Pay cash or finance a brand new car? And why?

Hi All,

 

I'm in the process of buying a brand new car worth around $33,000 out the door (2015 Subaru Legacy 3.6r Limited). One area I am now debating is whether to pay cash in full, or finance the car.

 

If I finance, I can get a rate of 1.49% which is a special offer until June 1st (not sure what it will be after that). My rate might be better since I have "excellent" credit. If I pay cash well there goes $33k from my bank account...ouch.

 

What are your thoughts? Pay cash or instead put like half-down ($16-17k) and finance the rest? They require $0 down. I could save that other $16k and invest it instead in the market as I will likely get better returns on that money over the life of the loan (36-60 months I imagine). 1.49% doesn't seem hard to beat in the market if I invest in Index funds/ETFs.

 

I don't have a relationship with any credit unions, but chances are, they or other major banks (Bank of America for example) won't be able to beat that 1.49% dealership financing rate special, at least I am not seeing any that do on websites...

 

Recommendations (pros/cons) and what approach you would take if you were in my situation would be greatly appreciated.

 

Thanks.

Paying cash for a new car isnt smart unless you plan to keep it forever in which case you can decide if thats your thing (depreciation is a B*TCH). The partial cash plus financed amount is better as you dont blow your wad and you start off with equity in the vehicle meaning if you hate it in a year you can offload with no loss also when paying cash those greedy salesmen may be willing to bend on price more so than a 100% finance buyer.

 

There should be great deals on 15s as the 16s are about to roll out so make sure to shop around (among the sparse inventories:) ) to find a good deal or something to force them into a match situation.

 

If you have 750+ credit they will match any financing offers you may get as they want get you in, in hopes you buy a house, open money market accounts etc etc. Dont worry about not having a relationship with the banks you're just a credit score to them and if you have money on hand, youre dirt cheap money for them to use to make themselves more money (given current interest rates)

 

So you are in much better shape than most folks when buying a new car. If you dont require a brand new 15 maybe glance over the lightly used 15s (very thin i know but cant hurt).

I don't have the money to buy a new car in cash, so I am not in your position. I do have excellent credit. When I bought my car, my credit score was actually 850 (which is out of 850) and I didn't get a better rate than what Subaru advertising.

 

Personally, I would finance the car. Today interest rates are dirt cheap and likely in the next year the interest rates should start to increase. I had the choice to use the money from my old car towards a down payment on the new one and chose to use the money towards else where (I mostly added to my savings.) In my case it was $6500 for my old car and the loan interest rate 0.9%, the saving was going to be less than $200 over the life of the loan. My saving account pays 0.75% interest and I expect that to increase in the next couple years.

 

You can beat the return in the market, but their is always some risk and you also have to pay taxes on the gains. It really comes down to how comfortable you are in doing that. Some people I know stress themselves over investments fluctuations and/or get upset seeing the money every month that they pay in interest. Their is also some benefit in being liquid with your assets. If you have your money tied up in a car its not so easy to access that money if its needed. Market investments are much more liquid.

I have a 800+ credit score. I just bought my Subaru. I paid cash for mine. Personally, I feel that there are much more important things for me to spend my money on than financing fees and interest. I wouldn't buy I car I couldn't afford. In the past, I've bought some really crappy cars because that's what I could pay cash for.

Paying cash for a new car isnt smart unless you plan to keep it forever in which case you can decide if thats your thing (depreciation is a B*TCH). The partial cash plus financed amount is better as you dont blow your wad and you start off with equity in the vehicle meaning if you hate it in a year you can offload with no loss also when paying cash those greedy salesmen may be willing to bend on price more so than a 100% finance buyer.

 

There should be great deals on 15s as the 16s are about to roll out so make sure to shop around (among the sparse inventories:) ) to find a good deal or something to force them into a match situation.

