Pay cash or go crazy (and take 2.5% loan and invest

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curious george
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Pay cash or go crazy (and take 2.5% loan and invest

Post by curious george » Tue Mar 13, 2018 8:53 pm

Considering splurging and getting a new car
Could either pay cash or take a 2.5% loan for 3-6 years (I just noticed that PenFed offers 2.2% for 3 years) and invest the money.
I am leaning towards just paying cash.

If this were you - what would you do ?

Thanks

creditdefaultswaps
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Re: Pay cash or go crazy (and take 2.5% loan and invest

Post by creditdefaultswaps » Tue Mar 13, 2018 8:55 pm

I've found that if I qualify for the ~2% auto loan, I also usually qualify for the 0% loans offered through the manufacturer. Is that an option for you?

curious george
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Re: Pay cash or go crazy (and take 2.5% loan and invest

Post by curious george » Tue Mar 13, 2018 8:57 pm

The 2.5% for up to 6 years is the manufacturer offer.
The best I could find outside of that is PenFed - better rate but shorter term.

creditdefaultswaps
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Re: Pay cash or go crazy (and take 2.5% loan and invest

Post by creditdefaultswaps » Tue Mar 13, 2018 9:00 pm

Well, I'll give the first unpopular opinion. 2.5% is a pretty good rate and I'd take it over paying all cash. The interest rate almost matches the most recent inflation rates so the true cost is next to zero under current conditions. I am also partial to keeping more of my money to direct however I see fit, even if I risk not achieving a high enough return to account for the interest.

I can also imagine having a high-enough net worth that dealing with a little auto loan is an encumbrance of my time.

greatwhite24
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Re: Pay cash or go crazy (and take 2.5% loan and invest

Post by greatwhite24 » Tue Mar 13, 2018 9:17 pm

Not sure if you got your loan or not but Nassau Educators Federal credit union is 1.95% up to 60 months right now for a new car. Also, Teachers federal credit union usually has even better rates but the site is down. I recently got 1.64% through them. Good luck.

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grabiner
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Re: Pay cash or go crazy (and take 2.5% loan and invest

Post by grabiner » Tue Mar 13, 2018 9:37 pm

If you have enough cash to pay for the car, it's likely a better deal to use the cash.

Say that you take out the 2.5% four-year loan. Paying off that loan would be equivalent to buying CDs yielding 2.5% tax-free maturing in 1-48 months. Since 2.5% is better than the after-tax return you can get on CDs or short-term bonds, it would be worth paying off the loan.

If you aren't maxing out your 401(k) and IRA, the money that would otherwise go to car payments can go to those accounts, so that you get more tax-free growth.

Another reason not to take out the loan is that the lender may require that you have a lower insurance deductible than you want. If you have a $2000 deductible rather than the $500 the lender requires, this will reduce your insurance costs.
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Exafchick
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Re: Pay cash or go crazy (and take 2.5% loan and invest

Post by Exafchick » Wed Mar 14, 2018 8:55 am

Would paying cash deplete your emergency savings? If you have a car payment, will you still be able to save at the same rate (IRA, 401k, etc.)?

Personally, I am going to pay cash for my next vehicle. I like the peace of mind that comes from not owing anything!

mortfree
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Re: Pay cash or go crazy (and take 2.5% loan and invest

Post by mortfree » Wed Mar 14, 2018 9:05 am

I lose more sleep over paying $600 per month in interest on my mortgage vs the $9/month on a car loan....


well, not really but I think you get the point.

I always take the car loan...

YMMV and any other disclaimer...

Nowizard
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Re: Pay cash or go crazy (and take 2.5% loan and invest

Post by Nowizard » Wed Mar 14, 2018 10:01 am

Seems your decision is clear if taking the loan will cause you to "go crazy." :happy However, some of us would have been more likely to go crazy if we did not take the loan!

Tim

SRenaeP
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Re: Pay cash or go crazy (and take 2.5% loan and invest

Post by SRenaeP » Wed Mar 14, 2018 10:20 am

I'd pay cash for the sake of simplicity. One less thing to keep track of.

-Steph

German Expat
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Re: Pay cash or go crazy (and take 2.5% loan and invest

Post by German Expat » Wed Mar 14, 2018 10:55 am

I am in the pay for it now camp. But I don't like monthly payments except a mortgage. If I can't pay for it now from savings I don't need it (yet). It is not fully optimal from a returns perspective but worked well especially in my younger years (saw plenty of friends with life style creep leasing really nice cars).

