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.
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.
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.
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).
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!
Ned says
Hi
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
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.
Margaret says
Suze Orman was saying have six months’ income in an emergency fund. She has upped that to eight months’ — noting that 2012-2013 are coming and while we don’t know WHAT is going to happen, she believes SOMETHING is going to happen to shake our financial world.
Personally, I would look for something a bit older and not ruin my Emergency Fund. If the vehicles you have are basically working for you, but just hard on gas, keep going on while you look.
I myself was thrilled to find a 2000 Saturn in excellent condition, albeit high mileage, for $2,000! It needs one repair, but runs like a dream!
Alex says
Perhaps you can reach a happy meduim. I would say never use all of your savings up, but if you have enoough “extra” to put a huge downpayment on the car-it may be a good deal. You will still spend a tremendous amount less in interest, have lower monthly payments, but can get the car earlier if you need it. This is the “meduim” solution to your question.
Jacqueline says
I would definitely try to pay cash and use the money for what would have been your payments towards savings to increase your emergency fund. No need to pay any interest if you can help it.
Kacy says
I think that paying anything and everything you can off will create financial security.
I worked in the car business for many, many years and was a national trainer for many different car brands. I can tell you that most of the money that is made in the dealeship (outside of the finanace dept.) is in used cars. Don’t get me wrong, there are great benefits to buying a used car and there is the depreciation not on your dime.
However, dealerships can jack up the price of used cars a lot more then they can with new…so make sure you do your research. Also, the advantage of buying new is that you will have a long warranty on the car and if various repairs are needed, you would at least not be paying out of pocket for however long the manufacturer’s warranty is.
Also, depending on the brand (we have a Subaru and live in CO) if we were to sell this car that we bought brand new, we would make more then we owe on the car because some cars really hold their value well.
And one last big tip from a industry insider! If you do go with partial financing, do NOT say how much you would pay monthly. Make sure they give you the total price of the car and then find out what the monthly payments are from there and also if you are trading in a car, do not them know about it until AFTER you have negotiated the price of the car you intend to buy…car dealerships are rewarded for being unscrupulous so keep that in mind and good luck!
Kacy says
Also, 🙂 if you do finance in the used car dept. you will beyond a shadow of a doubt get a much higher interest rate then with a new car. Bottom line if you buy used, negotiate a good deal and try and pay for it in cash. If you buy new and can get 0% or a low interest rate you can pay it off at a comfortable rate while maintaining a great warranty.
Carrie says
once upon a time i thought i would always pay cash for cars but so far i never have. my first car i bought at a special 0% interest rate which was the best thing i ever did for my credit – boosted me well in to the 800 scores. i bought another new car a week and a half ago. the interest rate i have on my loan now is 1.8% and i decided to finance because i’m confident i can make more than 1.8% in the next 5 years by investing that money instead of paying it up front for the car.
SillySimple says
First off, I believe in the fundamentals of living simply and within your means. To me that means keeping monthly expenses as low as possible, having an e-fund and preparing for retirement. I consider myself religious, but my religion does not prohibit debt. I am a huge proponent of disciplined money management, reducing expenses, increasing income and am ok with debt when the numbers make sense.
That said, everything I will say below is based on the assumption that Leah’s family absolutely needs to buy a reliable car to maintain or increase their income (get to work, make deliveries etc).
I faced a similar situation to Leah, and had to choose to take out a car loan or reduce my e-fund to a level I was uncomfortable with. I chose the car loan, and it was the right choice for my family. Why was it the right choice? Because lo and behold not too long after I bought the car my husband was offered his dream job in a new city. We needed some of that e-fund money so that we could both move to the new city and be together rather than continue to work in separate cities 9 hours apart. Sure maybe having that car loan means I will pay $500 ish in interest over the next few years, but it also means that I get to kiss my husband good night every single night– and to me that is priceless.
Coletta says
Silly Simple, I totally agree with you! Somethings are complete priceless and financing a little bit of money is well worth it in the end. I hope you and your husband are enjoying married life in your “NEW” city:)
Christina says
I would like to know your thoughts. We “financed” our new vehicle, but we had a no interest loan. This allowed us to both keep money in savings and pay only the negotiated cost of the vehicle. The only down side is the month to month looming payment.
Heather says
One other thing to factor in when making the cash vs. credit decision is the increase to your savings that will be necessary because of the car payment. For example, if your 6 month emergency fund was $12,000 ($2,000 a month), it will now have to increase so that you can incorporate the car payment into your monthly expenses. So, if your car payment is $300 a month, your savings now has to increase to $13,800 to truly cover 6 months of expenses in case something happens.
Autumn says
I have been less stressed on the Cash Only method but I have to say that when I was making car payments my credit score was higher. It’s been paid off for 4 years and although I continue my remaining credit cards on time and more than the minimums my score is stuck not going any higher. I do not want to go take out any loans or open up any new cards in hopes of trying to raise it so I’m just chugging along trying to eliminate all of the debt. I know they say if you have a good percentage of credit that’s considered “mixed” like a credit card, car loan, line of credit and student loan, home loan your fico score can get boosted quicker if you pay all on time but I just can’t see going into further debt to maybe raise a score. I have learned to save much more money with coupons and being a better shopper so I figure over time I have less and less to purchase therefore allowing the extra to keep snow balling on this debt.
