Debt averse but took 0% car financing over cash rebate. Need advice.

[Toons]

Pay It Off
Free Your Mind
Move On

[Rus In Urbe]

Rus In Urbe wrote: ↑Mon Jun 21, 2021 9:43 am
Last time we bought a car, I called Amex in advance to warn them, and then we put the total cost of the car on the Amex card, got a whole bunch of doubled points that we'll use for travel, and paid off the Amex the next month as usual. Like getting a 30-day float that pays points. We might do this next time too. The car salesman would MUCH rather have financed us....of course.

indx wrote: ↑Mon Jun 21, 2021 10:58 am
The dealership didn’t give you grief over this? Part of the negotiation process?

stoptothink » Mon Jun 21, 2021 11:01 am
I've purchased 5 cars in my life and never been allowed to put more than $3k on a CC no matter how much I bargained.

Well, I did have to negotiate for it. I'm kind of a grandmotherly type so I probably blinked my eyes and said, Oh I want the travel points to visit my grandkids. Um. And they didn't add a fee. This was about five years ago.

But I wonder if more people have done this and they're now on to us......

[fyre4ce]

If you could do the deal over again, I think it would have been better to either pay cash (if you could get the full rebate this way), or take the 3.99% loan (if not), then pay it off within a few months. But that's sunk cost. You now have a 0% loan.

Mathematically the best option is to keep the 0% loan and make minimum payments. It's not a big difference - we're talking hundreds of dollars over 5 years if you leverage using low-risk investments, but if you are looking for advice for the best move, that's it.

If you are really debt-averse and it's bothering you having the monthly payment, go ahead and pay it off. Think of it like buying yourself a luxury item you don't need but want - in this case, being debt-free.

[esteen]

On a nonfinancial note, I like the car a lot. It's very comfortable, drives well, has nice features (i.e. comfort & safety), looks nice, and is quite the upgrade from what I was driving before. At the same time, I feel like the car is too nice for me, and in some ways, I have new car guilt. I'm not sure I deserve to be driving a car this nice (at my age at least). I'm glad I didn't go above the base trim. I wonder when these feelings will subside?

To me this has nothing to do with optimal car prices. This decision is one that many in your financial shoes wouldn't think twice about, but it is a big deal to you. It's all about your relationship with money, which is internal not external. If I were you I would start reading books on not sweating the small stuff, on the psychology of finance like Morgan Housel's "The Psychology of Money" or Sarah Newcomb's "Loaded: Money, Psychology, and How to Get Ahead without Leaving Your Values Behind." There are probably others that forum members can suggest.

In the meantime, rest assured that any choice you made on this purchase is fine, and any next choice will be fine. This has zero affect on the big money choices (how much are you saving each year, what is your long-term asset allocation, etc.)

Explore your relationship with money, and it will pay you dividends!

[cchrissyy]

it sounds like you are doing very well at managing your finances.

i agree with the people above who pointed out that none of these options are bad. this is the type of choice where you can pick whatever feels right for you, and mathematically there will be no perceptible long run impact.

second guessing yourself is not helpful. you made a fine choice. but one of the things that makes it fine is that you can easily change your mind! you are free to pay it off at any time. I don't advise that, I am only pointing out how no harm was done.

FWIW, the last time i bought a car, I got a loan at 1.9% and paid for a couple years to help my credit score, then paid the remainder in one chunk to get rid of the nuisance. like you, i felt some slight annoyance seeing the monthly withdrawal.

the only red flag i see here is that your decisions were/are influenced by "what will people say". This is not the path to happiness or to making the best decision for you! I suggest reflection on this, maybe counseling. It is a common pitfall especially when a person is uncomfortable with having a new financial status or when a person has friends or family who have more or less than they do.

if "what will people think" is in your own head, you can learn to think differently.

if "what will people say" is real life people asking nosy questions you can learn phrases that deflect or end their inquiries without even being rude.
you can make a joke or a vague reply
"what did that cost? not too bad actually!"
"how much is your rent? enough!"
"how is your retirement account doing? (shrug) ok i guess" when in fact you know the number


I recently deflected a question abut the cost of something by saying "nah... i'm shy about that" and the same person tried it another day in front of a group and i laughed "sheesh, look at this guy! don't worry!"


for the record, like another poster said above, i am middle aged and never been asked my price/payment/down on any car i ever had. the thing i wrote above about 1.9% is the first time i told anybody that story because frankly it's not that interesting and has never come up.


good luck!

[sunny_socal]

I'll take a 0% loan any day of the week even if I "have the cash."

[Sic Vis Pacem]

We recently faced the same decision. We had money set aside for a new vehicle and had the choice of the rebate versus 0% 60 month financing.

I figure I can probably do better than 0% investing the money, and was willing to take a wager that near-term inflation will make this the right choice.

Put the first year of payments in savings, the rest invested in VTSAX.

So far, so good.

[indx]

OP here.

