Why pay cash for a car?

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hudson
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Re: Why pay cash for a car?

Post by hudson » Mon May 28, 2018 9:06 am

Lynette wrote:
Mon May 28, 2018 8:53 am
Laziness. I did not want to have to unfreeze my credit cards even though this only takes about !5 minutes and costs me about $20.00. In addition, I had the money in a savings account and I have to pay tax on the interest and this increases my MAGI which increases Medicare IRMAA. I'm not sure if it was financially expedient but $1 of additional income could place me into next IRMAA bracket.
This discussion has made me consider getting a loan...although I'm usually a cash customer.
I just put a deposit on a vehicle to be delivered in a few days. Since it doesn't have a zero percent loan, I won't bite on a loan.
I unfroze the 3 credit bureaus going into this process so that my options would be open....there's no charge for me.
The last time I tried to buy a vehicle with a personal check, they wouldn't take it; I think the dealer's check service turned me down because my credit was frozen. The finance guy asked to try my wife's check; it took; so she paid for the vehicle....temporarily.
The salesperson recommended that I bring a certified or cashier's check for payment this time.
The medicare MAGI/IRMAA thing is worth watching if you can control your income.

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Re: Why pay cash for a car?

Post by LadyGeek » Mon May 28, 2018 9:18 am

Lynette wrote:
Mon May 28, 2018 8:53 am
Laziness. I did not want to have to unfreeze my credit cards even though this only takes about !5 minutes and costs me about $20.00. In addition, I had the money in a savings account and I have to pay tax on the interest and this increases my MAGI which increases Medicare IRMAA. I'm not sure if it was financially expedient but $1 of additional income could place me into next IRMAA bracket.
At the end of September, freezing / unfreezing your credit report will be free. See: Free to freeze and unfreeze your credit report
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PhilosophyAndrew
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Re: Why pay cash for a car?

Post by PhilosophyAndrew » Mon May 28, 2018 9:26 am

I pay cash because I wish to, and because indulging my orefeeence makes no material difference in my fiancial life.

When the stakes are low, investing time deciding what to do is irrational. If I preferred to possibly maximize investment return by taking on a low-interest auto loan, I would do that without worry or extra deliberation.

Andy.

PinotGris
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Re: Why pay cash for a car?

Post by PinotGris » Mon May 28, 2018 9:36 am

noco-hawkeye wrote:
Mon May 28, 2018 7:34 am
I'm someone who avoids the loans by in large, but might take one out in limited situations. I don't like the loan on a quickly depreciating asset, and don't see it in the same light as a house. Cars are an expense, kind of like clothes etc (in my mind).
[ quote fixed by admin LadyGeek]

Why is paying a large sum of cash better on that same fast depreciating property? Instead that money can be earning an income, possibly at a higher rate. At the end of a mortgage you have a house that has appreciated in value leaving a profit.

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Re: Why pay cash for a car?

Post by noco-hawkeye » Mon May 28, 2018 10:03 am

chabil wrote:
Mon May 28, 2018 9:36 am
noco-hawkeye wrote:
Mon May 28, 2018 7:34 am
I'm someone who avoids the loans by in large, but might take one out in limited situations. I don't like the loan on a quickly depreciating asset, and don't see it in the same light as a house. Cars are an expense, kind of like clothes etc (in my mind).
[ quote fixed by admin LadyGeek]

Why is paying a large sum of cash better on that same fast depreciating property? Instead that money can be earning an income, possibly at a higher rate. At the end of a mortgage you have a house that has appreciated in value leaving a profit.
The math is certainly there to support this point of view - technically a 0% loan and earning 2% in interest is a good deal. But it's just not my thing when it comes to cars. I don't like debt in general, and its one more thing to account for in my head / balance sheet. If you take this 0% view to an extreme - imagine this:

I can get a 0% credit card for X months. Why doesn't everyone get this credit card ASAP and put every single expense on it? It's because it's just not my thing. If I have an expense, I pay for that expense. Everyone sees this a bit differently, but thats just where my head is at. There is point where it's better to go outside / live life than optimize every single transaction.

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Re: Why pay cash for a car?

Post by Church Lady » Mon May 28, 2018 12:12 pm

I financed my first car loan to build up my credit rating. I'm dating myself here, but I think I paid 10% :!: or so, and was happy to get that rate. After a year or so, I figured my credit was as improved as it was going to get, so I paid it off. At the time, it was considered savvy to finance a car to build credit. I have no idea whether this is still the case. Pretty much anyone can get a car loan, so it's something to look into.

I bought the next car with cash. The salesperson said cash sales were quite rare. No rebate offered.

I bought the last car through TrueCar. Neither financing nor rebates offered. Salesman wouldn't budge from TrueCar price. I paid cash.

One of my colleagues has the theory that you pay for the 0% car loans through a higher price. Mathematically, that would have to be the case as car dealerships aren't running charities.
He that loveth silver shall not be satisfied with silver; nor he that loveth abundance with increase: this is also vanity. Ecclesiastes 1:8

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Re: Why pay cash for a car?

