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Ask Jesse: Should we finance our car in order to keep more money in savings?

If we can afford the payments, is it smarter to finance part of the vehicle to keep our savings, or should we go ahead and pay cash (keeping $5,000 to $6,000 in our Emergency Funds still)? -Leah

First off, congratulations on building your savings to afford paying cash for the vehicle! Having just purchased a newer car for the first time last year after years of driving old and hand-me-down vehicles, I can empathize with how nice it is to have the money set aside.

If I were in your shoes, I would make sure that your Emergency Fund is enough to cover at least three months’ worth of expenses if something happens to your income. If you have enough after that is set aside to buy a vehicle with cash, I would go ahead and pay cash for the vehicle.

Is it “smarter” to make the payments and finance the vehicle? I would say, in short, no. You will be paying more for the car with interest payments over the next five years than you would if you just paid cash outright.

Also, touching on another discussion for another day, I think we have some serious inflation coming down the pike within the next few years. If you spend the cash now, I believe the money will be worth more now than it would be sitting in savings at a later date when you would use it to pay the interest payments over the next five to seven years. So, not only would you be paying more money due to the interest payments, you potentially could be paying more due to inflation.

Additionally, if you use cash, there is a greater potential at having your money go further by being able to negotiate a better deal. When I bought my car last year, I may not have saved that much money upfront by paying cash, but paying in cash allowed me to go an unconventional route and expedite the process.

After extensive research, I ended up getting my car through a dealer who got the vehicle at a dealer auction. The car was off-lease and had been wrecked and had hail damage but the dealership repaired it as good as new under the lease. The car I bought still had the original sticker in the glove box and we ended up paying half of the value of the original price for a three-year-old vehicle. The previous owner took the hit on depreciation and we were able to get a great deal. And going the cash route allowed us to finish the deal rather quickly.

If you can afford the payments now when you have everything saved up, I would go ahead and use the already-saved money to buy a vehicle. Then, I would take the money you would have been paying for a car payment and set it aside for your next vehicle purchase or another savings goal. When setting aside money for something, I’ve found it helpful to already mentally “spend” the money while it is being set aside. Then, when it is time to write the check, it does not hurt as much. :)

What about the rest of you? Would you recommend paying cash for a vehicle or would you finance a vehicle and keep more money in savings?

Jesse Paine is a licensed attorney who owns his own law firm. He’s married to Crystal and is the numbers nerd of the MoneySavingMom.com team! If you have a question you’d like him to answer in a future column, you can submit it here.

The content of this column intended for informational use only and is not to be construed as providing legal, investing, accounting or other professional advice. Your situation is factually specific and you should accordingly seek qualified professional counsel concerning your specific legal, investing or accounting needs.

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  1. Lee Ann says

    We are also a “cash” family. Love it. Believe in it. However …….:) My husband also invests heavily in very secure investments. I used to nag him continually to just pay off the car. It felt better to me to know there wasn’t a payment. The math for us says differently though. The interest we’re making by investing that large sum of money is far greater than the interest on our credit union car loan. Again – we each have to look at our own situation, look at the math, the security of our jobs, and go from there.

  2. Ned says

    I bought a 2011 RAV4 recently for $21k including all taxes/fees and paid off 2k in front and have a loan for 19K now from capital one, I have excellent credit score ( more than 790) and the financing guy at toyota company ripped me off, since I did not know anything about financing by putting me 4.5 % interest rate (5 years). Later I realized that that was a mistake by doing 4.5 % and Now, I am paying $367/mon like $299/month (principal) and $80 (interest). But i am getting payment bill every month and they are charging me extra interest (around $60/month) on the top of car interest, I am pissed off seeing that bill and called capital one and asked about it, they say something about loaning money..,blah., I do not understand exactly. They do not really convince me why they are charging more interest. Now, My question is I do have money to pay off now, I am wondering that is just paying off entire car loan is a worth? or just make month payment? or paying off in less than year? which one is better, I am kind of afraid that paying off entire car loan because it is lot of money/feel like throwing entire money to drain. Please advice me and provide me some suggestions, I will really appreciate, Thanks , Ned

  3. Stephanie says

    Earlier this year, we bought a used car with cash and thought we were being so smart about it. We had saved up and did our research to make sure we got a good deal and could still afford the tax and other fees. What we didn’t plan for was being rear-ended on the way home from the dealer by a guy with a fake insurance card. We didn’t find out about his lack of coverage until after we had already had the repairs done so we had to pay for the new bumper ourselves, and never was I happier that we hadn’t “borrowed” from our emergency savings to be able to afford the car in the first place!

    Driving a paid for car is certainly a freeing experience, but you never know when an emergency is going to come up and bite you on the rump. Pay cash if you can, but buying a car is almost never going to be a true emergency, so it should never come out of that fund!

  4. Bonnie says

    I haven’t read through the comments, so please excuse me if someone’s already pointed this out. Paragraph 4 regarding inflation is incorrect. Assuming that you have a low-rate loan (lower than the current inflation rate), high inflation would be a reason TO finance the car, because paying up front would mean that you’re paying more in inflation-adjusted dollars than spreading out your payments over several years (where dollars are worth less in future years). It’s one of the arguments that some people make for keeping a mortgage (not that I agree with it).

  5. Allison V. says

    Well, I had a five year car loan once…that’s a long time, especially given the average life expectancy of a domestic car is something like 8 years…bleh.

    I currently drive a 14 year old car with 180K miles on it, paid $1000 cash for it two years ago, and my liability insurance is less than $30/mo. I’d keep driving it, but my kids have outgrown the car seats that currently fit. So I’m finally shopping for my minivan! (very excited) Financing is not an option in any way, shape, or form, so with my $4000 tax refund budget (the rest will be my first e-fund!), that sets me up for something 5-8 years old, with well over 100K miles. I’ve already seen some great specimens in my search. Liability is pretty similar to what I already pay, but I have yet to research pros & cons of liability vs. full coverage, since $4k is a big chunk of change for me. But I fully expect that whatever I get, I will get some decent longevity for my money. Heck, I could get years out of my $1000 car! Or it could fall over and die tomorrow. Who knows? But I know that the freedom that comes from being debt free is well worth any minor concern like potential car trouble. I can worry or I can live life. No biggie.

  6. Nicole says

    I noticed that no one mentioned the future maintenance cost into the new / used figures.

    We ALWAYS buy new! My husband is a mechanic and refuses to buy used. When you buy a used vehicle you are taking a gamble. You have no idea how the used car was maintained and in the end you might end up paying more for repair costs then you would have if you had properly maintained the vehicle from new.

    Also factor in how long you plan on keeping your vehicle into the new / used debate. If you have to buy a used vehicle every few years then are you really saving money?

    My husband currently drives a 1997 Ford F-150 with 190,000 miles. The truck is in mint condition because we maintain our investment. We are replacing it soon with a 2011 Ford F-150 because we need a larger cab for the kids to sit in (they are squished). We will be participating in Ford’s 0% financing program and are looking forward to having the new truck for another 14 years.

    I am not trying to argue with anyone but just stating that there is more to a vehicle then cash / finance (new / used) debate.
    In my opinion a vehicle is a very personal decision and everyone needs to do what is best for their family given their financial state.

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