Ashlee says
I didn’t read all the comments so I’m sorry if this has been said already. I remember when my parents bought their first brand new car. They had part of it saved but were looking to finance. As someone mentioned already, you can get better deals sometimes when financing if you are buying a brand new car. After financing they received a $4,000 cash back bonus. They made sure the particular financing did NOT have a early pay-off penalty. They then made a large upfront first payment and made double or triple payments the rest of the time. They looked at it and they did pay significantly less in interest than they would have paying the minimum once a month. It gave them a better sense of security knowing they only HAD to pay a certain amount if times got tough, but they still saved a lot on interest.
Elizabeth says
My husband and I have always gone debt free as much as possible, and I’m proud of that. However, when we spoke with a credit counselor we realized that, while our credit wasn’t bad, it wasn’t great ether because there just wasn’t that much of it (we only had one credit card that we paid off each month). We were advised to take out a loan the next time the opportunity arose, keep it for two years and then pay it off. The idea was that it takes two years of steady payments to positively impact your credit score. We decided to follow their advice when, a while back, we needed a new (to us) car. Even though we had the cash on hand, we opted to finance it. We put a LARGE amount down at signing and took out a fairly typical loan. We then made payments each months that exceed the minimum amount and paid it off completely at the two year mark. This meant we paid it off before it was scheduled to be paid off (there were no penalties for doing so). It was not what we had imagined doing, but it did help our credit which, in the long run, will help keep payments low on larger purchases such as a mortgage.
Sherri says
Definitely something to consider if you do not yet have a house and will need a mortgage for it. Having little or no credit history will come back to bite you then. Fact is, most people will need a mortgage when buying a house, and a good credit history will enable you to get the best deal.
Janet says
Jesse,
I am surprised you didn’t get in a little light hearted tweak about the garage door on your advice in this post.
Kathryn says
Enjoyed reading all the comments. I totally agree that everyone’s situation is different but there is still one common thread in all of this. There is more to this than just the financial calculations…the bottom line is that you do not want to owe anyone any money period. Pay cash so you don’t have that “payment” lingering over your head even if you can “afford” the monthly payment. I know folks who have a 0% loan on their new cars but they spent way over what they should have in the first place…that 0% interest offer just suckered them in.
It is common misconception in our society that “you will always have a car payment”. Why do you want a car payment? Or a credit card payment? Or any other payment?
I hear a lot of “I need to get a newer car for the safety of my children or I need a newer car so that it won’t break down”. If you need to get a different car to handle a growing family, then certainly shop around to find a great deal and yes, pay cash. As for a newer car breaking down less frequently than an older car, I have to disagree. Any car can break down, new or used. If you have a paid off older car and it breaks down, it can be fixed (outside of something really really major like the transmission going out and it would cost more to fix it than what the car is worth itself). It really stinks when you have a new car and it breaks down…sure it may be under warranty but it costs you time and effort to take it to the dealership then go pick it up, etc. You still have that car payment to make.
If you are contemplating a car purchase, I highly recommend brainstorming with folks you can trust with their sound advice/insights. I would be cautious on taking advice from folks who are deeply in debt.
Hope this helps!
Crystal @ Counselor Mom says
I would only pay cash if I could TRULY afford it. I just paid my SUV off early, so I know the feeling of paying with cash!
Misplaced Coupon says
My husband and I were in a similar situation. My husband needed a new car and he was able to find one in the $2,000-3000 range. We had the money available from our $6,000 emergency fund, but decided to finance instead. The primary reason why we financed was because my husband had zero credit history. He had had student loan debt in the past, but we had paid it off almost immediately after he finished school, which left him without a payment history on his loan.
Presuming one never is planning on taking out a loan again in their lives (per Crystal and Jesse), using emergency fund money pay work. If you are planning on getting a house loan in the future (such as my husband and I), a small car loan may be the way to go. I feel as though the nature of a loan changed when you do in fact have the money to pay it off at any time. I would recommend taking out the loan and preserving your emergency fund.
Ashlee says
I think I’m going to have to disagree on the inflation comment. Of course we have seen inflation in gas and food prices but everything else is at a steady 2% inflation rate and has been, which is the normal for a growing economy. I think when people start to see gas and food prices increase, they panic and think overall our economy is struggling and everything is going to increase. You’re not looking at the overall picture.
SillySimple says
Actually, historically speaking 2% annual inflation isn’t really that common. It has only been in the last 10 years or so that 2% inflation has been “normal”.
Also, inflation fears are fueled by a combination of rising gas and food prices AND consistent history over the last 100 years that shows post-recession inflation spikes as the economy ramps up and demand increases.
trisha says
We’ve gotten to the point that if we can’t pay cash, we either don’t do it or look for other alternatives if it truly is a “need” to see if there’s another way.
