Pay cash for the new car or finance (and what to invest with the cash)?

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vwgrrc
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Pay cash for the new car or finance (and what to invest with the cash)?

Post by vwgrrc » Tue Oct 23, 2018 3:56 pm

Hey all,

Have been on this forum for a few years and learned a lot but never post on this section. Here I need some thoughts from your smart minds on a financial decision :sharebeer

We are going to take delivery of our new car in a few weeks that costs about $67k total. We happen to have enough cash at this point to pay that in full. But I have good credit history that should put me in 2-4% APR range if I get a loan from my credit union. So the question is should we finance the car and invest the $60K+? What to invest?

I'm a believer of boglehead and i have my own modified 2-fund portfolio for a while. At this point, I'm just having a hard time convincing myself to put the $60K into the portfolio that would other wise be used to pay the car in full and save the interest. It just feels too risky to invest with the "borrowed money" (I have not idea where that feeling comes from :oops: ). It will make me more confident if I can invest the money in some less volatile products even if I can only make a tad above the interest on the car loan, like 5-6%. I bumped into sites like Fundrise and RealtyMogul and hopefully that will give me a more "consistent" 8% ish return. But the lack of liquidity on those products put me off. Then I circled back to Vanguard but not sure what to pick. Would Wellington or STAR a good choice? Does it worth to pick short-term bond giving the current rate environment?

What would you guys do if you're in my position? Any thought would help. Thanks all in advance :sharebeer

PFInterest
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Re: Pay cash for the new car or finance (and what to invest with the cash)?

Post by PFInterest » Tue Oct 23, 2018 6:22 pm

Either put in stocks or pay off.

mortfree
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Re: Pay cash for the new car or finance (and what to invest with the cash)?

Post by mortfree » Tue Oct 23, 2018 6:27 pm

I would put most of it (50-60k) in a 12-month CD at 2.5%.

Probably not going to be a popular answer but that is what I would do.

mmmodem
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Re: Pay cash for the new car or finance (and what to invest with the cash)?

Post by mmmodem » Tue Oct 23, 2018 6:41 pm

I predict the responses you receive will have pretty convincing arguments for both sides which indicates either decision will be fine. There's been a lot of discussions of this sort Boglehead.

If it feels too risky to invest borrowed money, then don't do it. I find it interesting you worry about the lack of liquidity on some investments. Liquidity is exactly why I didn't pay off my vehicle and invested instead.

Notsobad
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Re: Pay cash for the new car or finance (and what to invest with the cash)?

Post by Notsobad » Tue Oct 23, 2018 7:03 pm

Good question.

It depends. The more you have saved and invested already then the more it makes sense to pay cash and move on. If there are shortfalls in your annual investment goals then consider taking the loan and putting away more now, to allow for longer market exposure.

Any investment should slide into your overall asset allocation.

I stopped taking car loans in principle a couple of cars ago. It is hard to write a big check so it keeps the car budget in check. I don’t think I would take a 0 percent loan now, but that’s more an emotional than mathematical strategy.

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Re: Pay cash for the new car or finance (and what to invest with the cash)?

Post by Dave C. » Tue Oct 23, 2018 7:09 pm

Interesting....... my wife and I are in almost exactly the situation and timeframe in which you find yourself. My wife bought a new car last week, I liked it so much I bought the exact same car two days ago (Different color). We paid exactly the same amount for two cars that you paid for one.

I paid cash for both. 0% financing was not available. So instead of playing what I consider a silly game, I decided not to try to match earning percentage with interest expenses.

Don't get me wrong, it was not easy for me to lay out the cash for the two new automobiles! My wife and I have not bought a new automobile in over 30 years.

BUT..... we've got the cash, we are both retired and will not be buying many new cars, and I would hate looking at the financials every day to see if my earnings were keeping pace with my expenses!

(and we both got leather… kind of exciting for both of us).
Easy does it/Live & Let Live/One day at a time. Thanks Bill.

vwgrrc
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Re: Pay cash for the new car or finance (and what to invest with the cash)?

Post by vwgrrc » Tue Oct 23, 2018 9:11 pm

mmmodem wrote:
Tue Oct 23, 2018 6:41 pm
I predict the responses you receive will have pretty convincing arguments for both sides which indicates either decision will be fine. There's been a lot of discussions of this sort Boglehead.

