Auto loan or dip into emergency fund?

aaja · Post by **aaja** » Fri Apr 27, 2018 9:03 pm

Going in to buy a car tomorrow and am in a dilemma on whether to take out a 3.5% auto loan or dip into my emergency fund (50% of it) which is in a 1.6% savings account. I am sure I can replenish the emergency fund within a year and am leaning towards taking the risk but wanted to check in with the folks on the forum if they have any thoughts on it.

I like the idea of being debt free but also see the importance of an emergency fund hence the confusion. Is it too big a risk?

P. S. Delaying the car purchase is a not an option at this point.

delamer · Post by **delamer** » Fri Apr 27, 2018 9:07 pm

Our emergency fund was only for the purpose of replacing lost income. Lost income is a result of job loss or inability to work due to illness.

So what is the likelihood of that for you?

Could you take a loan for half and use the emergency fund for the rest?

longleaf · Post by **longleaf** » Fri Apr 27, 2018 9:08 pm

How were you originally planning on paying for the car? Why can't you delay the purchase?

aaja · Post by **aaja** » Fri Apr 27, 2018 9:37 pm

longleaf wrote: ↑Fri Apr 27, 2018 9:08 pm How were you originally planning on paying for the car? Why can't you delay the purchase?

I was originally thinking of taking out a loan when they said 2% rate but this was if I buy extended warranty from them. Without the warranty the rate goes up and at this point it felt like I should skip the loan and use half the money in the EF. I can't delay since the lease ends on the car and we need a car to replace. It is the wife's car and she really likes it and is comfortable with it.

aaja · Post by **aaja** » Fri Apr 27, 2018 9:40 pm

delamer wrote: ↑Fri Apr 27, 2018 9:07 pm Our emergency fund was only for the purpose of replacing lost income. Lost income is a result of job loss or inability to work due to illness.

So what is the likelihood of that for you?

Could you take a loan for half and use the emergency fund for the rest?

I am taking the risk becuase I feel the probability is low of that happening but again I could be wrong. At this point it is more just to avoid the loan and be debt free. I feel it should be easy to replenish with my current job

quantAndHold · Post by **quantAndHold** » Fri Apr 27, 2018 9:44 pm

I would take the loan with the idea that I would either shop around and refinance it quickly at a lower rate somewhere else, or else pay the loan off early.

It really depends on how big your emergency fund is, though.

longleaf · Post by **longleaf** » Fri Apr 27, 2018 10:14 pm

Then I guess it depends on your stability with having half of your emergency fund should you lose your job and if the stock market crashes the same day.

Perhaps planning ahead of time to be able to pay for a car in cash would have been prudent.

I would personally use the EF

aaja · Post by **aaja** » Fri Apr 27, 2018 10:25 pm

longleaf wrote: ↑Fri Apr 27, 2018 10:14 pm
Perhaps planning ahead of time to be able to pay for a car in cash would have been prudent.

Agreed. The plan was to take a loan all along but then I found this forum and now I don't like debts

but I also want my money to be working hard for me.

BogleMelon · Post by **BogleMelon** » Fri Apr 27, 2018 10:33 pm

aaja wrote: ↑Fri Apr 27, 2018 10:25 pm
longleaf wrote: ↑Fri Apr 27, 2018 10:14 pm
Perhaps planning ahead of time to be able to pay for a car in cash would have been prudent.

Agreed. The plan was to take a loan all along but then I found this forum and now I don't like debts but I also want my money to be working hard for me.

A 3.5% loan for a consumable purchase (a car) will drag your working money.
A reduction in emergency fund means you could tab your investing money (in a bear market) if you got unemployment, which will drag your working money.
Buying a car every decade or more is a true expense in your budget, so for the future, it is better to save for it ahead, or if you prefer to take some risk, invest that money in a taxable account.

As to answer to your question, I would dip into emergency fund, then find a way to squeeze my budget to replenish in less than 6 months.

Watty · Post by **Watty** » Fri Apr 27, 2018 11:13 pm

In an emergency you should be able to get a car loan, as long as the emergency is not that you lost your job.

If you pay cash for the car and lost your job and could not get a loan, then you could sell the car and buy a beater if you had to.