I can't believe I'm saying this, but I'm still struggling with whether or not to pay off the car.

I have made 16 on-time payments (auto-drafted out of my high-yield online savings account as per some of your suggestions). Another 44 payments to go (~$14,300 total).

Other factor(s) at play here that weren't present at time of purchase are:

• High inflationary environment
• Bear market for equities

On the one hand, I'm concerned about the purchasing power of my dollars eroding in my savings account due to high inflation. This money could be invested in my taxable account. Additionally, I could be buying equities at a 'discount'. Or at the very least, I'm actively arbitraging the rate between the car note (0% APR) and my savings account yield (over 2%).

On the other hand, I'm not too keen on investing the spare cash because I'd have to be willing to wait 5-10+ years for equities to recover. And if I wanted to pay off the car at some point in the next few years, I wouldn't have the cash above and beyond my emergency fund to do so.

I suppose another option would be to throw all disposable income/savings at the car note each month until it's paid off, but this seems less than optimal (capturing a 0% return) vs. investing in the market (capturing the average market return).

If I pay off the car today, I would still have a six month emergency fund (four of the months are tied up in Series I Bonds at the moment). I'm probably okay with six months, but I've always preferred a 12 month emergency fund.

Thoughts?

[bluebolt]

OP here.

I can't believe I'm saying this, but I'm still struggling with whether or not to pay off the car.

I have made 16 on-time payments (auto-drafted out of my high-yield online savings account as per some of your suggestions). Another 44 payments to go (~$14,300 total).

Other factor(s) at play here that weren't present at time of purchase are:

• High inflationary environment
• Bear market for equities

On the one hand, I'm concerned about the purchasing power of my dollars eroding in my savings account due to high inflation. This money could be invested in my taxable account. Additionally, I could be buying equities at a 'discount'. Or at the very least, I'm actively arbitraging the rate between the car note (0% APR) and my savings account yield (over 2%).

On the other hand, I'm not too keen on investing the spare cash because I'd have to be willing to wait 5-10+ years for equities to recover. And if I wanted to pay off the car at some point in the next few years, I wouldn't have the cash above and beyond my emergency fund to do so.

I suppose another option would be to throw all disposable income/savings at the car note each month until it's paid off, but this seems less than optimal (capturing a 0% return) vs. investing in the market (capturing the average market return).

If I pay off the car today, I would still have a six month emergency fund (four of the months are tied up in Series I Bonds at the moment). I'm probably okay with six months, but I've always preferred a 12 month emergency fund.

Thoughts?

6 month T-bills are currently yielding around 4%.

Paying off a 0% loan in a non-deflationary environment is not the optimal financial decision, though it appears there is a non-financial factor in your discomfort with the debt.

[lstone19]

My take is if I have the funds in cash to pay off what I owe, I'm not really in debt. To me, debt (as it once was for me) is being dependent on future income in order to pay what I owe. When you have the funds to pay it off, taking a 0% loan while the ready funds to pay it off are sitting risk-free earning interest is arbitrage, not true debt.

I would bet that your real concern is finding yourself owing more than you can afford to pay off. But that's not your situation. You're being paid money to pay off the loan slowly.

[jrbdmb]

It seems some of my options at this point are:
• Open a separate online savings account, set the car payments on autopay, and forget about it.

I personally like this option. You take advantage of the 0% offer, get a 2% bonus on the cash while it's paying down the loan, and you have flexibility if something should change in the future and you need that cash (ex. you never know when a home buying opportunity may present itself).

[robphoto]

On a nonfinancial note, I like the car a lot. It's very comfortable, drives well, has nice features (i.e. comfort & safety), looks nice, and is quite the upgrade from what I was driving before. At the same time, I feel like the car is too nice for me, and in some ways, I have new car guilt. I'm not sure I deserve to be driving a car this nice (at my age at least). I'm glad I didn't go above the base trim. I wonder when these feelings will subside?

This kind of worry, hopefully you can get beyond it.

Nowadays, after I make these decisions I try to understand which ones will make a real difference to my future life (say, getting hit by a car) and which are just momentary less-than-optimal (not making the perfect deal on a car). This is really a minor thing.

You got a nice car which will work well for you, you know a couple of things to do next time; this isn't worth any worry.

If I had this quandary, I might buy a CD with the 20K, and at 3% that's 600. a year. That gives you a clear image of the cash you're saving, and you just pay the loan from your other cash flow. If you really need emergency money, you cash in the CD with a small interest penalty.

[indx]

Update (9/30/24):

I've made 40 payments (out of 60). Current loan balance is about $6,500. Should I pay it off?

I would still have a 6-month emergency fund after paying it off.

[Hyperchicken]

No you should not.

[blortchplop]

Update (9/30/24):

I've made 40 payments (out of 60). Current loan balance is about $6,500. Should I pay it off?

I would still have a 6-month emergency fund after paying it off.

Over the past year or so when money market funds were getting above 4%, did you feel better about paying this 0% loan slowly while your savings earned interest?