I never regretted paying cash for a car, even when it pretty much depleted our savings. I know it’s so hard to let the money go but as long as it didn’t bring my savings down below my comfort level and as long as we didn’t feel our income was in jeopardy I would pay cash (and if our income was in jeopardy I would really be rethinking whether it was a “need” or not).
Charlotte says
CASH!! If you know you are going to have to buy a car and can plan for it set a budget and stay in it!!! If you are not saving for a car emergency start now!!! My husband and I have had one car payment and paid it off in 2 years. That was a VERY stressful situation having that payment think about and to take our money. We were not out of our means it was just something else to pay. At the time we had two low student loans and rent. At this point we have paid cash for a new to us van and a new to us car. Both great cars with average mileage.
We were so thankful when my husband lost his job this past year that we did not have that payment over our heads. If you can pay cash do so…set your budget and stay in it!! Really when the unexpected happens do you really want a car payment to worry about. Just a thought!! (Yes, I know there are circumstances that may arise that cause you to have to take out a car payment to just get a car, but really think and see if there is another way!!!)
Eileen says
I just found your blog, I really like it. That said, I disagree with your reasoning. The people best situated in an inflationary scenario are the ones with lots of debt. In an inflationary environment, money is worth more now than it will be tomorrow.
Of course, debt terrifies me, so I’d probably buy a $2500 beater.
The old line about a car losing 30 percent (or whatever) of its value when you drive it off the lot gets repeated so often that everybody thinks it’s true. And it probably is true if you pay sticker price. But our last two cars were not only purchased under sticker, they were both purchased under the dealer invoice amount. If you looked at the kelly blue book values for our cars, we had actually made a decent financial investment if we’d wanted to sell them during our first two years of ownership.
The trick with buying a new car is to wait and get a leftover and don’t be picky about colors or options. We like to go with Hondas, because they have little or no dealer options, that way you’re comparing apples to apples across dealers. Just send out price asking emails to all the dealers within a couple of hours drive of your home. You’ll likely make out much better than if buy a slightly used vehicle.
Wendi S says
Thanks for this advice. I had never heard this before, and it’s interesting.
Haila says
Good advice. We bought an “old” new car (not used, but the previous year’s model) in an unpopular color. Got an excellent deal.
One point to add – some models of cars depreciate faster than others. More reliable ones (like Honda or Toyota) often hold their value longer – so you don’t get as good a deal when you buy a late model used car than you would, say, with a Ford or Chevy.
B says
I bought a car with a good downpayment and paid it off within a few years (6 years early). Some people I know pay very steep prices for a used car so they can pay cash. Yeah it’s cheaper than the new car but they are getting a car that has 85,000+ miles on it too. I know people that stay in tough money situations because they pay cash for their car. I think you should only do it if you have the money to do so and it won’t make it a question if you can go to the store or pay the electric bill because of the car. Also, at least in this area you are usually getting ripped off when you buy a used car in comparison to the price rate of a new/newer used car. Not to mention the interest on a new car purchase is MUCH lower than that of a used car. At least in this area, it was a much cheaper and wiser use of my money to buy new car and to make payments for a few years. I have it totally paid off and have less milage then most of my friends “new” used cars. Most of them will likely go through 2-3 cars in the time frame I will use this one. In the end I am the one reaping the huge savings.
B says
Also, I think one needs to consider how much potential maintenace cost buying used might bring vs. a newer car.
siobhan says
I would say, put 20-25% down on a brand new car, and you can easily get 20% off to start with anyways, then just do the car payments. Plus interest on a used car is upwards of 9% that’s insane! Plus look for cars with high trade in values that way when you trade the new car in you’ll get more for it than you would with a cheaper less valued car in the market. Hope this helps!
Oh and think about your lifestyle and what it will be in a few years! You don’t want to be stuck with a sports car and lead an suv type of life 🙂
Andrea Q says
Our local banks are advertising 3 percent on used car loans. It pays to shop around!
Brit @MomAnswersWithBrit.com says
I definitely say cash too! I would rather have a $1000 car than have to get a loan on a vehicle. I understand that sometimes it’s just not possible, but I would do anything to not have to have an extra payment. Good luck!
Lise says
People have posted a lot of great food for thought. My perspective is that if you are able to pay cash and still have 6 months of emergency savings, you should pay cash. I’m all for paying cash and absolutely think it’s the right decision in most circumstances. Depleting your emergency savings for an illiquid and highly depreciating asset just isn’t safe, though (to me). We also buy new cars. I’m pretty much convinced there are two types of car buyers – new car buyers and used car buyers – and never the two shall meet. 🙂 Both have logical arguments – just depends on which resonates most with your personal situation and also your preferences.