You also likely have credit cards and a low interest rate credit card can have a roll in an emergency.

I would not take the emergency fund down below three months expenses but I would be Ok with using it.

Tgleaso · Post by **Tgleaso** » Sat Apr 28, 2018 12:25 am

You said you could replenish the money you would take out of your emergency fund in a year..Why not take the loan for a year while saving up all that money you would have used to replenish the fund and payoff the loan. If it’s a 10k loan it would only cost you $350 in interest. That way you wouldn’t run into a cash flow problem? Just a thought.

Thanks
Tim

HAWK23 · Post by **HAWK23** » Sat Apr 28, 2018 6:09 am

Tgleaso wrote: ↑Sat Apr 28, 2018 12:25 am You said you could replenish the money you would take out of your emergency fund in a year..Why not take the loan for a year while saving up all that money you would have used to replenish the fund and payoff the loan. If it’s a 10k loan it would only cost you $350 in interest. That way you wouldn’t run into a cash flow problem? Just a thought.

Thanks
Tim

+1 This is what I was thinking. Plus, having a loan payment that you pay on time every month can be advantageous to your credit score as it builds good history. Take the loan and make double or triple payments on it. Just make sure there is no penalty for paying the entire thing off early. Or take the loan and pay off half of it (or whatever you're comfortable with) to cut down interest moving forward. 10K loan and then paying 5k right off the bat would leave you with 5k to payoff. At 3.44 percent that 5k would be peanuts.

ihelosec · Post by **ihelosec** » Sat Apr 28, 2018 6:59 am

Can the extended warranty be cancelled without a fee within the first 30-60 days?

Post by **Flyer24** » Sat Apr 28, 2018 8:29 am

Take the loan. The emergency fund should stay for emergencies. I would check out some local credit unions to see about refinancing to a lower rate. I would also just pay extra each month towards the principal.

PFInterest · Post by **PFInterest** » Sat Apr 28, 2018 8:37 am

aaja wrote: ↑Fri Apr 27, 2018 9:03 pm Going in to buy a car tomorrow and am in a dilemma on whether to take out a 3.5% auto loan or dip into my emergency fund (50% of it) which is in a 1.6% savings account. I am sure I can replenish the emergency fund within a year and am leaning towards taking the risk but wanted to check in with the folks on the forum if they have any thoughts on it.

I like the idea of being debt free but also see the importance of an emergency fund hence the confusion. Is it too big a risk?

P. S. Delaying the car purchase is a not an option at this point.

Either one. At 3.5% though.... Can you get lower through a credit Union?

mrpotatoheadsays · Post by **mrpotatoheadsays** » Sat Apr 28, 2018 8:42 am

It's not an emergency.

If you can't pay for a car in cash, you can't afford one.

Auto warranties are for suckers.

Take the bus and work a side job until you save-up enough money to pay for a car in cash.

StevieG72 · Post by **StevieG72** » Sat Apr 28, 2018 8:43 am

Sounds like they are playing games with you.

You can only get this rate if you buy this extended warranty? ( don’t buy the warranty ) They make money off of the warranty & the financing. If they want to put the screws to you, turn the table.

Get a loan from somewhere else, you do not have to finance with them.

RickBoglehead · Post by **RickBoglehead** » Sat Apr 28, 2018 8:48 am

Sometimes a loan from a manufacturer, such as Ford Credit, comes with an accompanying rebate that you lose if you don't finance. With Ford Credit, I suggest people take the standard, non-discounted rate, and the rebate, and then refinance or payoff the loan days later, keeping the rebate.

Khanmots · Post by **Khanmots** » Sat Apr 28, 2018 8:49 am

I wouldn't only look at financing through the dealer. They don't always have the best rates. Last car I financed through penfed.

That said, do make sure to get two quotes from the dealer. One with you paying cash (outside financing would fall here), one with you financing through them. Sometimes the two will be significantly different. Sometimes using their financing qualifies for a credit, sometimes there's a cost to it.
When I bought my car last spring, using the dealerships 0% promo rate would add ~$1000 to the purchase price.

aaja · Post by **aaja** » Sat Apr 28, 2018 9:29 am

HAWK23 wrote: ↑Sat Apr 28, 2018 6:09 am
Tgleaso wrote: ↑Sat Apr 28, 2018 12:25 am You said you could replenish the money you would take out of your emergency fund in a year..Why not take the loan for a year while saving up all that money you would have used to replenish the fund and payoff the loan. If it’s a 10k loan it would only cost you $350 in interest. That way you wouldn’t run into a cash flow problem? Just a thought.