[indx]

Update (9/30/24):

I've made 40 payments (out of 60). Current loan balance is about $6,500. Should I pay it off?

I would still have a 6-month emergency fund after paying it off.

Over the past year or so when money market funds were getting above 4%, did you feel better about paying this 0% loan slowly while your savings earned interest?

The interest I’ve been earning on my HYSA’s entire balance has been helping to service the note, as payments are being auto-drafted from that same account. Yes, that has been nice to see.

But as the outstanding principal balance of the note has been decreasing, the interest earned on the amount earmarked for the remaining balance (now $6,500) isn’t as material as it used to be.

Over the course of the next 20 months, factoring in principal reductions each month, and perhaps further rate cuts (with the corresponding HYSA rate cuts), we’re talking about projected interest income of a couple hundred bucks.

Perhaps I should fund my Roth IRA with this cash on 1/1/25 to force myself to not pay this off?

[rogue_economist]

Let me get this straight, you have ~30k borrowed at 0%, and you want to allocate other funds (which are probably earning at least 4.75%) to pay that off. In other words, do the opposite of what banks to to make money.

This is why debt aversion shouldn't be taught as part of personal finance, because it results in people doing foolish things. Don't pay it off.

The financial error here was likely buying a commodity car for new pricing. A used car would have been a better financial choice but clearly that ship has sailed so its better to learn the lesson for next time and move on.

[doobiedoo]

Update (9/30/24):
I've made 40 payments (out of 60). Current loan balance is about $6,500. Should I pay it off? ..

The interest I’ve been earning on my HYSA’s entire balance has been helping to service the note, as payments are being auto-drafted from that same account. Yes, that has been nice to see.
..
Over the course of the next 20 months, .. we’re talking about projected interest income of a couple hundred bucks. ..

Yes, I would pay off the loan.
You would save $200-300 by keeping the loan. But it obviously bothers you to do that.
Sleeping Well At Night [SWAN] and no stress are worth something. For me, it would be worth the $200.

OTOH, if $200 is going to make a difference in your quality of life, maybe it's worth some stress or worry.
Not everything is about the numbers.

[Valhalla7]

The financial error here was likely buying a commodity car for new pricing. A used car would have been a better financial choice but clearly that ship has sailed so its better to learn the lesson for next time and move on.

I disagree. In the past when new vehicles took a huge hit upon leaving the lot, it might have been true. These days, new vehicle depreciation is almost perfectly linear, terminating at some specific point in the future like 300,000 miles, ten years old, whatever. So when buying new, your cost per year of ownership is hypothetically the same as buying the same vehicle used but you get more years of service at the end of the vehicles life. This is obviously pretty fuzzy math since a vehicles lifespan is impossible to pre-determine and both new and used prices fluctuate.

Plus buying new is a much easier process. The last one I bought, I built the vehicle on the manufacturer’s website, sent the link to the dealer, paid straight MSRP and they delivered it to my driveway.

[rogue_economist]

The financial error here was likely buying a commodity car for new pricing. A used car would have been a better financial choice but clearly that ship has sailed so its better to learn the lesson for next time and move on.

I disagree. In the past when new vehicles took a huge hit upon leaving the lot, it might have been true. These days, new vehicle depreciation is almost perfectly linear, terminating at some specific point in the future like 300,000 miles, ten years old, whatever. So when buying new, your cost per year of ownership is hypothetically the same as buying the same vehicle used but you get more years of service at the end of the vehicles life. This is obviously pretty fuzzy math since a vehicles lifespan is impossible to pre-determine and both new and used prices fluctuate.

Plus buying new is a much easier process. The last one I bought, I built the vehicle on the manufacturer’s website, sent the link to the dealer, paid straight MSRP and they delivered it to my driveway.

Vehicles still take a large hit in the first few years, the distortions of the COVID market make it look like it doesn't but that doesn't hold water when you actually shop the used market.

I can go out and buy a car for less than $10k that has only 1/3 or even less of its reasonable life expectation. It would cost considerably more to do that buying New.

Nor would I say buying new is a "much easier process" it is a painful experience dealing with dealerships, salesmen, finance managers, and the rest.
And if you paid MSRP you overpaid by several thousand dollars.

The only time I would buy new would be if I was getting something you cannot reasonably get on the used market like a Supra.

[Northern Flicker]

The interest I’ve been earning on my HYSA’s entire balance has been helping to service the note, as payments are being auto-drafted from that same account. Yes, that has been nice to see.

But as the outstanding principal balance of the note has been decreasing, the interest earned on the amount earmarked for the remaining balance (now $6,500) isn’t as material as it used to be.

Get over it. By keeping the funds earning interest in a HYSA, and withdrawing the payment amount, when the loan is paid off, you will have a residual balance of free money.

If you can cash flow the loan payments from your take home pay comfortably, it would be fine to invest the funds some other way instead.

Most people have more important issues to worry about or address than something like this. Focus on them instead.