NextMil
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Re: Pay cash or go crazy (and take 2.5% loan and invest

Post by NextMil » Wed Mar 14, 2018 12:53 pm

I will ask the question you didn't want asked. Why are you buying new? Why not pick up someone's 2 year old lease that is still under warranty and spend $1k with a pro detailer who will make it showroom worthy?

If you go this route, you will have a way better ROI over considering a spread, which I think is the underlying sentiment of your question.

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HomerJ
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Re: Pay cash or go crazy (and take 2.5% loan and invest

Post by HomerJ » Wed Mar 14, 2018 1:03 pm

curious george wrote:
Tue Mar 13, 2018 8:53 pm
If this were you - what would you do ?
I'd pay cash.

What are you going to invest it in? CDs? Bonds? Then you just break even, and what's the point?

Stocks? Recessions happen, stocks can go down. And losing your job is more likely during a period when stocks are crashing.

I wouldn't want a payment hanging over me. If you have an emergency fund with 3-6 months of expenses in it, you'll have to increase it to account for a car payment.

My life is better with minimal debt. I sleep better at night.

But that's just what I would do.

inbox788
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Re: Pay cash or go crazy (and take 2.5% loan and invest

Post by inbox788 » Wed Mar 14, 2018 1:56 pm

curious george wrote:
Tue Mar 13, 2018 8:53 pm
Could either pay cash or take a 2.5% loan for 3-6 years (I just noticed that PenFed offers 2.2% for 3 years) and invest the money.
I am leaning towards just paying cash.

If this were you - what would you do ?
I'm indifferent at 2.5% (probably between 2-4%), so do what you want. Don't make it overly complicated. What is simpler, writing a check for the cash amount if it's in the bank or putting a monthly payment on autopay? Do you have cash in the account that you planned on spending or do you need to liquidate equities? Do you have an excess $300 or $600 in your monthly cash flow? Where would it be going? Basically, you're emptying a bucket and slowly filling it back up, or you pay a little interest and leave the bucket alone and the interest the bucket earns covers the cost, plus or minus depending on your luck. In the end, it's small potatoes.

beth65
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Re: Pay cash or go crazy (and take 2.5% loan and invest

Post by beth65 » Wed Mar 14, 2018 2:12 pm

HomerJ wrote:
Wed Mar 14, 2018 1:03 pm
curious george wrote:
Tue Mar 13, 2018 8:53 pm
If this were you - what would you do ?
I'd pay cash.

What are you going to invest it in? CDs? Bonds? Then you just break even, and what's the point?

Stocks? Recessions happen, stocks can go down. And losing your job is more likely during a period when stocks are crashing.

I wouldn't want a payment hanging over me. If you have an emergency fund with 3-6 months of expenses in it, you'll have to increase it to account for a car payment.

My life is better with minimal debt. I sleep better at night.

But that's just what I would do.

I do agree with what you are saying, but one of the other issues is liquidity. If you have the car loan but keep the cash, if you lose your job, you have more money available (assuming it wasn’t invested in a stock that tanked). If you spend $40,000 on a new car, that $40,000 is gone, but $400 per month might be more manageable with an additional $40,000 in the bank. At least that’s always what I wrestle with.

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Elsebet
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Re: Pay cash or go crazy (and take 2.5% loan and invest

Post by Elsebet » Wed Mar 14, 2018 2:26 pm

I take a loan and pay double payments until I get to a smaller amount like 5k and pay it off at that point. However I buy new cars and keep them, my last car was 15 years old when I replaced it with my current truck in 2016. My husband's car is a 2006 Honda Civic and I hope we can make it last to 2026, he has a tiny commute (5 min up the road).

ChinchillaWhiplash
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Re: Pay cash or go crazy (and take 2.5% loan and invest

Post by ChinchillaWhiplash » Wed Mar 14, 2018 3:33 pm

beth65 wrote:
Wed Mar 14, 2018 2:12 pm
HomerJ wrote:
Wed Mar 14, 2018 1:03 pm
curious george wrote:
Tue Mar 13, 2018 8:53 pm
If this were you - what would you do ?
I'd pay cash.

What are you going to invest it in? CDs? Bonds? Then you just break even, and what's the point?

Stocks? Recessions happen, stocks can go down. And losing your job is more likely during a period when stocks are crashing.