Thanks
Tim
+1 This is what I was thinking. Plus, having a loan payment that you pay on time every month can be advantageous to your credit score as it builds good history. Take the loan and make double or triple payments on it. Just make sure there is no penalty for paying the entire thing off early. Or take the loan and pay off half of it (or whatever you're comfortable with) to cut down interest moving forward. 10K loan and then paying 5k right off the bat would leave you with 5k to payoff. At 3.44 percent that 5k would be peanuts.

This was the plan but smaller the term the rate goes up. I'll go get exact numbers today and decide. Also will look into early prepayment penalties.

aaja · Post by **aaja** » Sat Apr 28, 2018 9:31 am

Khanmots wrote: ↑Sat Apr 28, 2018 8:49 am I wouldn't only look at financing through the dealer. They don't always have the best rates. Last car I financed through penfed.

That said, do make sure to get two quotes from the dealer. One with you paying cash (outside financing would fall here), one with you financing through them. Sometimes the two will be significantly different. Sometimes using their financing qualifies for a credit, sometimes there's a cost to it.
When I bought my car last spring, using the dealerships 0% promo rate would add ~$1000 to the purchase price.

Any info on how to go about shopping for loans? Not done this before so is there a way online or do I need to contact a bunch of credit unions.

aaja · Post by **aaja** » Sat Apr 28, 2018 9:32 am

phitchow wrote: ↑Sat Apr 28, 2018 6:59 am Can the extended warranty be cancelled without a fee within the first 30-60 days?

Not a bad idea. Will ask about this.

rebellovw · Post by **rebellovw** » Sat Apr 28, 2018 9:34 am

Dump the extended warranty as they completely suck. I bought one with my wife's new 2010 beetle and when I went to use it they declined and said the issue wasn't covered. I didn't get squat from that warranty. It was a complete waste.

aerosurfer · Post by **aerosurfer** » Sat Apr 28, 2018 10:02 am

I would shop around too, just to see if ypu can get less run around from someone else with a loan and all the extras they try and sell you.

As another strategy, if you have a cash rewards credit card, most dealers have a 5k limit for what you can use to buy a car. Buy 5k on the card, take 1% back from the cc company and finance the rest. Take the $50 or so dollars from Discover, off the card with cash on hand or from EF, and then really pay the loan down aggressively til its gone. Whatever the loan amount is, its just not going to be that much interest if you can get it paid off in 12 months. Also see if you can do 24-36 months financing, thatll save a little more in interest calculations as well as keep you motivated to pay it off

I just did this last month, but paid cash cash for the difference instead of financing.

dm200 · Post by **dm200** » Sat Apr 28, 2018 10:05 am

Auto loan rates are usually low/very low. Get the loan and have the cash for emergencies. If the cash builds up more than needed, pay the car loan early.

aerosurfer · Post by **aerosurfer** » Sat Apr 28, 2018 10:08 am

Loan rates arent a cheap as they used to be, at least on used cars. I have 800+ credit score, no other debt and was only finding upper 3- mid 4% rates advertised. My big reason for just buying outright.

ihelosec · Post by **ihelosec** » Sat Apr 28, 2018 10:09 am

aaja wrote: ↑Sat Apr 28, 2018 9:32 am
phitchow wrote: ↑Sat Apr 28, 2018 6:59 am Can the extended warranty be cancelled without a fee within the first 30-60 days?
Not a bad idea. Will ask about this.

The dealer may lose a kickback if you cancel the extended warranty. Thus, the dealer may be less than truthful. I would search Google for the warranty terms and read the fine print before signing.

Khanmots · Post by **Khanmots** » Sat Apr 28, 2018 11:45 am

aaja wrote: ↑Sat Apr 28, 2018 9:31 am
Khanmots wrote: ↑Sat Apr 28, 2018 8:49 am I wouldn't only look at financing through the dealer. They don't always have the best rates. Last car I financed through penfed.