Bridgette @ Blessings Multiplied says
We have done it both ways in our family depending on the current situation. My preference is when we can pay cash up front and have no car payment. Although there was a time in our lives we had to take a low interest car loan from our Credit Union; once we had our emergency fund built up we paid off the car several years early. Personally, we have always purchased used vehicles but some people may not be able to or want to do that due to their job or other circumstances.
Every family situation is unique and you may have seasons in your life that finances allow you to pay cash and others were it is not an option and you have to finance a car. If you want a new car at least consider looking at the cost difference at buying one that is the same model but a couple years older. Seek the advice of the people around you including your insurance company, credit union, etc…. Do the calculations, wait if you don’t need the car right way, research thoroughly, pray for wisdom, and make the best decision that works for your family.
Amanda says
We paid cash for our last used vehicle and it was the best decision. It cleaned out our savings (except for our $2000 starter emergency fund) and we kept plugging away at our other vehicle payment paying an extra $200 – $300 per month. We have now paid off our truck and are putting $300 in savings a month towards our next vehicle. The only way we would finance is if my car died within the next year and there was no way we could come up with around $4000 – $5000 for a safe reliable used car (my current car was purchased when it was 10 years old and it runs great). Then we would only finance the difference between our savings and what we needed to make up that difference. It wouldn’t take more than 6 months to a year to pay off the financed portion.
Liz says
I’m hoping someone (if not Jesse) can help me with this, as it’s similar to this post. I purchased a Mazda5 minivan brand new in March of 2010. I got an AMAZING deal that I could not pass up. I was only going to finance 3K, and pay it off 1 or 2 months later. However, when I went in to sign the papers, I was told there was a slight error and I had no choice but to finance a minimum of 7K. So I went along with it, but figured I would make a 4K payment immediately, no big deal. Well I still have no made that payment…I have been told that would not be smart. Basically, my payment is $194.44 per month for 3 years with no interest. So if I keep making this monthly payment, my vehicle will be paid in full in March of 2013 without any interest ever being dished out, which is great. So, some of my friends say that it’s like I am being loaned money for free, so I should not pay off the vehicle sooner. But other friends say that because this is the last item on my debt snowball, that I should get rid of it ASAP. Any thoughts? I want to be a good steward of the money God blesses us with, but in this scenario, I’m just not sure what is right. Any thoughts would be greatly appreciated!
Liz says
I also forgot to mention that the reason friends were telling me to keep this payment in our debt snowball is because once it’s paid off, it will free up almost 200 more dollars per month. However, paying this off now would also put our savings on hold for a long time. That is the other end of it.
TNK says
If you would feel better about NOT having those payments every month pay it off. Get rid of the debt. You have already lost money on the deal (check out edmunds true cost of ownership calculator), so the idea that you are being loaned money for free is moot. Pay it off.
Put the $200.00 a month payments in a “car savings account”. Then when the time comes to replace it, you should be able to pay cash for your next car. You have already adjusted to making the $200 a month payments so it shouldn’t be a big deal to continue “paying” that money to yourself.
TNK says
“I was only going to finance 3K, and pay it off 1 or 2 months later.”
Stick with the orginal plan, if you were going to only finance the $3k then pay the $4,000 off, and pay the total loan off in 1-2 months.
Liz says
Thanks for your advice. Let me clarify, though. I was “only going to finance 3K and pay the rest of 1-2 months later”–this was BEFORE I realized it was no interest for 3 years. Do you still think I should pay it off asap? Also, would you be willing to explain what you said about being loaned free money is not all it’s cracked up to be? I wasn’t sure exactly what you meant. Thanks!
Liz says
No, that 4K is long gone. I used it to pay off my last big debt on my debt snowball. So the question is, is my debt snowball done, or should my car be on it? I pretty much depleted my large savings to pay off this HUGE loan, and I’m so glad it’s gone and I’m not paying interest on it anymore. However, that means my savings (money market) is at an all-time low. But, I am following Dave Ramsey where anything above 1K, you put towards your debt snowball. Which is why I’m wondering if I should crack away at the car payment just leaving 1K in my money market, or should I build up my money market and forget about paying the car off early since I am not and will never pay interest on it?
Katie says
I don’t know much about the Dave Ramsey stuff. He says that you should put anything over $1K toward debt? Is this before or after you set up an emergency fund? I just don’t think that I’d feel comfortable only having $1K in savings. I currently don’t have an emergency fund set up yet. My lowest insurance deductible (car) is $500, and the highest is $2500/$5K for family (health insurance). I’d wipe out that $1K and then have spent the money paying off my debt. 🙁
Stephanie says
Liz, I agree with Katie. I’d build up the savings up a little more before tackling the car loan, especially since it’s 0%.
Bonnie says
I’m a fan of Dave Ramsey, but that $1000 baby-step #1 recommendation was made prior to 2008. I wonder if he would amend step #1 in light of the “new economic reality” where it regularly takes 6 months+ to find a new job after being laid off. Build your EF to a level that you feel comfortable with and THEN pay off the car loan. From a purely financial standpoint, at 0%, there’s really no loss in keeping the loan.