I wouldn't want a payment hanging over me. If you have an emergency fund with 3-6 months of expenses in it, you'll have to increase it to account for a car payment.

My life is better with minimal debt. I sleep better at night.

But that's just what I would do.

I do agree with what you are saying, but one of the other issues is liquidity. If you have the car loan but keep the cash, if you lose your job, you have more money available (assuming it wasn’t invested in a stock that tanked). If you spend $40,000 on a new car, that $40,000 is gone, but $400 per month might be more manageable with an additional $40,000 in the bank. At least that’s always what I wrestle with.
Would hope that the car will have some residual value. It won't be worth $0 after 2-3 years.

JoeRetire
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Re: Pay cash or go crazy (and take 2.5% loan and invest

Post by JoeRetire » Wed Mar 14, 2018 3:36 pm

curious george wrote:
Tue Mar 13, 2018 8:53 pm
Could either pay cash or take a 2.5% loan for 3-6 years (I just noticed that PenFed offers 2.2% for 3 years) and invest the money.
I am leaning towards just paying cash.

If this were you - what would you do ?
How much cash do you have kicking around? If this would consume your entire emergency fund, I wouldn't use it.
I would never get a car loan for more than 2 years. And I'd shop around before accepting a 2.5% loan. My dad just purchased a car and got a 0.9% loan.

JBTX
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Re: Pay cash or go crazy (and take 2.5% loan and invest

Post by JBTX » Wed Mar 14, 2018 3:40 pm

For us, right now, I’d probably do the 2.5% loan, solely for liquidity. There have been other points in times where I’d just pay it off.

curious george
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Re: Pay cash or go crazy (and take 2.5% loan and invest

Post by curious george » Wed Mar 14, 2018 5:08 pm

Just to clarify

Yes - we know we could get a better deal with a used car but we want to splurge. It’s something we enjoy.

We have the cash set aside in a separate fund and it would not impact our investments or our emergency fund.

I guess the heart of the question is could I leverage the money to beat the 2.5% (after taxes) without taking extraordinary risks and if so - is it worth the effort ??

I am leaning towards just paying cash but I appreciate the viewpoints and all of the comments.

westrichj312
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Re: Pay cash or go crazy (and take 2.5% loan and invest

Post by westrichj312 » Wed Mar 14, 2018 5:15 pm

cash! If you really think your getting a 6 year loan at 2.3% I have some land in Florida to sell you.

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midareff
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Re: Pay cash or go crazy (and take 2.5% loan and invest

Post by midareff » Wed Mar 14, 2018 5:22 pm

I have a new car in the way and am taking PenFed's 2.2% for three years. I could sell some IT Tax-Ex and just pay for it but I don't know why I would sell a fund paying 2.7% tax-ex to avoid a 2.2% debt.

westrichj312
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Re: Pay cash or go crazy (and take 2.5% loan and invest

Post by westrichj312 » Wed Mar 14, 2018 6:01 pm

.05% interest is not going to make you much money

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grabiner
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Re: Pay cash or go crazy (and take 2.5% loan and invest

Post by grabiner » Wed Mar 14, 2018 6:07 pm

curious george wrote:
Wed Mar 14, 2018 5:08 pm
I guess the heart of the question is could I leverage the money to beat the 2.5% (after taxes) without taking extraordinary risks and if so - is it worth the effort ??
And the answer to that question is no. If you want to take more risk for higher returns, a better way to do that is to sell your existing bond funds, and buy stock funds, or riskier bond funds. For example, if you hold Vanguard Limited-Term Tax-Exempt Admiral shares (about the same duration as your car loan), you are currently earning 1.86%; you can sell that and buy stock, for a better return than taking out the loan. If you hold Vanguard Intermediate-Term Tax-Exempt Admiral shares, you are currently earning 2.36%; you can sell that and buy stock, breaking even in expected return and taking less interest-rate risk. If you hold Total Bond Market in your IRA, you are currently earning 2.99%, but you can replace that with a tax-deferred stock return which is significantly better than the taxable stock return.
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gmc4h232
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Re: Pay cash or go crazy (and take 2.5% loan and invest

Post by gmc4h232 » Wed Mar 14, 2018 6:09 pm

Surely you can negotiate a better price paying cash rather than financing - especially on a slightly used car.