If it feels too risky to invest borrowed money, then don't do it. I find it interesting you worry about the lack of liquidity on some investments. Liquidity is exactly why I didn't pay off my vehicle and invested instead.
Thanks! Lack of liquidity might just be my "excuse" to talk myself out of it. To be honest, I personally like the idea (Fundrise/Realty Mogul). But after some searches on this forum and reddit, it seems many people discourage it and saying one should just invest in REIT (VGSLX). But I don't like how that fund performs. I'll probably just go with Fundrise eventually for part of the money. Fund-wise, I'm interested in Wellington and maybe just the balanced index. But I'm not very sure how the rising interest rate gonna impact the NAV of these balance funds.
Last edited by vwgrrc on Tue Oct 23, 2018 9:32 pm, edited 1 time in total.

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Watty
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Re: Pay cash for the new car or finance (and what to invest with the cash)?

Post by Watty » Tue Oct 23, 2018 9:32 pm

vwgrrc wrote:
Tue Oct 23, 2018 3:56 pm
But I have good credit history that should put me in 2-4% APR range if I get a loan from my credit union.
That really is not all that special. Not that I would do it but you can also get margin loans in that interest rate range.

https://www.interactivebrokers.com/en/index.php?f=18069

Getting a higher AFTER TAX investment return is not all that easy and requires extra risk. If you manage to clear 1% after taxes that is all of $670 a year or about $55 a month and I doubt that would make a dent in your situation.

I would pay cash and then invest your "car payment" each month.

One thing I have found when I pay cash for cars is that I also tend to buy less expensive cars. If you find it hard to write a check for $67K then you might want to consider a less expensive car.

K@3
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Re: Pay cash for the new car or finance (and what to invest with the cash)?

Post by K@3 » Tue Oct 23, 2018 9:38 pm

What if you bought a $53K car at 0 down and 0.9%APR? Would you pay it off or invest in something low risk like a 2.75% APR 15-month CD? If I am going to invest, should I consider investing in anything less than than 3% inflation rate?

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Re: Pay cash for the new car or finance (and what to invest with the cash)?

Post by grabiner » Tue Oct 23, 2018 10:16 pm

vwgrrc wrote:
Tue Oct 23, 2018 3:56 pm
We are going to take delivery of our new car in a few weeks that costs about $67k total. We happen to have enough cash at this point to pay that in full. But I have good credit history that should put me in 2-4% APR range if I get a loan from my credit union. So the question is should we finance the car and invest the $60K+? What to invest?
See Paying down loans versus investing on the wiki. The fair comparison is the after-tax return on a bond fund with the same duration as your loan.

If you take out a 5-year loan, and invest in a portfolio of low-risk, short-term bonds, you don't change your risk level. The current yield on Vanguard Limited-Term Tax-Exempt Admiral shares is 2.26%; therefore, if your loan rate is higher, you would come out ahead by avoiding the loan rather than taking it out and buying these bonds. And avoiding the loan gives you other advantages; your credit union will probably require a lower deductible on collision and comprehensive than you want.

If you invest in something with more risk, you may get higher returns, but you can do that whether or not you take out the loan; you could take out the loan and buy stock, or pay cash for the car and sell bonds to buy stock.
K@3 wrote:
Tue Oct 23, 2018 9:38 pm
What if you bought a $53K car at 0 down and 0.9%APR? Would you pay it off or invest in something low risk like a 2.75% APR 15-month CD? If I am going to invest, should I consider investing in anything less than than 3% inflation rate?
If you can get a 0.9% APR without any extra costs, the math above does indicate that you will come out ahead by taking out the loan and investing the difference. But make sure that there are no costs involved; sometimes, the dealer will offer cash back if you don't take out the loan.
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vwgrrc
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Re: Pay cash for the new car or finance (and what to invest with the cash)?

Post by vwgrrc » Tue Oct 23, 2018 11:15 pm

grabiner wrote:
Tue Oct 23, 2018 10:16 pm

If you take out a 5-year loan, and invest in a portfolio of low-risk, short-term bonds, you don't change your risk level. The current yield on Vanguard Limited-Term Tax-Exempt Admiral shares is 2.26%; therefore, if your loan rate is higher, you would come out ahead by avoiding the loan rather than taking it out and buying these bonds. And avoiding the loan gives you other advantages; your credit union will probably require a lower deductible on collision and comprehensive than you want.

If you invest in something with more risk, you may get higher returns, but you can do that whether or not you take out the loan; you could take out the loan and buy stock, or pay cash for the car and sell bonds to buy stock.

Thanks a lot! You pointed me to a right direction. A couple follow-up questions.

I'm qualified for 36-month @1.99% or longer terms @2-4% APR. I think Vanguard Limited-Term Tax-Exempt is a great example here since the duration is close to 3 year and the yield is just above 2%. My question is if the SEC yield on this fund a good indicator of future return? When I look back, the past performance averages are all around 1%. Meanwhile, how does this compare to Prime Money Market. It has similar SEC yield at this point but seems more "promising"/going up giving the current rate environment. With taxation considered, which one is better for a 3-year holding period?