Stephanie says
Do you have a sufficient emergency fund/savings account? If not, I would hold on to the money and not pay the loan early. You might need that money in the future for something unexpected.
If you are comfortable with the level of money you have in savings (beyond the $4k we’re talking about), I would apply it to the loan now. Savings interest rates are so low, the best you can earn is 1% on that $4k, which is just peanuts. And I agree with the other commenter that you should take the $200 you would have paid on the loan each month, and set it aside in your savings account to replenish it.
Liz says
Stephanie, I just replied to you, but it went above your message…
cathy says
I think it is more economical to buy used with cash if you can. If you HAVE to finance, sometimes new can be just as economical if not more so. That said, not having a car loan can mean cheaper insurance (liability only required in our state) so you should factor that in as well. Don’t forget property taxes on your new cars.
Becky says
Good point on the insurance. We made the mistake of not checking insurance rates before our last vehicle. In hindsight, we may have chosen another model because our rates were unexpectedly high.
Adrienne @ Whole New Mom says
I appreciate Jesse mentioning the inflation issue. I wrote a recent post on it and how purchasing big ticket items now can be a real money saver in the long run.
Here is a link to the post: http://wholenewmom.com/whole-new-budget/inflation-one-way-to-beat-it/
Milk Donor Mama says
We paid cash for a new to us vehicle in 2008. It was a lease turnback. We got a very good deal by negotiating and then walked away with no debt! We’re debt free, as we paid off our mortgage last year. We plan to do the same the next time we need a “new” car.
Holly says
I would also suggest that if you go the financing route, you don’t get a car loan over 5 years. My friend’s husband bought his car before he was married to her for “a good price.” He financed it over seven years. I sat down and helped her do the math to find out when they were going to be paying it off–turns out over 90% of their monthly payment was going towards interest and once they were done they were going to pay over twice the “sticker price” for the car.
Meg says
I wanted to chime in and say that if you ever consider financing, do your research and ALWAYS negotiate off the final price of the car, and NEVER negotiate the ‘monthly payment.’ Unfortunately, many people in the auto/financing business are dishonest. (I have worked in that industry and have seen it first hand) One of the things they do is ‘pack your payment.’ When you negotiate monthly payment, they add in extra money for warranties/profit/etc. Most people never know because they don’t multiple out their monthly payments to see how much they are actually paying for their car. We had this happen to us when we bought our first car years ago. We were shocked to come home and find that we were paying an extra $2500!!!! We went back in and they played dumb, but when my husband told them he knew exactly what they had done, they quickly offered to make it right and just happened to find an extra key/remote for the car too! We had thought we had negotiated such a good deal, and talked him waaaay down on the warranty, but the truth is they were getting us anyway. Beware!
Trixie says
I so agree, whenever my husband and I shop for vehicles that is the first thing out of the salesman’s mouth — how much of a payment do you want? How dumb do they think we are? Of course it’s always possible to get a low payment, but do we really want to pay on a car long after it’s died?
Becky says
I wouldn’t rule out financing completely, even if you have the cash in hand to pay for it outright. We bought a new vehicle last year and were offered an additional $1000 instant rebate just for obtaining their financing. We paid the loan off the next month. Of course, we had to pay a little interest, but we still saved over $900.
Trixie says
Personally, I LOVE not having a car payment! In 2009 I bought a very low milage new to me car and paid cash. We had the money in savings to use, but with my husband being self employed, we hestitated to reduce our savings by that amount. So I did quite a few creative things to earn almost all of the money. You can read all about it at the link below in case you are wanting some ideas, but sadly, one of the easiest ways I used to raise the money isn’t available now : ( (It was getting paid $200 -$300 to open up checking and savings accounts during the financial crisis)
I did end up taking a 1 year note to pay for a small portion of the purchse and paid it off in a few months. The reason I did that is the overall amount of interest for such a short time was very low and it was much easier for me to pay the note than it would’ve been to put the money back into our savings. Why is it always so easy to spend instead of replace savings? : )
Trixie says
oops, here’s the link:
http://farmhomelife.blogspot.com/2009/02/how-i-bought-new-car-debt-free-well.html
Erin says
Yes, 0% financing is great, but if you are buying a vehicle that costs 30% more than a used one, how does that save you money? Of course if you are set on buying a brand new car, that is one thing. But it seems to me if you can pay cash for a used one you are probably saving more money in the long run.
CW says
It largely depends on do you really need a car now. If you dont need the car then I would continue to save and delay purchasing a car. If you continue to save. Also it depends on the type of unit you are looking for. An example is the Kia Sol which is dirt cheap and cost about $13k new and they normally have rebates. I currently work in the auto industry and dealers are really paying top dollar for used cars because of the fear of delayed delivery from the factory of new cars. Some used cars are now more expensive than new cars. With current rebates and 0% interest rates you could get a really good deal.
I currently drive a 2001 Ford Explorer Sports Trac that I purchased brand new and it has 159,000 miles on it now but I will continue to drive it until the wheels fall off. I am bias because I believe in buying new cars and keeping them for 15+ years. I have good credit so I normally qualify for the zero percent.
