Buy car cash or take low rate loan

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soloekahi
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Buy car cash or take low rate loan

Post by soloekahi » Sun Oct 14, 2018 12:52 pm

Alright. This has been asked many times before and it seems the general consensus is to pay cash but I don’t quite understand why. Here’s my scenario...

Buying new Tacoma pickup and cost is around 38k. If I get a 2018 then Toyota is offering 1.9% financing on the loan. I can pay cash but with the 1.9% interest rate loan, why not just get the loan and put the money in something that earns 1.9% or greater. Especially in this financial climate where rates are rising. There are plenty of 1-3 year CDs that are doing 2.5-3% so it’s not clear why I wouldn’t do this. The pros are that I have my cash for investing and liquidity and if rates keep rising I’ll get a better return on cash. Am I missing something?

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8foot7
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Re: Buy car cash or take low rate loan

Post by 8foot7 » Sun Oct 14, 2018 12:57 pm

1.9 isn’t particularly attractive to me. Your net margin at a 3% CD is 1.1% and then you have to account for tax so you’re under a percentage point in advantage. Too much hassle for me. You’re talking about a gain of $300 or less a year.

Goal33
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Re: Buy car cash or take low rate loan

Post by Goal33 » Sun Oct 14, 2018 1:02 pm

Tell us about your needs for liquidity
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Alexa9
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Re: Buy car cash or take low rate loan

Post by Alexa9 » Sun Oct 14, 2018 1:05 pm

Peace of mind of not having an outstanding loan and payment every month is worth it to me. I don't even really like keeping track of my credit cards.

Nissanzx1
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Re: Buy car cash or take low rate loan

Post by Nissanzx1 » Sun Oct 14, 2018 1:05 pm

Do you have the 38K over and above your emergency fund? If yes, do what you like. I wouldn't personally want to fool with making monthly payments but maybe that doesn't bother you. Watch the fine print, maybe one late pay could raise the interest up...

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soloekahi
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Re: Buy car cash or take low rate loan

Post by soloekahi » Sun Oct 14, 2018 1:18 pm

Thanks all. No issues at all with liquidity. It’s a small hassle but $300 a year is still $300 extra. I live my life by nickel and diming everything so every $1 counts.

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8foot7
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Re: Buy car cash or take low rate loan

Post by 8foot7 » Sun Oct 14, 2018 1:42 pm

Also consider any additional cost of insurance that would be higher than what you’d normally carry due to the demand of the lien holder. In my case a $500 vs $1000 deductible on collision would easily eat up $300/year.

Also is there a cash rebate you are foregoing to get the 1.9? Toyota is famous for doing a $2k rebatis or special financing but not both. You don’t earn enough with the arbitrage to offset the foregone rebate

This is a no brained at 0% and maybe even 0.9% but above that it becomes far less clear if it’s worth the hassle

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Re: Buy car cash or take low rate loan

Post by delamer » Sun Oct 14, 2018 1:47 pm

soloekahi wrote:
Sun Oct 14, 2018 1:18 pm
Thanks all. No issues at all with liquidity. It’s a small hassle but $300 a year is still $300 extra. I live my life by nickel and diming everything so every $1 counts.
If you truly live you lfe by nickel and diming everything, then find a less expensive used truck that meets your needs.

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Re: Buy car cash or take low rate loan

Post by deltaneutral83 » Sun Oct 14, 2018 1:49 pm

soloekahi wrote:
Sun Oct 14, 2018 1:18 pm
Thanks all. No issues at all with liquidity. It’s a small hassle but $300 a year is still $300 extra. I live my life by nickel and diming everything so every $1 counts.
Buying a brand new car for $38k and nickel and diming don't exactly seem to me to go hand in hand. This car will depreciate $8k in year one (assuming 12-15k miles and not even factoring in increased taxes and ins.). I can't imagine worrying about $200-$300 in financing shenanigans.