That said, do make sure to get two quotes from the dealer. One with you paying cash (outside financing would fall here), one with you financing through them. Sometimes the two will be significantly different. Sometimes using their financing qualifies for a credit, sometimes there's a cost to it.
When I bought my car last spring, using the dealerships 0% promo rate would add ~$1000 to the purchase price.
Any info on how to go about shopping for loans? Not done this before so is there a way online or do I need to contact a bunch of credit unions.

I've always just researched rates online. Most banks will publish their rates for all to see. For instance here's penfeds https://www.penfed.org/auto/new-auto-loans

I got clued into penfed 6 years ago through this board when they had a really good home refinance program going on. Last spring at least their auto rates were quite competitive and I already had an account there... made the choice easy.

aaja · Post by **aaja** » Tue May 01, 2018 11:27 am

Update to close on this:

I am buying a used car and penfed rates were around 3.5 which was comparable to what the dealer offered hence did not research much down that path.

When I got there the dealer offered a rate of 3.59 which I rejected and said will pay full cash. At that point, I could see the finance advisor was not happy and had not expected me to offer full cash. They next came back with a rate of 2.5 which seemed reasonable and I accepted. I liked that having the option of paying cash gave me leverage in the negotiation and I was able to get my preferred rate.

chevca · Post by **chevca** » Tue May 01, 2018 11:34 am

Haha... nicely done! The dealer had to go the route of something is better than nothing getting you to finance.

jehovasfitness · Post by **jehovasfitness** » Tue May 01, 2018 11:44 am

mrpotatoheadsays wrote: ↑Sat Apr 28, 2018 8:42 am

Take the bus and work a side job until you save-up enough money to pay for a car in cash.

Maybe I missed it, but not everyone can just take the bus

Nottooclever · Post by **Nottooclever** » Tue May 01, 2018 12:04 pm

It looks like the original poster resolved this matter without my input.

Having faced the same decision once and learned something from what was probably the wrong decision (I used our emergency fund to buy my car) it seemed worthwhile to share details.

This was back in 2006 so I'll have to give approximations for the actual numbers, but the point is the important part. At that time, my car died. I went out and bought a brand new car for about $24,000, paying in cash with our emergency fund money. I think this left about $6,000 in our emergency fund.

The following year, the combined income for my wife and I dropped to about 1/2 what it was in 2006. It wasn't long before I think we used up the rest of the emergency fund.

We were fine, but, as I recall, I think money was tight for awhile.

Suffice it to say we sure would have liked to have had the extra cushion of the previously-much-larger emergency fund.

MathWizard · Post by **MathWizard** » Tue May 01, 2018 12:45 pm

I pay cash. In fact I drained my first tier EF (savings) when I needed to replace a car last summer.
That's what my first tier EF is for. The much more substantial second tier is my ROTH contributions, which is for job loss.

I also insure only for liability, and do not insure my own car. With a loan you
would need to have full coverage.

grkmec · Post by **grkmec** » Tue May 01, 2018 1:03 pm

How about using Penfed to get a 2.49% 36 month loan. Rate is lower than the 3.5% you quoted and if payments are higher due to 36 month term, use your emergency fund to handle larger payment ?

Texanbybirth · Post by **Texanbybirth** » Wed May 02, 2018 9:45 am

Take the loan, keep your EF intact, and pay off the loan ASAP. Sounds like you can pay the car loan off in a year without damaging your EF, and if you got an extended term loan (72 months is the standard now, right?) then in the unlikely event that you lost your job the payments would still be somewhat low/affordable. Sounds like as long as you're employed you have good cash flow.

And as others have said, start a sinking fund for your next new car now. Lesson learned on this one. The interest you pay on the auto loan will be your "tuition" for this lesson.

new2bogle · Post by **new2bogle** » Wed May 02, 2018 9:54 am

quantAndHold wrote: ↑Fri Apr 27, 2018 9:44 pm I would take the loan with the idea that I would either shop around and refinance it quickly at a lower rate somewhere else, or else pay the loan off early.

It really depends on how big your emergency fund is, though.

This.

Is this a new car or used? I can't believe a new car loan is 3.5%, is that normal these days? how is your credit score?