This is more for my curiosity. Like someone said above, the net profit would be pretty small. I'll probably just go ahead invest whatever I want and pay the 1.99% interest. It seems more like an emotional than financial consideration... :oops:

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Re: Pay cash for the new car or finance (and what to invest with the cash)?

Post by Nissanzx1 » Tue Oct 23, 2018 11:21 pm

I'd write the check and be done, that is an awfully nice car- Congrats!

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grabiner
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Re: Pay cash for the new car or finance (and what to invest with the cash)?

Post by grabiner » Tue Oct 23, 2018 11:25 pm

vwgrrc wrote:
Tue Oct 23, 2018 11:15 pm
grabiner wrote:
Tue Oct 23, 2018 10:16 pm

If you take out a 5-year loan, and invest in a portfolio of low-risk, short-term bonds, you don't change your risk level. The current yield on Vanguard Limited-Term Tax-Exempt Admiral shares is 2.26%; therefore, if your loan rate is higher, you would come out ahead by avoiding the loan rather than taking it out and buying these bonds. And avoiding the loan gives you other advantages; your credit union will probably require a lower deductible on collision and comprehensive than you want.

If you invest in something with more risk, you may get higher returns, but you can do that whether or not you take out the loan; you could take out the loan and buy stock, or pay cash for the car and sell bonds to buy stock.

Thanks a lot! You pointed me to a right direction. A couple follow-up questions.

I'm qualified for 36-month @1.99% or longer terms @2-4% APR. I think Vanguard Limited-Term Tax-Exempt is a great example here since the duration is close to 3 year and the yield is just above 2%. My question is if the SEC yield on this fund a good indicator of future return?
That is exactly what it is. The SEC yield is what you would get if you held the bonds in the fund to maturity.

Note that the duration of an auto loan is about half its term; a five-year loan is comparable in duration to Limited-Term Tax-Exempt, because it holds negative bonds (future payments) in 1-60 months.
When I look back, the past performance averages are all around 1%. Meanwhile, how does this compare to Prime Money Market. It has similar SEC yield at this point but seems more "promising"/going up giving the current rate environment. With taxation considered, which one is better for a 3-year holding period?
Prime Money Market is taxable, so you would have to adjust for the taxes due. If you are in a 24% bracket, the 2.20% yield becomes 1.67% after tax The difference between 1.67% after tax on Prime Money Market and 2.26% on Limited-Term Tax-Exempt is the premium you are receiving for taking the interest-rate risk (and a slightly higher expense ratio on the money-market fund).

But it appears with these numbers that paying cash for the car is a better deal unless you would have to sell stock for a large capital gain.

(edited to remove excess quoted material)
Last edited by grabiner on Wed Oct 24, 2018 6:50 pm, edited 1 time in total.
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salecat0709
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Re: Pay cash for the new car or finance (and what to invest with the cash)?

Post by salecat0709 » Wed Oct 24, 2018 8:38 am

I hardly ever post here but I pay cash for my cars. We do keep them a long time. I have had car loans before but they can be a pain even if the interest rate is low. I like to suck if up and write one big check and be done with it.

Salecat

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Re: Pay cash for the new car or finance (and what to invest with the cash)?

Post by midareff » Wed Oct 24, 2018 8:54 am

I picked up a new ride the end of last March. PenFed was offering 1.49% money and VWIUX was distributing 2.9% tax-ex. Pretty easy call for me.

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Re: Pay cash for the new car or finance (and what to invest with the cash)?

Post by Smoke » Wed Oct 24, 2018 8:54 am

I hate having debt, last yr I bought a new car and wrote a check and paid in full.
The only debt I have ever had was my mortgage, which I paid off early (4 yrs) when I retired.
It's a great feeling (imo) not to owe anyone nuttin. :wink:

vwgrrc
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Re: Pay cash for the new car or finance (and what to invest with the cash)?

Post by vwgrrc » Wed Oct 24, 2018 10:55 am

midareff wrote:
Wed Oct 24, 2018 8:54 am
I picked up a new ride the end of last March. PenFed was offering 1.49% money and VWIUX was distributing 2.9% tax-ex. Pretty easy call for me.
That's a great rate! BTW, how do you consider VWIUX vs. VWALX (High Yield Tax-exempted)? Regardless of the duration, VWALX seems much volatile but it also recovers from any draw back pretty quickly.