Post by KyleAAA » Mon May 28, 2018 12:19 pm

Church Lady wrote:
Mon May 28, 2018 12:12 pm
I financed my first car loan to build up my credit rating. I'm dating myself here, but I think I paid 10% :!: or so, and was happy to get that rate. After a year or so, I figured my credit was as improved as it was going to get, so I paid it off. At the time, it was considered savvy to finance a car to build credit. I have no idea whether this is still the case. Pretty much anyone can get a car loan, so it's something to look into.

I bought the next car with cash. The salesperson said cash sales were quite rare. No rebate offered.

I bought the last car through TrueCar. Neither financing nor rebates offered. Salesman wouldn't budge from TrueCar price. I paid cash.

One of my colleagues has the theory that you pay for the 0% car loans through a higher price. Mathematically, that would have to be the case as car dealerships aren't running charities.
It would be the case if the dealership was the one underwriting the loan, but they aren’t. Those come from the manufacturer. Sometimes you have to give up a manufacturer rebate to get the 0% rate but not always. Dealership might be giving up a few hundred $$$ from a finance partner if you take the 0% which would make them less likely to give you the lowest price, but if it’s the end of the month and they are close to a volume breakpoint they will because the manufacturer bonuses for exceeding quota are many times more valuable (tens of thousands of dollars in pure profit).

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Re: Why pay cash for a car?

Post by Spirit Rider » Mon May 28, 2018 1:35 pm

KyleAAA wrote:
Mon May 28, 2018 12:19 pm
Church Lady wrote:
Mon May 28, 2018 12:12 pm
One of my colleagues has the theory that you pay for the 0% car loans through a higher price. Mathematically, that would have to be the case as car dealerships aren't running charities.
It would be the case if the dealership was the one underwriting the loan, but they aren’t. Those come from the manufacturer. Sometimes you have to give up a manufacturer rebate to get the 0% rate but not always. Dealership might be giving up a few hundred $$$ from a finance partner if you take the 0% which would make them less likely to give you the lowest price, but if it’s the end of the month and they are close to a volume breakpoint they will because the manufacturer bonuses for exceeding quota are many times more valuable (tens of thousands of dollars in pure profit).
This is why you should never go car shopping based a a targeted payment price. Or rather, you should never tell the dealer what you have in your mind. Also, you should never divulge you are going to pay cash up front.

People think they will get a better price if they are paying cash. The opposite is true, because the dealer gets a kickback from financing. So let them them think they are likely getting those finance dollars until after you get an out the door price.

Finally, the last two vehicles I have bought, both had large rebates or 0% financing. I did the math, in both cases it was better to to take the rebate than the 0% financing.

EnjoyIt
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Re: Why pay cash for a car?

Post by EnjoyIt » Mon May 28, 2018 1:59 pm

One thing people often forget about is insurance. When you finance the loan company demands a certain type of insurance. When you own the car, you get to choose what you want. For example we often choose a much higher deductible on our cars since self insuring the higher deductible makes a lot of sense. We cut our insurance costs significantly which far outweighs any small gain in investing vs taking on low interest rate debt.

mortfree
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Re: Why pay cash for a car?

Post by mortfree » Mon May 28, 2018 2:28 pm

EnjoyIt wrote:
Mon May 28, 2018 1:59 pm
One thing people often forget about is insurance. When you finance the loan company demands a certain type of insurance. When you own the car, you get to choose what you want. For example we often choose a much higher deductible on our cars since self insuring the higher deductible makes a lot of sense. We cut our insurance costs significantly which far outweighs any small gain in investing vs taking on low interest rate debt.
I see this mentioned a lot on here about Insurance.

I go with a 1k deductible on vehicles that are (or have been) financed.

What level of deductible are people referring to?

Or is it dependent on the state where one lives?

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Re: Why pay cash for a car?

Post by ThePrince » Mon May 28, 2018 3:08 pm

noco-hawkeye wrote:
Mon May 28, 2018 10:03 am
chabil wrote:
Mon May 28, 2018 9:36 am
noco-hawkeye wrote:
Mon May 28, 2018 7:34 am
I'm someone who avoids the loans by in large, but might take one out in limited situations. I don't like the loan on a quickly depreciating asset, and don't see it in the same light as a house. Cars are an expense, kind of like clothes etc (in my mind).
[ quote fixed by admin LadyGeek]

Why is paying a large sum of cash better on that same fast depreciating property? Instead that money can be earning an income, possibly at a higher rate. At the end of a mortgage you have a house that has appreciated in value leaving a profit.
The math is certainly there to support this point of view - technically a 0% loan and earning 2% in interest is a good deal. But it's just not my thing when it comes to cars. I don't like debt in general, and its one more thing to account for in my head / balance sheet. If you take this 0% view to an extreme - imagine this:

I can get a 0% credit card for X months. Why doesn't everyone get this credit card ASAP and put every single expense on it? It's because it's just not my thing. If I have an expense, I pay for that expense. Everyone sees this a bit differently, but thats just where my head is at. There is point where it's better to go outside / live life than optimize every single transaction.
Excellent point about the 0% credit card.

WolfgangPauli
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Re: Why pay cash for a car?