Lauren says
COMPLETELY disagree with that advice. Why use your money when car companies offer 0% financing??? I always finance and never pay more than 0.9% interest. With free finacing, I buy a new car rather than a used one and get far more use (time driving the car) per dollar than with a used car. My insurance payments are lower for a new car (always talk to your insurance agent before you buy a car. They will run cost scenarios for you for the models you are considering), zero repair costs and lower gasoline costs (newer technology – better mileage). Buy new, pay less, keep your money.
Angela says
Yes said exactly what I wanted to say! I totally agree with your comment Lauren! 🙂
Heather says
Car insurance is quite low on a clunker! And our ’93 Civic gets 37-40 mpg.
Total cost of a new car (even at 0%) is still usually more than total cost of an older car. Some people just can’t afford that or don’t qualify for 0%.
But I’m not saying I’m opposed to buying new in every case. Depends on your situation, your wants, your needs, and some of it is just a gamble! Old and new cars can have expensive repairs.
flutemom says
in our case, it was the opposite. hubby’s vehicle was costing more to insure because it was getting older, the parts were more difficult to find. we saved money by trading in the clunker on a brand-new car last year with 0% financing. this is only the second time in our 30 years of marriage that we have bought a brand-new car, but we plan to keep it for at least 13 years like we did the first one we bought new.
everyone’s situation is a little different and there is no ‘one-size-fits-all’ answer for these times in life.
Lauren says
Heather, you raise an important point about the cost of “Car insurance (being) quite low on a clunker”. We should have a post on the cost of car insurance, too!
There are SO many variables in the cost of insurance. What I was referring to is a discount Allstate offers on the first three years of life of any new car. The rate is reduced significantly, Another variable is if you only buy minimal coverage. The largest chunk of my insurance is in liability where I carry very high amounts. I pay it to protect my other assets (house, etc) from siezure in the event of my liability for damage or medical bills to and for other parties.
A says
You might want to check out this article on 0% financing.
http://www.computegassavings.com/zeropercentsavingscalc.html
Also, we’ve paid cash for our new cars after doing the math on Dave Ramsey’s “drive free” plan.
I LOVE having no car payment and a paid-for vehicle. Don’t ever want to go back. In addition, our insurance and property taxes are far lower on our older vehicles.
Heather says
A,
Thanks for the article link. I’ve never bought a new car so I didn’t realize what the trick was to 0% financing.
Lauren says
Good link! I hate that he calls it a “scam” though. It’s really not. But ALWAYS bring a calculator when you go car shopping (like we all do at the grocery store – a car is just on a larger scale) and run the numbers.
Jennifer says
You pay property tax on a vehicle? Where is this?
Rhianna says
Colorado has ownership tax on vehicles as well as South Carolina. I am not sure about other states but as I’ve moved a few times I’ve found a few surprises as far as that stuff goes. I was used to just paying to register and insure the car and only paying any tax if I bought a new one!
Jennifer says
Oh, OK. I had never heard of that before! Lived in MI and AZ and neither state has it. I’ll put that under my “I learned something new today” file! 🙂
Kristine says
When I lived in Nebraska and Missouri, they charged property tax on vehicles, too.
Andrea Q says
We only purchase new and we’ve never owned a vehicle that had “zero repair costs”. There’s always something not under warranty. Better gas mileage isn’t a given, either, as it depends on the model.
Lauren says
🙂 LOL. When I went from a Cadillac to a Honda. My repair costs went from constant to zero. The dealer also gave me a coupon book good for enormous discounts on routine maintenece. Love that place. Anyone near Chicago? Check into Honda of Joliet. I did have to sweat them out and wait for the exact model I wnated with the exact finacing deal I wanted, but with patience, it was mine each time I purchased from them. I often use Jessica’s suggestion of buying the previous year’s model in August when the dealer was anxious to clear unsold “new car” stock ahead of the new models.
Autumn says
Good point but I think it’s safe to say that a good percentage of people probably have not always qualified for 0% interest or even low interest rates. Paying off my debt and on time I’ve been able to slowly dig my way out and have a great credit rating but there was a time I had a car payment with high interest. I needed a vehicle and well, I just didn’t know any better at the time and surely MSM blog was not yet around. Lol. My car payment has been paid off for 4 years now and I’m so relieved as I don’t know what I’d do right now if I still had that huge monthly expense. I know with the economy there has to be room for negotiation and cash speaks volumes I just don’t know about negotiating when one has a below average credit rating. I will follow along to see what Jesse has to say. 🙂
sue says
I think another thing to consider when deciding new vs. used is how much you drive and if your job depends on a reliable vehicle. I put 200 miles on my car yesterday and average btw 20,000 to 30,000 per year! Last two cars I had (Jetta and Nissan Maxima) started to incur major repairs at about 50,000 miles. It would not be affordable for me to buy used, esp if there were repairs in the near future. I would guess most people trade in a vehicle if there is something wrong with it or it was a lease.