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Re: Buy car cash or take low rate loan

Post by JGoneRiding » Sun Oct 14, 2018 1:50 pm

I agree with OP. If you can easily invest the cash for a decent margin do so. I think part of the issue becomes people tend to buy more car on credit then they should

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Re: Buy car cash or take low rate loan

Post by Nissanzx1 » Sun Oct 14, 2018 1:55 pm

deltaneutral83 wrote:
Sun Oct 14, 2018 1:49 pm
soloekahi wrote:
Sun Oct 14, 2018 1:18 pm
Thanks all. No issues at all with liquidity. It’s a small hassle but $300 a year is still $300 extra. I live my life by nickel and diming everything so every $1 counts.
Buying a brand new car for $38k and nickel and diming don't exactly seem to me to go hand in hand. This car will depreciate $8k in year one (assuming 12-15k miles and not even factoring in increased taxes and ins.). I can't imagine worrying about $200-$300 in financing shenanigans.
+1 exactly. Doesn't make any sense to spend this amount on a vehicle if you are truly a person who watches every penny. Not consistent at all sorry.

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soloekahi
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Re: Buy car cash or take low rate loan

Post by soloekahi » Sun Oct 14, 2018 2:24 pm

Touché on the purchasing a 38k truck and nickel and diming. My current car is closing in on 20 years old and it’s time for something new. Finding a used (<2 years) Tacoma double cab 4x4 that is a big price difference from a brand new truck is very hard to find. I don’t think I’ve heard of increased insurance with loan so I’ll need to check that out. I do like nice things so I don’t have an issue spending money on things I want but I try to save where I can.

Momus
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Re: Buy car cash or take low rate loan

Post by Momus » Sun Oct 14, 2018 2:33 pm

No one buying a truck and consider themselves frugal...
That gas... That price tag... And new car?

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ClevrChico
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Re: Buy car cash or take low rate loan

Post by ClevrChico » Sun Oct 14, 2018 3:07 pm

Don't forget to add an origination fee for the loan. Financially it looks like a near wash, but I'd pay cash to make the deal simpler. (Less chance to be taken advantage of.)

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dm200
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Re: Buy car cash or take low rate loan

Post by dm200 » Sun Oct 14, 2018 3:09 pm

ClevrChico wrote:
Sun Oct 14, 2018 3:07 pm
Don't forget to add an origination fee for the loan. Financially it looks like a near wash, but I'd pay cash to make the deal simpler. (Less chance to be taken advantage of.)
From my observation and experience, origination fees for car loans are uncommon and, if there is one, not significant.

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Re: Buy car cash or take low rate loan

Post by grabiner » Sun Oct 14, 2018 6:07 pm

soloekahi wrote:
Sun Oct 14, 2018 12:52 pm
Buying new Tacoma pickup and cost is around 38k. If I get a 2018 then Toyota is offering 1.9% financing on the loan. I can pay cash but with the 1.9% interest rate loan, why not just get the loan and put the money in something that earns 1.9% or greater. Especially in this financial climate where rates are rising. There are plenty of 1-3 year CDs that are doing 2.5-3% so it’s not clear why I wouldn’t do this.
First, check the terms; sometimes, the promotion is a low-rate loan or cash back, so the loan is actually more expensive than the rate indicates.

The CD interest is taxable, while the loan interest is not tax-deductible. If you are in the 22% tax bracket, a 2.5% CD is only 1.95% after tax, so that is break-even.

And it may not be break-even. If you have a loan, the bank will probably require that you get a low deductible on collision and comprehensive insurance; if you use a higher deductible, you can save some money.
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TheAccountant
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Re: Buy car cash or take low rate loan

Post by TheAccountant » Sun Oct 14, 2018 6:08 pm

I wouldn’t worry about cash or finance as much as I would worry about spending 38k on a Tacoma.