Post by WolfgangPauli » Mon May 28, 2018 5:50 pm

My feeling is this: Always pay cash for a car as long as you can afford it. Here is the problem with loans:

1. A car is a DEPRECIATING ASSET in a big way and rule of thumb is not to take out a loan on a DA. Mortgages tend to work out because usually (although not always) the underlying asset (the home and land) either holds its value or increases in value.

2. The "teaser rates" on cars are just designed to have you buy a car you cannot afford (where the real margin is). I use the "no car loan rule" as my rule of thumb saying how much car I can afford. If I can pay for it in cash comfortably then I can afford it. If I need a loan, I likely cannot.

3. If you are justifying it by saying the loan is xx% and I can get yy% in the bank then all you are doing is arbitraging interest rates. Which, can be very dangerous.

Of course, if you are perfectly disciplined than none of this matters however my bet is taking a loan out will cause you to get a bigger / fancier car than you would otherwise get and, also, over time, most will figure out something to do with the cash in the bank besides sit there as a hedge against the car loan.
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Stormbringer
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Re: Why pay cash for a car?

Post by Stormbringer » Mon May 28, 2018 6:29 pm

Many (most?) people I know feel trapped in jobs they don't like because they accumulate all these monthly financial obligations:
  • Rent or mortgage payment.
  • Car payments.
  • Student loans.
  • Credit cards.
  • Etc.
They need to match a regular paycheck up to all these bills that come every month. Financing a car may or may not be optimal in a mathematical sense, but having a car loan (or two, or three, and possibly a boat and a vacation home) helps lock you onto the financial treadmill that makes so many people unhappy. Being debt-free is liberating, even if that means giving up a few basis points around the edges.
"Compound interest is the most powerful force in the universe." - Albert Einstein

PinotGris
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Re: Why pay cash for a car?

Post by PinotGris » Mon May 28, 2018 7:34 pm

I am not arguing for any side, cash or finance the purchase. It is a personal decision based on many factors.
Some of the arguments for cash however are totally false or does not make sense.
Do you use credit cards? That is buying on credit but if you use it carefully and pay off balance on time you are fine.
If you do your homework and do the math why should the dealer deceive you?
Everybody should buy the car they can afford, cash or financed.
What one does with the earning from the investment has nothing do with the financing!
Our insurance company or finance company has never dictated the deductible we should have

PinotGris
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Re: Why pay cash for a car?

Post by PinotGris » Mon May 28, 2018 7:37 pm

Stormbringer wrote:
Mon May 28, 2018 6:29 pm
Many (most?) people I know feel trapped in jobs they don't like because they accumulate all these monthly financial obligations:
  • Rent or mortgage payment.
  • Car payments.
  • Student loans.
  • Credit cards.
  • Etc.
They need to match a regular paycheck up to all these bills that come every month. Financing a car may or may not be optimal in a mathematical sense, but having a car loan (or two, or three, and possibly a boat and a vacation home) helps lock you onto the financial treadmill that makes so many people unhappy. Being debt-free is liberating, even if that means giving up a few basis points around the edges.
Good point. But if you can pay cash for a new car you can afford to finance it. How we manage our budget is an entirely different thing.

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Re: Why pay cash for a car?

Post by PinotGris » Mon May 28, 2018 7:43 pm

RDHlooking4FIRE wrote:
Sun Nov 12, 2017 5:58 pm

Poll: do most boggleheads pay cash for cars or get low interest loans?
My guess is mostly pay cash.

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Re: Why pay cash for a car?

Post by grabiner » Mon May 28, 2018 11:23 pm

Stormbringer wrote:
Mon May 28, 2018 6:29 pm
Many (most?) people I know feel trapped in jobs they don't like because they accumulate all these monthly financial obligations:
  • Rent or mortgage payment.
  • Car payments.
  • Student loans.
  • Credit cards.
  • Etc.
They need to match a regular paycheck up to all these bills that come every month. Financing a car may or may not be optimal in a mathematical sense, but having a car loan (or two, or three, and possibly a boat and a vacation home) helps lock you onto the financial treadmill that makes so many people unhappy. Being debt-free is liberating, even if that means giving up a few basis points around the edges.
This has very little to do with the decision whether to pay cash for a car. If you can't pay cash for a car, you are stuck with a car payment on your lease or loan. If you could keep your old car, or could only pay cash for a used car and buy a new one, you are also stuck with a car payment. But if you can pay cash for a car and choose to buy the same car with a loan, then you are not stuck with the payment; you are making the payment, but you have the money available to pay off the loan if you want to (or make the payments if you leave your job), and be in the same situation as if you had not taken out the loan.
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Re: Why pay cash for a car?

Post by Stormbringer » Tue May 29, 2018 4:54 am

grabiner wrote:
Mon May 28, 2018 11:23 pm
But if you can pay cash for a car and choose to buy the same car with a loan, then you are not stuck with the payment; you are making the payment, but you have the money available to pay off the loan if you want to (or make the payments if you leave your job), and be in the same situation as if you had not taken out the loan.
What you say is true, but in my experience not how most people behave. What usually happens is that if someone has $50K to pay cash for a car but instead chooses to finance the car and save the cash, within a couple years the $50K gets used to remodel a kitchen, buy a boat, or chipped away at a few thousand at a time on smaller expenses.
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njdealguy
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Re: Why pay cash for a car?