 

If you have 750+ credit they will match any financing offers you may get as they want get you in, in hopes you buy a house, open money market accounts etc etc. Dont worry about not having a relationship with the banks you're just a credit score to them and if you have money on hand, youre dirt cheap money for them to use to make themselves more money (given current interest rates)

 

So you are in much better shape than most folks when buying a new car. If you dont require a brand new 15 maybe glance over the lightly used 15s (very thin i know but cant hurt).

 

This is great advice and guidance, thank you so much. I will likely do the half and half (cash + finance). Also I heard today that brand new factory orders for 2015 Legacy's will close on Tuesday 5/26 so since that is too close for me to commit to a brand new car, I'm likely going to wait for the 2016s to get exactly what I want, or find a 2015 near where I live that gets me exactly what I want and save a little money in the process. I heard the 2016s will be pretty similar to 2015s..

I don't have the money to buy a new car in cash, so I am not in your position. I do have excellent credit. When I bought my car, my credit score was actually 850 (which is out of 850) and I didn't get a better rate than what Subaru advertising.

 

Personally, I would finance the car. Today interest rates are dirt cheap and likely in the next year the interest rates should start to increase. I had the choice to use the money from my old car towards a down payment on the new one and chose to use the money towards else where (I mostly added to my savings.) In my case it was $6500 for my old car and the loan interest rate 0.9%, the saving was going to be less than $200 over the life of the loan. My saving account pays 0.75% interest and I expect that to increase in the next couple years.

 

You can beat the return in the market, but their is always some risk and you also have to pay taxes on the gains. It really comes down to how comfortable you are in doing that. Some people I know stress themselves over investments fluctuations and/or get upset seeing the money every month that they pay in interest. Their is also some benefit in being liquid with your assets. If you have your money tied up in a car its not so easy to access that money if its needed. Market investments are much more liquid.

 

Great insight and approach, thank you for this. It does help paint a better picture and help me look more into my situation and know what I'll be doing is the right thing. I'm hesitant in paying all cash for the various reasons described, so as long as I can get a low rate for financing, I should be good to go with my excellent credit.

I have a 800+ credit score. I just bought my Subaru. I paid cash for mine. Personally, I feel that there are much more important things for me to spend my money on than financing fees and interest. I wouldn't buy I car I couldn't afford. In the past, I've bought some really crappy cars because that's what I could pay cash for.

 

I think it really comes down to everyone's own personal situation and intent. I don't think there is one right answer here, what may work for one guy may not work for the next and so on....

 

I totally get what you're saying about paying cash, but it is a big chunk of money that just goes away and you'll never see return on it ever again. So my thinking of the investment portion is, with half of it which I would finance, how much money can I realistically get back for the interest rate I'm paying (plus depreciation hit) over the course 3-5 years? maybe 10? If I can outpace that with inlation, then i'd come out in the end, and not to mention not worry about anything when paying $33k in cash vs half of that. Liquidity is key, having cash on hand is king.

Sounds like you answered your own question.

Also look into leasing but study it very well.

 

If done right, you will only end up paying for the depreciation of the car.

 

Also if done right, it is usually cheaper to lease a Subaru 1st and then buy it at the end of the lease.

 

Like the housing market, people usually don't know enough about leasing and end up getting screwed over.

 

I have been leasing subarus for a while now and like the fact that my savings account remains untouched. I also change my cars every 3 years.

 

But there sure are ton of myths out there about leasing.....one being omg what happens if I go over the miles????

 

Like people indicated, it is a personal choice and I like being liquid. Leasing works for me.

I paid cash in full for mine, I don't like payments. my investments are separate from savings. I am paying myself back.

Also look into leasing but study it very well.

 

If done right, you will only end up paying for the depreciation of the car.

 

Also if done right, it is usually cheaper to lease a Subaru 1st and then buy it at the end of the lease.

 

Like the housing market, people usually don't know enough about leasing and end up getting screwed over.

 

I have been leasing subarus for a while now and like the fact that my savings account remains untouched. I also change my cars every 3 years.

 

But there sure are ton of myths out there about leasing.....one being omg what happens if I go over the miles????

 

Like people indicated, it is a personal choice and I like being liquid. Leasing works for me.