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midareff
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Re: Pay cash for the new car or finance (and what to invest with the cash)?

Post by midareff » Wed Oct 24, 2018 5:00 pm

vwgrrc wrote:
Wed Oct 24, 2018 10:55 am
midareff wrote:
Wed Oct 24, 2018 8:54 am
I picked up a new ride the end of last March. PenFed was offering 1.49% money and VWIUX was distributing 2.9% tax-ex. Pretty easy call for me.
That's a great rate! BTW, how do you consider VWIUX vs. VWALX (High Yield Tax-exempted)? Regardless of the duration, VWALX seems much volatile but it also recovers from any draw back pretty quickly.
FWIW, if there is another financial crisis municipalities will be stretched again, as they were in the last recession. We are retired and have enough that we don't need to chase a tenth, or a couple tenths ... as in don't risk money you have and need to make money you don't need.

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Re: Pay cash for the new car or finance (and what to invest with the cash)?

Post by grabiner » Wed Oct 24, 2018 6:52 pm

midareff wrote:
Wed Oct 24, 2018 8:54 am
I picked up a new ride the end of last March. PenFed was offering 1.49% money and VWIUX was distributing 2.9% tax-ex. Pretty easy call for me.
As was discussed earlier in the thread, this isn't quite the right comparison; your loan duration is closer to that of Short-Term or Limited-Term Tax-Exempt. But both of those funds also yielded more than 1.49%, so if you don't have any extra costs for taking out the 1.49% loan, it's still a good deal.
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Re: Pay cash for the new car or finance (and what to invest with the cash)?

Post by midareff » Thu Oct 25, 2018 7:37 am

grabiner wrote:
Wed Oct 24, 2018 6:52 pm
midareff wrote:
Wed Oct 24, 2018 8:54 am
I picked up a new ride the end of last March. PenFed was offering 1.49% money and VWIUX was distributing 2.9% tax-ex. Pretty easy call for me.
As was discussed earlier in the thread, this isn't quite the right comparison; your loan duration is closer to that of Short-Term or Limited-Term Tax-Exempt. But both of those funds also yielded more than 1.49%, so if you don't have any extra costs for taking out the 1.49% loan, it's still a good deal.
No extra costs ... except to them. I brough along a cashiers check for bit less than half the purchase.. the balance being PenFed and trade. They decided they didn't want to take the cashier's check since it was made out to me and by my signing it to them it became third party. Instead we put a very large sum on a 2% cash back Fidelity credit card. I guess when the golden goose wishes to lay an egg at your feet you are somewhat obliged to take it.

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Re: Pay cash for the new car or finance (and what to invest with the cash)?

Post by Watty » Thu Oct 25, 2018 10:22 am

vwgrrc wrote:
Tue Oct 23, 2018 11:15 pm
grabiner wrote:
Tue Oct 23, 2018 10:16 pm

If you take out a 5-year loan, and invest in a portfolio of low-risk, short-term bonds, you don't change your risk level. The current yield on Vanguard Limited-Term Tax-Exempt Admiral shares is 2.26%; therefore, if your loan rate is higher, you would come out ahead by avoiding the loan rather than taking it out and buying these bonds. And avoiding the loan gives you other advantages; your credit union will probably require a lower deductible on collision and comprehensive than you want.

If you invest in something with more risk, you may get higher returns, but you can do that whether or not you take out the loan; you could take out the loan and buy stock, or pay cash for the car and sell bonds to buy stock.

Thanks a lot! You pointed me to a right direction. A couple follow-up questions.

I'm qualified for 36-month @1.99% or longer terms @2-4% APR. I think Vanguard Limited-Term Tax-Exempt is a great example here since the duration is close to 3 year and the yield is just above 2%. My question is if the SEC yield on this fund a good indicator of future return? When I look back, the past performance averages are all around 1%. Meanwhile, how does this compare to Prime Money Market. It has similar SEC yield at this point but seems more "promising"/going up giving the current rate environment. With taxation considered, which one is better for a 3-year holding period?

This is more for my curiosity. Like someone said above, the net profit would be pretty small. I'll probably just go ahead invest whatever I want and pay the 1.99% interest. It seems more like an emotional than financial consideration... :oops:
The details could be a bit more complicated than that.

A couple of complications are;

a) Halfway through the car loan the loan balance will only be around half the original amount.

b) You have interest rate and default risk with a bond fund.

c) You would have around a $1,000 a month car payment. If you had a paid off car that could be invested in something with a higher expected yield.

d) There is a chance the Murphy's Law could hit and the bond income could cause you to hit some income limit where a tax credit or surcharge goes into effect.

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