Post by njdealguy » Tue May 29, 2018 8:42 am

Even if for some reason the dealer gives a lower price due to financing (and the kickback they would receive from the lender), why not do so and then immediately pay off that "loan" when the first payment is due.

PinotGris
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Re: Why pay cash for a car?

Post by PinotGris » Tue May 29, 2018 8:55 am

Stormbringer wrote:
Tue May 29, 2018 4:54 am
grabiner wrote:
Mon May 28, 2018 11:23 pm
But if you can pay cash for a car and choose to buy the same car with a loan, then you are not stuck with the payment; you are making the payment, but you have the money available to pay off the loan if you want to (or make the payments if you leave your job), and be in the same situation as if you had not taken out the loan.
What you say is true, but in my experience not how most people behave. What usually happens is that if someone has $50K to pay cash for a car but instead chooses to finance the car and save the cash, within a couple years the $50K gets used to remodel a kitchen, buy a boat, or chipped away at a few thousand at a time on smaller expenses.
It just means they have the cash to do it all, if that is what they need to do. The question is only does it make sense to finance a car purchase with a low interest rate loan and invest the money at a higher rate. What one does with the money made is irrelevant.

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Re: Why pay cash for a car?

Post by Canoesmith » Tue May 29, 2018 1:11 pm

I’ve been at the end of an hour negoatiation on a vehicle - where they assumed I was financing - and I say. Ok, that price. I’ll pay cash. “Ummm... we can’t sell you that car for that price for cash”. They make money on the financing - and can do better on the car price. Anyhow. It’s so infrequent people pay cash they often don’t see it coming.

I just like to buy a car (everything) for cash. It keeps me focused on what I need, not what I would like - and it’s mine. I know I can do a percent better if I use their money, and leave mine where it is. But for me, that isn’t worth the idea that I owe monthly payments. Everyone is different. Same thing when I paid off my homes. Hard to say it was the best move financially. But it was the best move mentally - for me.

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Re: Why pay cash for a car?

Post by Gnirk » Tue May 29, 2018 2:00 pm

Even though auto loan rates are low, we pay cash for our cars. In fact, if we can't pay cash for something, we don't buy it. At our age, we prefer to continue to be debt free. And know that we are fortunate that we can pay cash for those things we really want.

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Re: Why pay cash for a car?

Post by WolfgangPauli » Wed Jun 06, 2018 9:43 pm

chabil wrote:
Mon May 28, 2018 7:34 pm
I am not arguing for any side, cash or finance the purchase. It is a personal decision based on many factors.
Some of the arguments for cash however are totally false or does not make sense.
Do you use credit cards? That is buying on credit but if you use it carefully and pay off balance on time you are fine.
If you do your homework and do the math why should the dealer deceive you?
Everybody should buy the car they can afford, cash or financed.
What one does with the earning from the investment has nothing do with the financing!
Our insurance company or finance company has never dictated the deductible we should have
Yes, as I said, if you perfectly manage your money than none of this matters. I run up my CC bill every month to get 2.5% cash back and never pay interest. However, most don't. Most people I know have a beautiful new car and after talking with them you find out they have a huge payment and are one catastrophe away from financial ruin. Paying cash eliminates that risk.

But again, if you manage money perfectly then, of course, do the math and do what makes sense.
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Re: Why pay cash for a car?

Post by Kirkbroker » Sun Jun 17, 2018 11:40 pm

TheGreyingDuke wrote:
Sun Nov 12, 2017 6:07 pm
If the rate is low enough to be attractive, it is being subsidized by the auto maker. If you go all cash, you can get some of that subsidy in the form of a price reduction.
This is a very accurate statement. Anything less than a 4% offer on financing from a dealer is “probably” subsidized. I have always been able to reduce the cash price in lieu of a 0-1.9% loan offer. Hate to say the entire car dealer industry is based on the dealer trying to get your money at every angle, but it always proved shady to me..

My last car I paid cash for they told me how dumb it was to not take my $30K I had saved and put it in a 2% Cd and they would finance for .9%... When I asked him how I am supposed to pay for it with my money locked up in a cd?!? He said “payments”... (I saved car money because I couldn’t afford payments)!

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Re: Why pay cash for a car?

Post by livesoft » Sun Jun 17, 2018 11:49 pm

I think that nowadays the dealer just doesn't care whether you pay cash or finance --- except that the finance person is another way to sow Fear, Uncertainty, and Doubt and try to up-sell you on other things.

Funny thing on the last car I bought, I had a 0%-loan going for 100% of the purchase, but then asked the finance guy if I could use a credit card in order to get the cash-back. He said, "Sure!" Then I asked what the maximum amount I could charge and he named the number, so I promptly just charged that maximum amount. Now we all know the vendor pays a fee to accept the card, so I suppose I cost them some money, right?
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Re: Why pay cash for a car?

Post by Spirit Rider » Mon Jun 18, 2018 10:18 am

livesoft wrote:
Sun Jun 17, 2018 11:49 pm
I think that nowadays the dealer just doesn't care whether you pay cash or finance --- except that the finance person is another way to sow Fear, Uncertainty, and Doubt and try to up-sell you on other things.
The dealerships most definitely care.