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soloekahi
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Re: Buy car cash or take low rate loan

Post by soloekahi » Sun Oct 14, 2018 7:47 pm

TheAccountant wrote:
Sun Oct 14, 2018 6:08 pm
I wouldn’t worry about cash or finance as much as I would worry about spending 38k on a Tacoma.
A Tacoma is probably the best vehicle to buy in terms of holding value. You can’t find a used 2 year old Tacoma for 8k less than original MSRP that doesn’t have a salvage title. To each his own... 38k is not an issue for me and the question was whether to finance or not. I appreciate all the responses and some of them are definitely things I didn’t consider so thanks to those who chimed in. Thanks again.

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Re: Buy car cash or take low rate loan

Post by TheAccountant » Sun Oct 14, 2018 7:52 pm

soloekahi wrote:
Sun Oct 14, 2018 7:47 pm
TheAccountant wrote:
Sun Oct 14, 2018 6:08 pm
I wouldn’t worry about cash or finance as much as I would worry about spending 38k on a Tacoma.
A Tacoma is probably the best vehicle to buy in terms of holding value. You can’t find a used 2 year old Tacoma for 8k less than original MSRP that doesn’t have a salvage title. To each his own... 38k is not an issue for me and the question was whether to finance or not. I appreciate all the responses and some of them are definitely things I didn’t consider so thanks to those who chimed in. Thanks again.
Tacoma’s “hold their value” is mostly a myth. I looked into this before I bought my truck. You can buy a Tacoma private party for much less than new. Dealers purposely markup used Tacoma’s and Camrys so people buy their new ones instead.

Is this a TRD Pro?

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Re: Buy car cash or take low rate loan

Post by TheAccountant » Sun Oct 14, 2018 7:57 pm

Just as an example - I wanted a manual trans, extended cab 4x4 pickup that could tow 5000 lbs with ease. I looked at the TRD sport. Sticker 35k. Dealer would not negotiate.

A 2016 private party was 28k. The dealer had a few on the lot for 32k with 45-60090 miles. Dealer would not negotiate and used the “these trucks hold their value” bs.

It’s easy to find these trucks private party, but I couldn’t find one nearby with a stick. Private party is good because people always get lowballed on their trade-in and selling private gets them more money, and buyers can get good cars without paying dealer markup.

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soloekahi
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Re: Buy car cash or take low rate loan

Post by soloekahi » Sun Oct 14, 2018 9:42 pm

Looking to get a double cab TRD off-road 4x4 with long bed. Can’t seem to find that for anything worth the hassle of buying used. I’ve been burned before with a private sale so unless it’s a screaming deal I shy away. If I could find a good deal on that used truck I would check it out but so far nothing.

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Re: Buy car cash or take low rate loan

Post by munemaker » Sun Oct 14, 2018 9:50 pm

JGoneRiding wrote:
Sun Oct 14, 2018 1:50 pm
I agree with OP. If you can easily invest the cash for a decent margin do so. I think part of the issue becomes people tend to buy more car on credit then they should
I agree too since he is interested in buying a CD. I would not be in favor of using borrowed money to invest in equities or even a bond fund.

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munemaker
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Re: Buy car cash or take low rate loan

Post by munemaker » Sun Oct 14, 2018 9:51 pm

soloekahi wrote:
Sun Oct 14, 2018 9:42 pm
Looking to get a double cab TRD off-road 4x4 with long bed. Can’t seem to find that for anything worth the hassle of buying used. I’ve been burned before with a private sale so unless it’s a screaming deal I shy away. If I could find a good deal on that used truck I would check it out but so far nothing.
Toyota trucks hold their value so well, you are probably better off buying new.

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Watty
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Re: Buy car cash or take low rate loan

Post by Watty » Sun Oct 14, 2018 9:57 pm

soloekahi wrote:
Sun Oct 14, 2018 12:52 pm
Alright. This has been asked many times before and it seems the general consensus is to pay cash but I don’t quite understand why.
I bought a Corolla back in January that cost less than half that. At that time they had a 0% interest rate promotion and there was not a rebate that you had to give up to get the low interest rate.

In the negotiations with several dealers the cash price was over a thousand dollars less than the price to get the low interest rate. There was apparently a dealer participation fee of of over $1,000 that the dealership had to pay if you took the low interest rate. Several dealerships said the same thing so I suspect that they were telling the truth.

