, if you had the available funds, It was clearly advantageous to pay cash. However, in much of this millennium, the car loan rates have been lower than mortgages and in some cases 2 times lower. In this situation, even if you have the available funds, It may be advantageous to finance.

It seems like the thinking of all debt = bad, paying cash for everything = good has permeated this forum.

When debt is really just another tool, like investing is a tool in your personal finance toolbox. Personal finance should be about using the best tools available at the appropriate time. It seems rather ironic to me in a forum with the basis premise of the efficient use of personal finance assets, that so many participants will not even consider the particular financial pros and cons of vehicle financing.

They do a great disservice to all members, but especially new members trying to find their personal finance footing.
Maybe it's a difference between generations across "Bogleheadville".
The one demographic is "old school", avoid all debt, no payments, "don't owe nobohdy notion'", save for a rainy day, save up and pay cash for a running junker is better than financing a new debt mobile. Save up to get that used Plymouth Valiant with the straight six.
The middle demographic is in between.
The other end demographic is spreadsheet everything, work out the numbers, fiddle the financing, to end up okay.
Possible.
Maybe.
Old school around here used to include these things....
- learn how to fix things yourself
- buy used durable items
- do not borrow for anything
- do not trust the stock market, its gambling
- Save money in the bank or in Govmt savings and certs
- Only loan should be for your home

There have been times when buying things like a car on credit or leasing was an unfavorable option. Similarly there were times when purchasing items with a CC had unfavorable outcomes.
Folks that really use budgeting and see money transfers as opportunities to select the most favorable outcome should not be afraid or concerned about utilizing CC's or car/truck loans to their own benefit.
When I worked at a very larger marketing/distribution company we were taught by the data that folks that have a credit problem will repeat that behavior continuously and that is why the CC card companies exist. Similarly the folks that do not have a credit problem will be able to use these tools to their advantage many times. Its just a tool , it really not evil as its up to the owner to determine the use.
Last edited by smitcat on Mon Nov 20, 2017 9:24 am, edited 1 time in total.

nick2302
Posts: 64
Joined: Sun Sep 25, 2016 11:29 am

Re: Why pay cash for a car?

Post by nick2302 » Mon Nov 20, 2017 7:48 am

I hate to owe and pay interest that has no tax benefit. When I bought my car this past January I financed the car as I got a better deal. There was no pre-payment penalty as long as I made 2 payments. So On the third payment the car got paid off with cash on hand. I am one of the ones that like to sleep knowing I don't owe anyone anything.

That is one of the main reason I am working on the house mortgage and stressing over retiring and having a balance owed on the house. The only reason to finance a car in my opinion is if you get a better price break and there is no early payment penalty and you can afford to pay the car off ASAP after taking delivery.

With the way cars devalue after driving them off the lot you may be paying interest on a loan balance that is higher than the value of the car!!! No thanks, I will pass on that deal. Buy what you can pay off in cash at the end of the month when the credit card bill comes due. I even put the first 10K on my American Express to get the reward dollars and paid them off at the end of the first month when I got the Amex statement. Then finished paying the car off on the third month as outlined in the loan agreement.

Every trick in the book, take advantage of it.

User avatar
Kitty Telltales
Posts: 155
Joined: Thu Mar 17, 2016 8:36 am
Location: Europe sometimes Florida

Re: Why pay cash for a car?

Post by Kitty Telltales » Mon Nov 20, 2017 8:31 am

Sandtrap wrote:
Sun Nov 19, 2017 8:46 pm

Maybe it's a difference between generations across "Bogleheadville".
The one demographic is "old school", avoid all debt, no payments, "don't owe nobohdy notion'", save for a rainy day, save up and pay cash for a running junker is better than financing a new debt mobile. Save up to get that used Plymouth Valiant with the straight six.
The middle demographic is in between.
The other end demographic is spreadsheet everything, work out the numbers, fiddle the financing, to end up okay.
Possible.
Maybe.
But maybe the Boglehead gene can be passed on.


We paid cash last year for a little, slightly used 4 year old SUV for my husband, a year before he retired. It was part of our pre-retirement to-do checklist, to acquire a car for him that would last the next decade and ease into retirement still debt free. He had a VW Passat that was over 20 years old, almost 250,000 Kilometers.