Even if it is not manufacturer financing, dealer initiated financing gets the dealership an origination fee from the bank or credit union. Very often, the financing person's total compensation is based on incentives. Why do you think they push extended warranties so hard. The people selling cars are not the only salespeople at car dealerships.

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Re: Why pay cash for a car?

Post by EddyB » Mon Jun 18, 2018 10:24 am

Kirkbroker wrote:
Sun Jun 17, 2018 11:40 pm
TheGreyingDuke wrote:
Sun Nov 12, 2017 6:07 pm
If the rate is low enough to be attractive, it is being subsidized by the auto maker. If you go all cash, you can get some of that subsidy in the form of a price reduction.
This is a very accurate statement. Anything less than a 4% offer on financing from a dealer is “probably” subsidized. I have always been able to reduce the cash price in lieu of a 0-1.9% loan offer. Hate to say the entire car dealer industry is based on the dealer trying to get your money at every angle, but it always proved shady to me..

My last car I paid cash for they told me how dumb it was to not take my $30K I had saved and put it in a 2% Cd and they would finance for .9%... When I asked him how I am supposed to pay for it with my money locked up in a cd?!? He said “payments”... (I saved car money because I couldn’t afford payments)!
I know I’ve seen many examples on here of people who couldn’t get better prices for cash than with dealer-initiated financing. In that situation, I don’t see why not to take the loan.

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Re: Why pay cash for a car?

Post by KyleAAA » Mon Jun 18, 2018 7:03 pm

Kirkbroker wrote:
Sun Jun 17, 2018 11:40 pm
TheGreyingDuke wrote:
Sun Nov 12, 2017 6:07 pm
If the rate is low enough to be attractive, it is being subsidized by the auto maker. If you go all cash, you can get some of that subsidy in the form of a price reduction.
This is a very accurate statement. Anything less than a 4% offer on financing from a dealer is “probably” subsidized. I have always been able to reduce the cash price in lieu of a 0-1.9% loan offer. Hate to say the entire car dealer industry is based on the dealer trying to get your money at every angle, but it always proved shady to me..

My last car I paid cash for they told me how dumb it was to not take my $30K I had saved and put it in a 2% Cd and they would finance for .9%... When I asked him how I am supposed to pay for it with my money locked up in a cd?!? He said “payments”... (I saved car money because I couldn’t afford payments)!
This is inaccurate. In this environment it is trivial to get sub-3% car loans with no dealer or manfacturer subsidies. In fact, dealers get PAID if you take out a 1.9% loan as opposed to paying cash in that case. The only time you could get a cheaper-than-prevailing rate is if it comes from some sort of official financing promotion advertised by the manufacturer. You can almost always negotiate more if you finance EXCEPT in that one specific case.

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Re: Why pay cash for a car?

Post by WestUniversity » Tue Jun 19, 2018 7:53 pm

RDHlooking4FIRE wrote:
Sun Nov 12, 2017 5:16 pm
I can understand paying off a mortgage, because rates are higher than car loans. And you wouldnt take a new loan out to invest in the market now.

I am saving cash for my next car purchse. But why? Car loans are cheap. My current car is paid off and i like being debt free. Is that the best method?
I’m of the same opinion. If I can get a loan for say 1.99% and if my investments are currently making say 9 or 10%, why would I pay cash for a car? I think it makes more sense to finance it for say four years and keep my investments working for me. With that kind of spread I’m certainly coming out ahead...

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Re: Why pay cash for a car?

Post by grabiner » Tue Jun 19, 2018 10:32 pm

WestUniversity wrote:
Tue Jun 19, 2018 7:53 pm
I’m of the same opinion. If I can get a loan for say 1.99% and if my investments are currently making say 9 or 10%, why would I pay cash for a car?
Because of the risk involved. Paying off your car loan (or not taking it out in the first place) is a risk-free, tax-free 1.99% return, and you might prefer that return to the risky return of the stock market. This is the same reason you have bonds giving a low-risk 3% return rather than holding stocks.

The one time I took out a car loan at 2.99%, the risk-free return from paying cash instead wasn't worthwhile; in order to avoid the loan, I would have had to sell stock for a large capital gain, and would get a lower return than 2.99%. But I put all my spare cash against the loan, because a risk-free 2.99% was a better deal than buying more stock or bonds with the money.
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Hub
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Re: Why pay cash for a car?

Post by Hub » Wed Jun 20, 2018 11:05 am

Watty wrote:
Sun Nov 12, 2017 7:52 pm
One thing to watch out for is that I have found when paying cash for a car is that I tend to buy less expensive cars and to keep my prior car a bit longer.

I don't often write five figure checks so when I do adding a few thousand dollars to get the next higher trim level is a lot harder than having a payment that is a few bucks a month higher.
This is 100% my experience with myself. Not saying it makes a difference for all people but I know my wife and me well enough to know that we spend significantly less on cars by paying with cash because it keeps us from getting what we want when we want it. Having a loan payment or debt wouldn't bother me much, but we have a pay for cars with cash family rule anyway.

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Re: Why pay cash for a car?