I ended up buying the car with a loan from a credit union and got the lower purchase price.

Here is a post about my car buying experience.

viewtopic.php?f=11&t=239526&p=3746230

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eye.surgeon
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Re: Buy car cash or take low rate loan

Post by eye.surgeon » Sun Oct 14, 2018 11:54 pm

Just a heads up if you post here that you are buying anything more expensive than a mule pulling a covered wagon you will get at least one response telling you how indulgent you are being and that an uncovered wagon would meet your needs just fine.

As for paying cash or financing, I'd pay cash. if it was 0% I'd consider it but only if I had the cash available to buy it despite financing.
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selters
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Re: Buy car cash or take low rate loan

Post by selters » Mon Oct 15, 2018 3:57 am

Remember also to finance your next sofa, bed, kitchen remodel, AC, solar panels, whatever, if you can get 0% financing. It's a free loan, right, so why not invest the money now and pay monthly payments on your consumption items?

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Re: Buy car cash or take low rate loan

Post by indexonlyplease » Mon Oct 15, 2018 4:59 am

There is no better deal than paying cash and earning the rebate. Every car has a rebate. The rebate will be far more that you will earn on a cd. If you put the money in the cd where will the money come from to pay the monthly payments?

Chevy gave be 10k off on the 20% msrp. Paying cash was worth it. You are looking at to much of a hassle for savings that will not change one bit of your life.

indexonlyplease
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Re: Buy car cash or take low rate loan

Post by indexonlyplease » Mon Oct 15, 2018 5:01 am

selters wrote:
Mon Oct 15, 2018 3:57 am
Remember also to finance your next sofa, bed, kitchen remodel, AC, solar panels, whatever, if you can get 0% financing. It's a free loan, right, so why not invest the money now and pay monthly payments on your consumption items?
Because 78% of peple never payoff the loan in time.

bltn
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Re: Buy car cash or take low rate loan

Post by bltn » Mon Oct 15, 2018 5:54 am

I believe one should always buy cars without loans. Accumulate the purchase price before the purchase rather than afterward.
Buy what you can afford.

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Re: Buy car cash or take low rate loan

Post by Jack FFR1846 » Mon Oct 15, 2018 6:12 am

eye.surgeon wrote:
Sun Oct 14, 2018 11:54 pm
Just a heads up if you post here that you are buying anything more expensive than a mule pulling a covered wagon you will get at least one response telling you how indulgent you are being and that an uncovered wagon would meet your needs just fine.

As for paying cash or financing, I'd pay cash. if it was 0% I'd consider it but only if I had the cash available to buy it despite financing.
Why would you need a mule? You have a bicycle, right? A few hose clamps and you pull the wagon yourself.


To the OP, do your due diligence and search the used market first. I constantly observe the used market for whatever I might buy next. When I bought my 2014 Jeep Wrangler, I could not find one 3 years old or less for less than new so ordered exactly what I wanted. I'm still watching them and with the new model (JL), there are great deals on even current year JK Wranglers and used ones are far more affordable. You really, really have to be on top of the market.
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Re: Buy car cash or take low rate loan

Post by longinvest » Mon Oct 15, 2018 6:33 am

soloekahi wrote:
Sun Oct 14, 2018 12:52 pm
Buying new Tacoma pickup and cost is around 38k. If I get a 2018 then Toyota is offering 1.9% financing on the loan. I can pay cash but with the 1.9% interest rate loan, why not just get the loan and put the money in something that earns 1.9% or greater.
Two reasons.

Financing at a 1.9% rate and and having money invested in a portfolio, at the same time, is a form of leverage. To offset the interest on the 1.9% loan, the invested money has to earn 1.9% after taxes, based on the marginal (not the average) tax rate of the investor. To that goal, most people will keep the money invested into a portfolio of risky assets, including stocks. This might work well, and the investor will be rewarded for it, but it could backfire with stocks taking a plunge and the investor continuing to pay back the loan, monthly, instead of buying investments at bargain prices with the money.