The Passat was passed on to my 32 year old son who had been living in Berlin without a car for the last 6 years. He’s thrilled and glad to get some wheels but remain debt free too. Most of his friends don’t own cars, however the American boy missed did miss those wheels. I believe he still uses public transportation too.

Perhaps he also picked up the Boglehead gene from his mother.

smitcat
Posts: 1255
Joined: Mon Nov 07, 2016 10:51 am

Re: Why pay cash for a car?

Post by smitcat » Mon Nov 20, 2017 9:34 am

nick2302 wrote:
Mon Nov 20, 2017 7:48 am
I hate to owe and pay interest that has no tax benefit. When I bought my car this past January I financed the car as I got a better deal. There was no pre-payment penalty as long as I made 2 payments. So On the third payment the car got paid off with cash on hand. I am one of the ones that like to sleep knowing I don't owe anyone anything.

That is one of the main reason I am working on the house mortgage and stressing over retiring and having a balance owed on the house. The only reason to finance a car in my opinion is if you get a better price break and there is no early payment penalty and you can afford to pay the car off ASAP after taking delivery.

With the way cars devalue after driving them off the lot you may be paying interest on a loan balance that is higher than the value of the car!!! No thanks, I will pass on that deal. Buy what you can pay off in cash at the end of the month when the credit card bill comes due. I even put the first 10K on my American Express to get the reward dollars and paid them off at the end of the first month when I got the Amex statement. Then finished paying the car off on the third month as outlined in the loan agreement.

Every trick in the book, take advantage of it.
"That is one of the main reason I am working on the house mortgage and stressing over retiring and having a balance owed on the house. The only reason to finance a car in my opinion is if you get a better price break and there is no early payment penalty and you can afford to pay the car off ASAP after taking delivery."

Every trick in the book would include:
- keeping a car loan that had no interest expense
- keeping a car loan that had an interest expense below a current common CD rate
- Utilizing credit cards anytime their are discounts, points and bonus for opening them
- Paying a home mortgage on schedule when the rate is lower than a current CD rate (after tax considerations)
- Paying a home mortgage rate on schedule when it allows you to fully fund a matching 401K and a Roth.

jpdion
Posts: 75
Joined: Thu Feb 13, 2014 12:52 pm

Re: Why pay cash for a car?

Post by jpdion » Mon Nov 20, 2017 10:00 am

If you have cash in a taxable account, then you have to do the math with the return on that account versus the loan interest rate. If your cash is in a tax deferred account you have to look at the marginal tax rate when turning that into actual spending cash. I would argue that a low interest loan that allows one to pay for a car out of regular income over several years is "probably" better than taking a large tax hit on a distribution from retirement accounts.

User avatar
JupiterJones
Posts: 2649
Joined: Tue Aug 24, 2010 3:25 pm
Location: Nashville, TN

Re: Why pay cash for a car?

Post by JupiterJones » Mon Nov 20, 2017 10:12 am

Sandtrap wrote:
Sun Nov 19, 2017 8:46 pm
Save up to get that used Plymouth Valiant with the straight six.
It was a slant six in the Valiant, wasn't it?

I know because, coincidentally, it was the first used car I remember my Dad buying (for cash, at an auction no less!) after he got fed up with making payments on his new cars. He drove Caddies my whole childhood, then one day he shows up in an old, power-blue Valiant. We were gobsmacked.

It actually wound up being a pretty good car! :-)
Stay on target...

User avatar
Sandtrap
Posts: 4394
Joined: Sat Nov 26, 2016 6:32 pm
Location: Hawaii😀 Northern AZ.😳

Re: Why pay cash for a car?

Post by Sandtrap » Mon Nov 20, 2017 10:56 am

JupiterJones wrote:
Mon Nov 20, 2017 10:12 am
Sandtrap wrote:
Sun Nov 19, 2017 8:46 pm
Save up to get that used Plymouth Valiant with the straight six.
It was a slant six in the Valiant, wasn't it?

I know because, coincidentally, it was the first used car I remember my Dad buying (for cash, at an auction no less!) after he got fed up with making payments on his new cars. He drove Caddies my whole childhood, then one day he shows up in an old, power-blue Valiant. We were gobsmacked.