Take the loan and refinance it with a credit union for a lower rate (penfed is offering 2.4%). Then you can pay off quickly instead of the full X year term.

dknightd · Post by **dknightd** » Wed May 02, 2018 11:09 am

aaja wrote: ↑Tue May 01, 2018 11:27 am When I got there the dealer offered a rate of 3.59 which I rejected and said will pay full cash. At that point, I could see the finance advisor was not happy and had not expected me to offer full cash. They next came back with a rate of 2.5 which seemed reasonable and I accepted. I liked that having the option of paying cash gave me leverage in the negotiation and I was able to get my preferred rate.

pangea33 · Post by **pangea33** » Wed May 02, 2018 11:27 am

mrpotatoheadsays wrote: ↑Sat Apr 28, 2018 8:42 am It's not an emergency.

If you can't pay for a car in cash, you can't afford one.

Auto warranties are for suckers.

Take the bus and work a side job until you save-up enough money to pay for a car in cash.

$7000 in covered repairs on a 2007 Acura RDX we bought with under 100k miles disagrees with this assessment.

stocknoob4111 · Post by **stocknoob4111** » Wed May 02, 2018 4:19 pm

I would not pay for a car with my emergency fund as buying a new car is not an "emergency". I would just finance it and try to pay it off as soon as I can or even better save the money and pay for it cash or see if you can get a 0% financing deal. Personally I would never take a loan on a depreciating asset. I do have an auto loan but I took it only because I got 0% for 60 months in addition of $1500 cash discount to take the loan so it was a no-brainer.

lostdog · Post by **lostdog** » Wed May 02, 2018 5:24 pm

mrpotatoheadsays wrote: ↑Sat Apr 28, 2018 8:42 am It's not an emergency.

If you can't pay for a car in cash, you can't afford one.

Auto warranties are for suckers.

Take the bus and work a side job until you save-up enough money to pay for a car in cash.

+1

aaja · Post by **aaja** » Wed May 02, 2018 11:51 pm

JupiterJones wrote: ↑Wed May 02, 2018 3:34 pm
Rotarman wrote: ↑Wed May 02, 2018 7:50 am
JupiterJones wrote: ↑Tue May 01, 2018 1:12 pm True. Some people do choose to live in a place where, sadly, the transportation infrastructure pretty much demands that they have a car. Which is all the more reason for them to have a sinking fund.

Why arrange your life in such a way that a car is crucial, and then fail to have a plan to deal with replacing it when it eventually needs it? It's like moving to Mars and not setting aside any money to replace the oxygen scrubber. Baffling...

Probably because OP's housing, natural gas, electricity, property taxes, income taxes, sales tax, and food savings far outstrip the transportation savings of living in a city large enough to have good public transportation.
Seems to me that you may have focused solely on the first clause of my question and missed the second (italicized) one.

But hey, if anything, choosing car-dependency due to net cost savings would give one even less of an excuse to not have a "financial plan B" for when something happens to that vital piece of the puzzle.

It is not baffling to understand that not everyone on this forum is a seasoned veteran who has been planning their life according to the Bogle head philosophy for years. I am a newly initiated member and am still working my way through setting up my plan and getting things in order. A few years down the line, yes my plan would be to have everything setup by the time I have a need for a car. These are not things I had been thinking about until a few months ago and hence this situation sprung up on me. I am looking towards this forum for help and not judgment. Using the bus is not an option and I need a way to pick up and drop my son from daycare. The future me will not make this mistake but I was confused based on my current situation and was looking for ideas from the good folks on here.

stocknoob4111 · Post by **stocknoob4111** » Thu May 03, 2018 1:59 am

Put a significant down payment (20-30%) and finance the rest for a shorter period like 36 mos then try to pay it off faster if you can. It's not that big of a deal imo!

dknightd · Post by **dknightd** » Thu May 03, 2018 7:32 am

The OP has already resolved this, but here are my thoughts.
There are many ways to do this. The obvious one is to have money in the bank for when you need a new car.
I'm taking a different approach. I probably have more money in the bank than I need since my job is unlikely to go away.
My plan when we need to replace a car is to use some of that cash, then finance the rest. I'll make the car loan payment by reducing what I currently save for retirement each month.