The second reason is that when paying a car cash, most people tend to pay less (choosing fewer options, haggling more), because every $1,000 dollar saved on price has an immediate $1,000 impact. (Wouldn't one prefer to put the $1,000 in investments, instead?) When taking a loan, $1,000 dollar saved on price only looks as a small $10 to $15 monthly amount (depending on loan term), making it seem smaller than it really is. Car companies know this; that's why they offer low interest rates on financing.
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Re: Buy car cash or take low rate loan

Post by deltaneutral83 » Mon Oct 15, 2018 8:12 am

soloekahi wrote:
Sun Oct 14, 2018 2:24 pm
I don’t think I’ve heard of increased insurance with loan so I’ll need to check that out.
Increased insurance and taxes pertains to the higher priced automobile, not the hypothetical loan. I'm always curious when statements about new/used cars are made as factual when there are others chiming in who have indeed bought used and significantly less expensive with the exact parameters that one (who has not bought used) who only buys new claims to not be feasible. But again, issue is over $200-$300 max of pre tax dollars on a potential $38k purchase.
eye.surgeon wrote:
Sun Oct 14, 2018 11:54 pm
Just a heads up if you post here that you are buying anything more expensive than a mule pulling a covered wagon you will get at least one response telling you how indulgent you are being and that an uncovered wagon would meet your needs just fine.
Funny and entertaining, but in my opinion, not accurate. I think I read that the top 10% by net worth in U.S. have a million dollar NW, maybe closer to 1.1M; If you have less than that (which mathematically 89.99% do), I can't see many scenarios where it's prudent to drive a $38k car (new or used for that matter) and lose approximately $8k in 12 months in depreciation. I wouldn't even do this hypothetically with a $1.5M net worth but that's more preference and not mathematics at that point. The threads with high net worth earners talking about an $80k car are usually only balked at by others who don't have the means but that is to be expected but there is also usually thoughtful mathematical discussion that drowns that out.

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Re: Buy car cash or take low rate loan

Post by hudson » Mon Oct 15, 2018 9:25 am

I could argue either way pay cash or take the loan.

I would pay cash...if I had enough...because I'm through with borrowing money.

Tacomas are great vehicles; I drove one for almost 20 years. The Taco never had to go back to a dealer for anything except maybe an issue with the towing light harness. Mine didn't have the towing package, so I ignored the issue. I learned to always get the towing package if available.
I would also buy new and drive the wheels off. I know many that always buy used with no problems; I just bite the bullet and buy new.

A few years back, I got invited to a lunch with old friends from high school. When we met at the restaurant, we were all driving Tacomas.
Last edited by hudson on Mon Oct 15, 2018 10:05 am, edited 1 time in total.

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soloekahi
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Re: Buy car cash or take low rate loan

Post by soloekahi » Mon Oct 15, 2018 9:42 am

hudson wrote:
Mon Oct 15, 2018 9:25 am
I could argue either way pay cash or take the loan.

I would pay cash...if I had enough...because I'm through with borrowing money.

Tacomas are great vehicles; I drove one for almost 20 years. The Taco never had to go back to a dealer for anything except maybe an issue with the towing light harness. Mine didn't have the towing package so I ignored the issue. I learned to always get the towing package if available.
I would also buy new and drive the wheels off. I know many that always buy used with no problems; I just bite the bullet and buy new.

A few years back, I got invited to a lunch with old friends from high school. When we met at the restaurant, we were all driving Tacomas.

+1 My current Tacoma is closing in on 20 years old and I still get cold cash offers for 5k. These vehicles are hands down the best resale value vehicles. My 15 year accord on the other is worth less than the tires I put on them.

In regards to used, saving 6k on a 3 year old used Tacoma is not something that’s worth my while to deal with the hassle of not knowing what that truck has been through or how it was treated. After a bad experience I’ll never buy a used car again from a private seller.

After all the input, I’ll likely just pay cash.

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