Post by GodelianKnot » Wed Jun 20, 2018 12:28 pm

I find it interesting that a lot of people here feel like they'll spend less on a car if they pay cash. I feel exactly the opposite. I have plenty of savings/investments built up, so spending some of it on a car feels far easier to me than committing to an additional $500 in my monthly budget. The monthly payment is a much better deterrent to me.

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Hub
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Re: Why pay cash for a car?

Post by Hub » Wed Jun 20, 2018 12:59 pm

Interesting perspective. I guess it depends on how much cash you have! Our cash on hand tends to be some sort of emergency fund slash to-be-invested money that fluctuates between $30k and $60k just depending on when we push in for annual big ticket things like solo401k, roths, HSA, property taxes, etc. A $30k car would be an intimidating number to remove from that for us whereas the monthly payment difference between a $20k car and a $35k car wouldn't seem to really move the needle much once we resign ourselves to having a payment anyway.

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Re: Why pay cash for a car?

Post by Jags4186 » Wed Jun 20, 2018 1:14 pm

I’d just rather buy the car, write the check, and be done with it. A few reasons:

1) It very much evens the playing field with dealers. The best way to get a price on a car is the reach out to the 4 or 5 closest dealers and ask for their best and final OTD price on XYZ model with ABC options for a cash buyer.

2) To me it screams penny wise, dollar foolish. Throwing $20k, $30, $40k, etc. into a 2% account while getting 0% loan discounts the fact that you likely could have bought a cheaper car with similar options + utility. You’re simply mitigating the damage of an already suboptimal decision. I try to get the “big things” right and worry less about the small stuff.

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CyclingDuo
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Re: Why pay cash for a car?

Post by CyclingDuo » Wed Jun 20, 2018 1:55 pm

Why pay cash? To avoid debt and be done with the purchase.

I cringe when I think of the dreaded debt trio we often see posted in threads: monthly student loan payments, monthly auto loan payments, and monthly mortgage payments. I drove $500 - $800 junkers until my student loans were paid off. We finally upgraded to used Honda Accords when we got married (worth about $4-5K each at the time we bought them in cash).

We have always paid cash for a car - be it used or new. Actually, it has more often been for a used car over the years as we have only purchased three new cars since we have been married. That's it since 1988 for new cars. The rest were all used.

Until now.

Recent anatomy of a purchase decision this past week:

We had a Honda with 223K on it that we bought new in 2005 for $20,750 (+T/T/L). Formerly my car, but my spouse drove it the past 13 months as her work/commuter car when I got a new car last May. We did a little looking a year ago for her, but both came to the conclusion that we thought it was worth it to eek out another year of service for the Honda as it was still running great. Enter June 2018 - end of quarter/end of month combination, and some of the 2019's are coming out so we noticed there were quite a few incentives being offered. The next thing you know - as in that day - we were test driving new vehicles. I didn't know how serious my wife was about this. :shock:

We went through a TrueCar high volume dealer for the latest car purchase (although we didn't know they were a TrueCar dealer when we walked in the door as we were just trying out SUV crossovers from various top rated brands). This was, by the way, the first ever new car purchase for my spouse (outside of a family mini-van we bought new and both drove 20 years ago). Needless to say, she had just turned age 60, and we both decided it was her turn and time to finally get a brand new car. She had reached a time in her life she felt she could relax and enjoy a new car.

There were incentives with this deal whether we went with a 0% loan, a 2.94% loan, or paying cash. The dealer talked us through all three of the options, and cash looked - as usual - the best way to go. So we paid cash for the price negotiated, got $3750 incentives (manufacturer and dealer). Put a chunk of the purchase price on the 2% back CC, and wrote out a check for the rest. Sold the old Honda privately a few days later for $4600 cash. :beer

Base cost of the 2005 Honda

$22,225 purchase price ($20,751 + tax/title/license)
-$ 4,600 selling price in 2018 (private sale)
$17,625

What does $17,625 work out to for the 13 years of ownership? The capital spent on the car purchase for cash works out to something like $112.98 per month for the purchase price of the car for 13 years of ownership (obviously there was no financing, and this does not include the cost of maintenance/fuel/repairs/insurance/registration).

I don't want to ignore the cost of lost opportunity if that cash had been working for us in investments (would have been through the 2007-09 financial crisis) or just a simple rate of return based on interest. Finance rates for autos were 6.X% in 2005 at the time of purchase. CD's were giving 2.74% for 6 months and up to 3.73% for a 5 year.

Jumping to the purchase of the new car this past week, it confirmed what we have experienced before in all of our previous car purchases (new and used) and private party selling. Cash is just so much easier to deal with if you have saved up for a car purchase and don't have to deal with any pesky monthly payments.

That being said, we certainly feel fortunate that we have always been able to swing a cash deal purchase for our cars (new or used). To justify it, we keep our cars a long time as the Honda above illustrates. I believe last year, in 2017, a record number of 107 Million in the US had a car loan (43% of the US adult population).

Our guess is the percentage of BH's that pay in cash is probably higher than the general US population percentage, but who knows?
Last edited by CyclingDuo on Wed Jun 20, 2018 3:20 pm, edited 2 times in total.
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Simple Simon
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Re: Why pay cash for a car?

Post by Simple Simon » Wed Jun 20, 2018 2:52 pm

I pay cash to keep things simple.