It actually wound up being a pretty good car! :-)
Image
Pay cash. Drive till the engine falls out. :D
Last edited by Sandtrap on Mon Nov 20, 2017 10:57 am, edited 1 time in total.

scrabbler1
Posts: 2124
Joined: Fri Nov 20, 2009 2:39 pm

Re: Why pay cash for a car?

Post by scrabbler1 » Mon Nov 20, 2017 10:56 am

jpdion wrote:
Mon Nov 20, 2017 10:00 am
If you have cash in a taxable account, then you have to do the math with the return on that account versus the loan interest rate. If your cash is in a tax deferred account you have to look at the marginal tax rate when turning that into actual spending cash. I would argue that a low interest loan that allows one to pay for a car out of regular income over several years is "probably" better than taking a large tax hit on a distribution from retirement accounts.
I did this when I was looking into paying off the mortgage back in the mid-1990s. I set up a spreadsheet to figure out how much after-tax interest I was saving versus how much interest I would be forgoing on the investment(s) I pulled the money from. The tipping point for me was seeing the reduction in deductible mortgage interest limited by the standard reduction on my state income tax return, thereby reducing the loss of taxable interest and giving me more incentive to pay off the mortgage.

Of course, for a car loan there is no tax deductibility from the loan's interest. That makes things much simpler.

chinchin
Posts: 7
Joined: Tue Nov 14, 2017 8:02 pm

Re: Why pay cash for a car?

Post by chinchin » Mon Nov 20, 2017 9:38 pm

Do people write five (or six?) figure checks and then go home and wait for the check to clear before they get the car?

hudson
Posts: 1374
Joined: Fri Apr 06, 2007 9:15 am

Re: Why pay cash for a car?

Post by hudson » Tue Nov 21, 2017 5:13 am

chinchin wrote:
Mon Nov 20, 2017 9:38 pm
Do people write five (or six?) figure checks and then go home and wait for the check to clear before they get the car?
I suspect that the dealership ran some kind of credit screen before taking a check...
Here's how it worked for me about Dec. 31, 2012...late in the evening....my checking account had enough in it to pay for the vehicle.
The sales manager told me that they would take my check...no problem, but he wasn't the dealership's "money guy". When my wife and I got in the back room to settle-up, the "money guy" took my check, faxed it somewhere, then made a phone call. He said, I can't take your check...and I don't know why. He asked if he could run one of my wife's checks. It was approved; we drove away. He couldn't explain why.
I think they sent the check to some kind of credit-check service for car dealers. I believe that any credit or bank screening would've come out OK. I think that my check was denied because my credit was frozen and my wife's wasn't.

User avatar
queso
Posts: 503
Joined: Thu Jan 07, 2016 3:52 pm

Re: Why pay cash for a car?

Post by queso » Tue Nov 21, 2017 8:08 am

+1. I think it is TeleCheck or similar. They take your check and run it through a verification system and then you walk away with the car. It's pretty painless. Just don't try to convince them to take a credit card. THAT is not painless.

nick2302
Posts: 64
Joined: Sun Sep 25, 2016 11:29 am

Re: Why pay cash for a car?

Post by nick2302 » Tue Nov 21, 2017 8:20 am

Taking a credit card was a challenge for the car dealership. They would let me put only 10K on my Amex that had a 30K limit and no balance owed. So I got reward dollars on 10K for the car. Then I took the loan offer with no early payment penalty and made two regular payments and then paid the car off (their loan requirement). That was the cheapest deal ( in my case) that I could come up with.
Nick

User avatar
queso
Posts: 503
Joined: Thu Jan 07, 2016 3:52 pm

Re: Why pay cash for a car?

Post by queso » Tue Nov 21, 2017 8:22 am

nick2302 wrote:
Tue Nov 21, 2017 8:20 am
Taking a credit card was a challenge for the car dealership. They would let me put only 10K on my Amex that had a 30K limit and no balance owed. So I got reward dollars on 10K for the car. Then I took the loan offer with no early payment penalty and made two regular payments and then paid the car off (their loan requirement). That was the cheapest deal ( in my case) that I could come up with.
Nick
My experience has been the same. Depending on the dealer they are usually willing to take part of the payment on a CC, but they really, really don't want to eat those fees.

Post Reply