Corrie says
Good question! We actually just paid off the last $6,000 on our car payment last week. We had the money sitting in our money market account as part of our emergency fund. However, we calculated that we were paying 4.9% interest on the loan and only making 1.24% interest on the money market account. It made me wonder why we didn’t do the math earlier!
I guess having the money in my account made me feel more secure in case my husband lost his job, but we should be able to build up what we took out fairly quickly, since we will now just divert the car payment plus some extra back into savings.
I will note, though, that even after pulling out the $6,000, we still had our 3-6 months of expenses. I’m not sure that I would feel so comfortable pulling it out with only $5-6 thousand left.
Sherri says
Judging by the first few responses, it seems we have yet another question where no one answer fits all situations, and there are many possible “right” answers. Everyone has different circumstances, and just because it works for Jesse and Crystal doesn’t mean it will work for you. Each person has to figure out their own path based on their own parameters. Seeking input is wise, but you have to evaluate it for your own situation.
Is $5-6K a sufficient emergency fund? My sister broke her ankle last week, and the medical bills (after insurance) will far exceed that- all for something as simple as missing the last step while going downstairs. Plus she can’t work, probably not for a month or more.
Do the math. Figure out what your different options will cost you- finance all, finance part, paying cash. If you got a loan, it doesn’t mean you can’t pay it off early. If you pay cash, you can’t get the money back without selling the car. You have to decide what level of risk you are comfortable with and decide from there.
Dee says
I agree. Each person’s situation is different.
Regarding emergency funds…
Having enough cash not for just suspended employment, but your home, auto and health insurance deductibles, is crucial. We are self-employed and have a high deductible health insurance plan. I broke my leg this January and had to have emergency surgery. We had to pay the first $10,000 of all the medical bills. I was walking my dogs and fell on the ice. Emergency funds are called emergencies because you don’t plan on them and you need them quickly.
Thankfully, we have insurance or our bills would have been much higher. The insurance company negotiated the $32,000 hospital bill down to $11,000. That doesn’t include the x-rays, anesthesiologist, surgeons, or ambulance. Thank God I work from home and own my own business. So, our income is not decreased.
Regarding the car… I agree it depends on how much cash you have and the available deal you can negotiate:
I have bought new and used cars over the years and usually pay cash. But when I got a new car (the previous year’s model) with 0% financing, I took it and kept my money earning interest. Last year, I bought a 2 yr-old Toyota with only 7K miles on it, in pristine condition, for $8,000 less than sticker. I paid cash. Someone freaked out about the Toyota recalls (my RAV4 was never recalled) and traded in their car.
Melinda says
I negotiated thousands off of our Honda Pilot. I emailed and called all the local dealerships and got an amazing deal. When I went to the actual dealership to buy it, the salesman told me there is no way I was getting the vehicle for that price, they even check the email account of the online salesman. I tell my story in my blog.
http://lindyandjeanne.blogspot.com/2010/10/everything-is-negotiable-well-almost.html
L says
Often times when you purchase a vehicle with cash you can take advantage of a rebate and/or at least have some room for negotiating. I agree with paying cash whenever possible to avoid paying any interest. Having no vehicle payment is the best feeling! Also buying a year old vehicle is a huge savings! We also had the dealer look for a vehicle at an auction. I also agree with putting money aside for your next vehicle.
Jenn says
I’d definitely have to see what my loan and payment options were before making the final decision. For example, in MrsK’s situation is was clearly the better choice to go with the loan.
And not to be stupid, I’m only a sophmore in college having taken your basic micro and macro economics but when there is inflation isn’t better for the borrower if it is a fixed interest rate loan? If there is high inflation in a few years your money will be worth less then than it is now. So if you lock in a good price and are paying the same payment over the life of the loan, as inflation occurs, your same payment actually reduces in relation to inflation (assuming your income also adjusts for inflation).
T says
Exactly what I was thinking! If money is worth less later, then it would make sense to delay payment. If inflation is higher than the interest rate on your loan, you are actually better off keeping the money in your pocket now, and making monthly payments.
grace says
i am on my 3rd car. the first and now my 3rd car i bought with cash and its a wonderful feeling. my 2nd car i had payments bc i overspent to buy a minivan 🙁 having payments is such a terrible feeling! i hate owing to anyone.
Amy says
I ended up financing my car – but had the cash to pay for it outright. Hubby and I have excellent credit and got a 0% rate. So we parked the cash for the car in bank deposit acct with decent interest. The payment pulled out of this account directly. It wasn’t part of our everyday accts so we were never tempted to touch it. But when the term was up, I had the equivalent of two car payments as profit. I used to only buy used low mileage cars but I think after this experience, new is worth considering. The dealer cut us a deal and we could have never gotten a 0% rate on a used vehicles. I think when buying – it is worth considering everything.