Hand over some cash. Get a car. Very simple.

v

Enter a finance contract. Get use of a car. Recurring monthly expense. Extra insurance issue. Concern about residual value. Not so simple.

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Re: Why pay cash for a car?

Post by jalbert » Wed Jun 20, 2018 3:02 pm

RDHlooking4FIRE wrote:
Sun Nov 12, 2017 5:43 pm
Before i paid off my car the interest rate was 1%. My online savings account is earning 1.3%.

I do really like being debt free though. But am i missing out on cheap money?
If you are buying a new car, and have the cash to buy it, then once uou’ve negotiated the price with the dealer, if they are offering you a subsidized loan, ask them if instead they will discount the car further if you pay cash.
Risk is not a guarantor of return.

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Re: Why pay cash for a car?

Post by UpperNwGuy » Wed Jun 20, 2018 3:09 pm

I have paid cash for cars, and I have taken out car loans for cars. I fail to see how it makes much of a difference either way, but some people here sure do have some strong feelings on this topic.
Last edited by UpperNwGuy on Wed Jun 20, 2018 3:18 pm, edited 1 time in total.
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Re: Why pay cash for a car?

Post by onourway » Wed Jun 20, 2018 3:12 pm

I went through this earlier this year. Crunched all the numbers. Taking the loan would have worked out slightly better financially and I almost went through with taking it, but in the end just decided to pay cash. Having the title in my name and no monthly payment to deal with for years was just not worth the small savings. In retrospect, even though we run a very tight budget, I do think that it also kept the purchase price in check as the aversion to withdrawing a large sum from our accounts was far greater than the aversion to adding another couple hundred dollars to the monthly payment once we decided we might go down that route.

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WestUniversity
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Re: Why pay cash for a car?

Post by WestUniversity » Wed Jun 20, 2018 3:55 pm

grabiner wrote:
Tue Jun 19, 2018 10:32 pm
WestUniversity wrote:
Tue Jun 19, 2018 7:53 pm
I’m of the same opinion. If I can get a loan for say 1.99% and if my investments are currently making say 9 or 10%, why would I pay cash for a car?
Because of the risk involved. Paying off your car loan (or not taking it out in the first place) is a risk-free, tax-free 1.99% return, and you might prefer that return to the risky return of the stock market. This is the same reason you have bonds giving a low-risk 3% return rather than holding stocks.

The one time I took out a car loan at 2.99%, the risk-free return from paying cash instead wasn't worthwhile; in order to avoid the loan, I would have had to sell stock for a large capital gain, and would get a lower return than 2.99%. But I put all my spare cash against the loan, because a risk-free 2.99% was a better deal than buying more stock or bonds with the money.
We will just have to respectfully disagree on this. I don’t look for risk free investments. If I found one the return would not be worth it. I look for investments that offer an acceptable return for the risk I’m taking.

In this case I am more comfortable with the risk and return of an S&P 500 index fund vs a receiving a risk free 1.99%...

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Re: Why pay cash for a car?

Post by SeeMoe » Wed Jun 20, 2018 7:28 pm

We have the funds so we always payoff the new cars. Everything else too! Don’t like giving others usery fees. We have one credit card and always payoff the monthly charges before the 30 day free period expires on the card.
SeeMoe.. :greedy
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Re: Why pay cash for a car?

Post by grabiner » Wed Jun 20, 2018 9:12 pm

WestUniversity wrote:
Wed Jun 20, 2018 3:55 pm
grabiner wrote:
Tue Jun 19, 2018 10:32 pm
WestUniversity wrote:
Tue Jun 19, 2018 7:53 pm
I’m of the same opinion. If I can get a loan for say 1.99% and if my investments are currently making say 9 or 10%, why would I pay cash for a car?
Because of the risk involved. Paying off your car loan (or not taking it out in the first place) is a risk-free, tax-free 1.99% return, and you might prefer that return to the risky return of the stock market. This is the same reason you have bonds giving a low-risk 3% return rather than holding stocks.

The one time I took out a car loan at 2.99%, the risk-free return from paying cash instead wasn't worthwhile; in order to avoid the loan, I would have had to sell stock for a large capital gain, and would get a lower return than 2.99%. But I put all my spare cash against the loan, because a risk-free 2.99% was a better deal than buying more stock or bonds with the money.
We will just have to respectfully disagree on this. I don’t look for risk free investments. If I found one the return would not be worth it. I look for investments that offer an acceptable return for the risk I’m taking.

In this case I am more comfortable with the risk and return of an S&P 500 index fund vs a receiving a risk free 1.99%...
Do you own any bonds? The same logic also says that you should prefer the risk and return of stocks to bonds. Few investors are 100% stock, but if you are, then it may make sense to borrow at more than the risk-free rate to hold even more stock.
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WestUniversity
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Re: Why pay cash for a car?

Post by WestUniversity » Wed Jun 20, 2018 10:02 pm

grabiner wrote:
Wed Jun 20, 2018 9:12 pm
Do you own any bonds? The same logic also says that you should prefer the risk and return of stocks to bonds. Few investors are 100% stock, but if you are, then it may make sense to borrow at more than the risk-free rate to hold even more stock.
Why do people feel compelled to cite an extreme to defend a point? If I take advantage of a spread to preserve some assets, why do you have a problem with that?