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KlingKlang
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Re: Pay cash or go crazy (and take 2.5% loan and invest

Post by KlingKlang » Wed Mar 14, 2018 6:19 pm

Are there any other manufacturer's or dealer's incentives that you can get if you pay cash rather than taking out a loan? Rebates usually fall into this category.

Khanmots
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Re: Pay cash or go crazy (and take 2.5% loan and invest

Post by Khanmots » Wed Mar 14, 2018 6:43 pm

creditdefaultswaps wrote:
Tue Mar 13, 2018 8:55 pm
I've found that if I qualify for the ~2% auto loan, I also usually qualify for the 0% loans offered through the manufacturer. Is that an option for you?
Be careful with those. This time last year when I bought my car, I asked for two quotes from most every dealer in Texas, one with 0% financing and one if I self-financed/paid cash... result was that you were paying $800-1500 more to get the 0%. Every dealer that responded had the delta.

Instead I got a 3yr 1.5% loan, and now have that money invested in a no-penalty CD at 1.75%. I'm coming out behind after taxes, but I have a potential need for a lot of liquidity in the next 1-2 years, and this was really cheap liquidity.

That said, incentives differ, sometimes there really isn't a cost to the dealership and it really is a free 0% rate offer, but in my case last year it sure wasn't.

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TxAg
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Re: Pay cash or go crazy (and take 2.5% loan and invest

Post by TxAg » Wed Mar 14, 2018 6:48 pm

We bought a Subaru for $30k 1.5 yrs ago. We paid half in cash and took out a loan from PenFed for the other half...was 2.5% if I remember. We ended up paying it off a few months ago.

It feels good to not have a payment, but the math is against us. I kinda wish we still had the loan.

JoeRetire
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Re: Pay cash or go crazy (and take 2.5% loan and invest

Post by JoeRetire » Wed Mar 14, 2018 6:52 pm

curious george wrote:
Wed Mar 14, 2018 5:08 pm
I guess the heart of the question is could I leverage the money to beat the 2.5% (after taxes) without taking extraordinary risks
Probably, depending on how you define "extraordinary risks".
and if so - is it worth the effort ??
Depends on how much you value your investing effort. If the cash is just sitting around doing nothing now - then you must not have put much effort into doing something with it. so likely the answer is "No, it won't be worth your effort".

Khanmots
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Re: Pay cash or go crazy (and take 2.5% loan and invest

Post by Khanmots » Wed Mar 14, 2018 6:57 pm

One other investment to consider, and what I would have done if I didn't have the liquidity need... put the money into your mortgage and take the car loan in it's place.

Depending on rates and your tax situation, this could be a guaranteed return.

beth65
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Re: Pay cash or go crazy (and take 2.5% loan and invest

Post by beth65 » Wed Mar 14, 2018 7:39 pm

ChinchillaWhiplash wrote:
Wed Mar 14, 2018 3:33 pm
beth65 wrote:
Wed Mar 14, 2018 2:12 pm
HomerJ wrote:
Wed Mar 14, 2018 1:03 pm
curious george wrote:
Tue Mar 13, 2018 8:53 pm
If this were you - what would you do ?
I'd pay cash.

What are you going to invest it in? CDs? Bonds? Then you just break even, and what's the point?

Stocks? Recessions happen, stocks can go down. And losing your job is more likely during a period when stocks are crashing.

I wouldn't want a payment hanging over me. If you have an emergency fund with 3-6 months of expenses in it, you'll have to increase it to account for a car payment.

My life is better with minimal debt. I sleep better at night.

But that's just what I would do.

I do agree with what you are saying, but one of the other issues is liquidity. If you have the car loan but keep the cash, if you lose your job, you have more money available (assuming it wasn’t invested in a stock that tanked). If you spend $40,000 on a new car, that $40,000 is gone, but $400 per month might be more manageable with an additional $40,000 in the bank. At least that’s always what I wrestle with.
Would hope that the car will have some residual value. It won't be worth $0 after 2-3 years.
Yes, and you could sell the car if absolutely necessary, but most people outside of urban areas still need a car to drive, so you would then have to purchase a cheaper car, take the time to shop, sell the existing car, transactions fees, etc. I had cash available as well, but if you can get a very-low rate, and pay it early if able, I find that I prefer to have the cash accruing interest and more liquid than having to sell the car less depreciation, and still purchase another car, and less capital if things do go south. It would be an even better deal to lock in low rates on a loan, and then invest the difference after rates increase.

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