The way I look at it, I could either have the money sitting around for years and years at bank interest rates.
Or, I could put that money into a tax deferred retirement plan and let it compound. Then when the time comes to buy a new car I essentially cash flow a low interest car loan.
We do not buy cars very often, and it is hard to predict when we might need/want to buy another one.
I have not crunched the numbers, but I suspect my plan is better than having the money sit in savings for 10 years. YMMV

JupiterJones · Post by **JupiterJones** » Thu May 03, 2018 9:19 am

dknightd wrote: ↑Thu May 03, 2018 7:32 am The OP has already resolved this, but here are my thoughts.
There are many ways to do this. The obvious one is to have money in the bank for when you need a new car.
I'm taking a different approach. I probably have more money in the bank than I need since my job is unlikely to go away.
My plan when we need to replace a car is to use some of that cash, then finance the rest. I'll make the car loan payment by reducing what I currently save for retirement each month.

The way I look at it, I could either have the money sitting around for years and years at bank interest rates.
Or, I could put that money into a tax deferred retirement plan and let it compound. Then when the time comes to buy a new car I essentially cash flow a low interest car loan.
We do not buy cars very often, and it is hard to predict when we might need/want to buy another one.
I have not crunched the numbers, but I suspect my plan is better than having the money sit in savings for 10 years. YMMV

If your assumptions hold, then yeah, you're probably mathematically correct.

Still, I'd recommend being sure you have a good "out" for that unlikely case where your job does go away (or you become unable to perform it for some reason).

People tend to get in a lot of financial trouble when they don't have a plan to accommodate cases where the assumptions don't hold. We saw that in 2008 ("houses always go up in value!"). We're seeing that with millennials and their student loans ("I'll definitely finish school and then quickly get a job that earns enough to pay off this mountain of debt!") And you could probably fill books with sad stories that began with "I thought I had a very stable job."

I've found it's usually a good idea to have an answer for "yeah, but what if..."

bgf · Post by **bgf** » Thu May 03, 2018 9:52 am

assume you have an emergency fund but do not want to touch. no current savings allocated for a car purchase. you need a car. assume also that you have taxable accounts, with some blocks showing a current loss.

what are the concerns with tax loss harvesting, using those funds to purchase the vehicle, then replenishing your taxable account with new funds?

would this be better in comparison to taking out a loan?

dknightd · Post by **dknightd** » Thu May 03, 2018 11:16 am

JupiterJones wrote: ↑Thu May 03, 2018 9:19 am [
Still, I'd recommend being sure you have a good "out" for that unlikely case where your job does go away (or you become unable to perform it for some reason).

That is what an emergency fund is for. I would not deplete my emergency fund to buy a car, in case I had an emergency. I do keep enough extra in it to put a good down payment on a car. If my "emergency" lasted for more than the car loan, I suppose I'd sell the car (if I don't have a job, or cannot perform it, likely I do not need the car - or the car is the least of my worries).

dknightd · Post by **dknightd** » Thu May 03, 2018 11:42 am

bgf wrote: ↑Thu May 03, 2018 9:52 am assume you have an emergency fund but do not want to touch. no current savings allocated for a car purchase. you need a car. assume also that you have taxable accounts, with some blocks showing a current loss.

what are the concerns with tax loss harvesting, using those funds to purchase the vehicle, then replenishing your taxable account with new funds?

would this be better in comparison to taking out a loan?

Maybe

Post by **LadyGeek** » Thu May 03, 2018 4:29 pm

I removed a few off-topic posts. Our experienced members should read: Please Do Not Bite the Newcomers

Miguelito · Post by **Miguelito** » Fri May 04, 2018 10:11 am

Personally, I'd split it. I'd put 50% or so down and finance the rest. Save up and pay it off early.

I've never had a car loan for the duration (usually 4 or 5 years). I've never kept a loan for more than 3 years or so. I've always paid them off early - sometimes very early.

I'm buying a fairly expensive car right now, but somehow, it appears I may score 1.9% financing. Because of that, I plan on financing most of it. If it turns out that it ends up being more like 4-5%, I'll just buy it in cash.

Eventually, it will probably bother me to still have the loan and I'll pay it off early as well.