When you pay cash for a car do you factor in the investment income you forego as part of the cost of the car, or do you only consider your total cost as simply the cash out the door? It sounds like the latter. If that’s what works for you and that’s what you are comfortable with, great.

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Re: Why pay cash for a car?

Post by mountain-lion » Wed Jun 20, 2018 10:37 pm

Jags4186 wrote:
Wed Jun 20, 2018 1:14 pm
To me it screams penny wise, dollar foolish. Throwing $20k, $30, $40k, etc. into a 2% account while getting 0% loan discounts the fact that you likely could have bought a cheaper car with similar options + utility. You’re simply mitigating the damage of an already suboptimal decision. I try to get the “big things” right and worry less about the small stuff.
This doesn't follow in any way, especially given the premise of the question, which is about when you have already chosen the car and could do it either way.

Assuming you are buying within your means, the method of paying for the car is independent of the choice of car.

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Socrates28
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Got 0% Suburu Forester in January

Post by Socrates28 » Wed Jun 20, 2018 11:07 pm

for my fiancee......wanted to keep cash on hand. She had a really unsafe car.

still driving my Honda 2008 CRV with over 200,000 miles

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Re: Why pay cash for a car?

Post by Jags4186 » Thu Jun 21, 2018 5:47 am

mountain-lion wrote:
Wed Jun 20, 2018 10:37 pm
Jags4186 wrote:
Wed Jun 20, 2018 1:14 pm
To me it screams penny wise, dollar foolish. Throwing $20k, $30, $40k, etc. into a 2% account while getting 0% loan discounts the fact that you likely could have bought a cheaper car with similar options + utility. You’re simply mitigating the damage of an already suboptimal decision. I try to get the “big things” right and worry less about the small stuff.
This doesn't follow in any way, especially given the premise of the question, which is about when you have already chosen the car and could do it either way.

Assuming you are buying within your means, the method of paying for the car is independent of the choice of car.
I am not a believer in financing a car in order to keep money in a savings account. The OP is looking for ways to eek out a few extra $100. I’m giving him an idea of how to save more than a few $100 that doesn’t involve financing a car. I understand it is the “optimal” choice to go for the interest arbitrage, but inevitably the choice of car is not the pure optimal choice.

I also don’t believe most people would truly throw $20k/$30k into a savings account for 5 years to pay for the car. They may start that way, but after 6 months or so they will look at the emergency fund and now this fund and say “jee I’m holding a lot of cash”. They’ll then invest the money defeating the apples to apples comparison.

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Re: Why pay cash for a car?

Post by mountain-lion » Thu Jun 21, 2018 10:45 am

inevitably the choice of car is not the pure optimal choice.
Only if by "pure optimal" one means "purely optimal considering only financial issues, and nothing but financial issues". A new car is almost surely discretionary spending, and so part of that discretion is evaluating the marginal benefit of the "brand new" part of car. Once one has decided that one is willing to spend $X extra to get that, minimizing X is perfectly reasonable.
I also don’t believe most people would truly throw $20k/$30k into a savings account for 5 years to pay for the car. They may start that way, but after 6 months or so they will look at the emergency fund and now this fund and say “jee I’m holding a lot of cash”. They’ll then invest the money defeating the apples to apples comparison.
It's not clear to me at all why the purchaser would want to keep it apples to apples.

One of the biggest advantages of the loan method is that it gives you flexibility to do things like invest the money, or to move it into a large portfolio.

If one's resources are sufficiently large that one could cover things going south on the car, then putting it in a place with higher expected returns is entirely rational. It is more risky (of course), but given sufficient resources, a low interest loan arbitraged with the rest of the market works great.

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T-Wrench
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Re: Why pay cash for a car?

Post by T-Wrench » Thu Jun 21, 2018 11:20 am

I pay cash for cars due to utility. I generally don't go to dealerships but instead go to Craigslist and the want ads. If I am patient, I can find a garage-kept, reliable car that I can drive into the ground (I drove my last car for 13 years and only now am considering replacing it if the repair shop quote is too expensive).

In general, as stated by the WhiteCoatInvestor in a different thread (and different circumstance), the money I would make on the arbitrage isn't worth it to me. I will concede that I'm buying cheaper cars, which affects the numbers.

Since so many BHs have made things clear for me by using numbers, I will do the same:

$8000 for the car.
$8000 in 2% CD = $160 per year.

4 year (48 month) loan at 0% for $8000 car is $167 per month. This is only available if I go to a dealership; a good deal in a private sale won't give me a loan for such (and neither will my credit union; your mileage may vary [pun!]).

If I am disciplined enough with this car and my CD, I will make $640 over 4 years. I can make more than $640 in a month in my side job and not have to worry about a payment (particularly one where the interest rate skyrockets upon a missed payment or the like). To sum, I value my autonomy (in terms of the payment and insurance options) more than the $640 in arbitrage.

totallystudly
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Re: Why pay cash for a car?

Post by totallystudly » Thu Jun 21, 2018 4:20 pm

Full coverage insurance would probably eat into that $640 savings pretty quick too...

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