 

Leasing is a worth while option if you plan on buying a new car every 3 years and you fit within the rules of a lease (keep the car in good shape, don't modify it, and don't drive an excessive amount of miles). It almost always is cheaper to buy a car and keep it long term.

Leasing is a worth while option if you plan on buying a new car every 3 years and you fit within the rules of a lease (keep the car in good shape, don't modify it, and don't drive an excessive amount of miles). It almost always is cheaper to buy a car and keep it long term.

 

Agreed.

Agreed.

+2, says the one with almost 134K miles on a '10 LGT.

I have gone both ways over the last 30 years or so. (Fortunate enough to have the funds to pay cash for reasonable cars.) But if a dealer or my credit union is going to give me free money, I will take it and go with financing.

 

IMHO, the best way to go with cars is to buy a good, reliable new car and keep it until it is too costly to keep it reliable. Then it is time to get another new one.

 

You will never get anywhere if you buy a car, new or recently used and trade it in every 3 years.

 

Problem is - that isn't exciting or sexy. Well I don't buy what other people want. I buy what I want. Over the last 50 years, I have driven many cars and lust after some of them, but that is all it is. Maserati's are nice, but only if you hit the lottery.

as pointed out already, you need to work the numbers for each option, considering how many miles you drive, how long you keep the car, and how good you are with maintenance, etc. - also, most folks don't have $30k sitting in the bank for a new car, and tapping into investments (assuming those are aimed at retirement) is usually not a great idea.

At that rate I think financing is the clear choice. $3k down, finance $30k for 60 months, payments are ~$520/m, your total interest payments are $1200 or $20/m. Invest the money elsewhere or sit on $30k in cash liquidity for other purposes.

I'm thinking about buying a BMW M235i and they have 0.9% financing. Heck, at that rate I might as well take out a 15-year mortgage on it! Seriously, it works out to $185/yr avg interest to finance $40k. I strongly suggest taking advantage of these low rates because sooner or later that almost have to go up.

I helped a friend buy a new car with financing through a credit union. CU cut her a check and she was able to negotiate the price down quite a bit because the dealership treated it as a cash purchase. Rate through CU was a little higher, once we figured in all the financing fees and total costs when the car is paid off, she is saving about a couple of thousand dollars going this route.

 

I know you said you have no relationship with credit union, but you may want to see if you can get one, maybe through your work. CU's rate is typically higher, but not much.

I'm gonna be getting 1.49% financing promotional deal with "excellent" credit, which I think will be hard for any CU or Bank to beat... I can finance the whole car which is around $34,000, but will likely put down $5k, $10k, $15k, or $20k depending on how the monthly payments shake out... I can pay all cash but don't want to see that much liquidity go "poof", I rather save that cash and keep it in case of emergencies or whatever

I would recommend putting the bare mininum down. When I finance a car, usually I try to pay only enough to cover tax and license, in your case about $3500. If you need a lower payment for a few months or a year, you can always augment your payments with some of your savings to make your monthly expenses easier. After the first 2 years of payments you should be in a good place loan/value wise where you have some equity if you decide to change cars or want to get out of the car altogether.

We all wish we could just buy things cash and be done without a second thought. But if you read some of these posts carefully you can see investing that money you have and financing at the super low rate you can come out ahead financially at the end of the loan term.

 

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With how low finance rates are these days...I finance and I will stay financed for one main reason...If I get into a total loss accident within the first year or two, GAP insurance pays the difference on the loan and it doesn't cost me anything additional over the $125 GAP insurance I purchased at the beginning of the loan. Heck, I financed my Subaru for 6years at 1.9% with ZERO down. I'll trade it in when I become even with its value, so the eintire time I am driving it, I will be upside down on my loan. This ends up saving me money in case a total loss accident or theft were to happen.

 

If you pay cash for your car, you will only get average value and will likely be out thousands of dollars. The initial depreciation of the car is scary for cash purchases.

 

If you have ANY other debt, pay that off and finance a car. Credit cards, house loan..etc Those should come first before a cash car purchase.