Andrea Q says
Awesome example of how sometimes financing a vehicle can work out better than paying cash.
ksenia says
I agree, buying new can, in some instances, be the best choice. My dad is awesome at buying new cars with 0% financing for pennies more than a two year older model.
Lynda says
I would never buy a brand new car – maybe one that is a year old and has low miles, but it never seems worth it to buy the new one as it depreciates as you drive it off the lot.
Having said that, I’d pay cash for it if I had enough in the bank. You end up paying full price plus a lot more in interest and by the time you sell it (used) you are never going to get close to getting all that interest money back.
Tracy says
Lynda,
Sorry to hear you would never purchase a brand new car. Our family does purchase new vehicles. In 2002, we purchased a brand new 2003 Kia Optima. Six months later we were rear-ended by a SUV. Our new car was totaled. We negotiated with the insurance company and made back our entire purchase price + $2K. The extra $2K was enough to put us over our savings limit for a down payment on our first home.
When purchasing a vehicle, you must research, negotiate, and spend your money wisely. I will always purchase new vehicles when the option presents itself.
Though that is a side issue, paying cash is always the best plan. My advise to Leah would be continue to save. When you have saved 6 months to a year in your emergency, calculate your overage, then purchase a vehicle with that overage. If you don’t need a car right now, then just keep saving. If you do need a car now, I would pay cash and keep on placing money in your emergency fund. Blessings!
ksenia says
As others have said, that is not always true. Where I live, used cars are not much cheaper than new and they are usually no longer under warranty. Three years ago we were shopping for a Honda Civic that had less than 50K miles and that had a clean title. After shopping for 6 months we found one that was around $9K. Last year, a small pin (defect) broke off that caused damage in the engine and cost us almost $3K to fix. We could have bought a new (and prettier) Honda Civic for under $15K + it would have had at least a 3 -5 year warranty.
Lynda says
FWIW, I would only buy a used car with a warranty. My daughter got a great 2005 Mazda 3 with a warranty just a few months ago.
ksenia says
Lynda,
We actually bought a limited warranty for it (for something like $1200) and the problem happened when we were within the warranty for time (within the 2 or 3 years) but we were 1 or 2 thousand miles over the mile limit. It was sad.
Jessica says
I just bought a car last weekend. I saved a significant amount of money (more than 1/4 of the sticker price) by buying a previous model year. I purchased a 2010 Ford Focus *new* for less than they were selling a used 2010 with 40k miles on it.
Stacy says
We’ve seen this too…especially at the end of the year when they’re trying to get rid of the 2010s because the 2011s are in stock.
MrsK says
Actually, if you a purchasing a brand new car, you can often get a better deal if you finance – often times, the dealer will get a kick back from the finance company that you can negotiate part of it back into your pocket. We recently purchased a new car – 60 months at .9%. We’re making 1.5% in our savings right now. It didn’t make sense to take money out of savings at that rate!
Camille says
I have a friend who saved up to buy a new car with cash. But then she qualified for 0% financing so she did that and is just making the payment from her car fund. Of course, you still take a hit buying new rather than slightly used, but some people prefer a new car.
Stephanie says
But you are also taking a depreciation hit by buying new versus used. So the principal on your loan would be $15,000 (just as an example) rather than $7,500 if the car was 3 years old (using the half-off discount referenced in Jesse’s post). The interest rate differential cannot make up for that.
MrsKruse says
Very true, but if you live where we do, there’s no such thing as a bargain on a used car. We paid $36k for my husband’s brand new car…a three year old used one with 50k miles was only $8k less. Let’s say we drive it for 150k miles…equals to about 24 cents a mile buying it new. If I buy the used one, I can only put 100k miles on it before reaching the point where we’d want to trade it in…equaling 28 cents a mile.
Ran into the same thing when I bought my Honda three years ago. Started looking at models with 2-3 years on them…just couldn’t get the dollars to work out for used. I paid $23k for it three years ago…had a dealer offer me $18k for it (with 50k miles on it) last week. I’m sure I could make $19k or so if I sold it private party.
Used cars are at a huge premium on the East Coast where we live, especially in this economy. Every time we car shop, we start looking at used cars and end up buying new. We’d consider used if either the economy plunges used car prices back down or we move to an area of the country where used car prices are more reasonable.
Crystal says
Have you ever factored in the savings if you bought out of state? We know many people who have saved thousands of dollars by doing that. It’s a little riskier and you have to know what you’re doing, but it seems like it can result in a great deal of savings — even when paying for the costs of flying out to pick up a car, etc.
Kristine says
We bought a used minivan from a different state on eBay for $3000 when we found out that I was pregnant with twins (and we already had one child). It was a risky thing to do, and I checked out the reviews of the seller carefully before bidding. I would have preferred to buy something more local, but at the time we lived in a sparsely populated area where we couldn’t find any good deals on used vehicles, so that wasn’t an option. Fortunately, that van has worked out well for us; we’ve had it for 10 years now and are finally considering replacing it next year. The kids will be sad when they have to say goodbye to it.
Stacy says
I know there’s a company that will go do an inspection of actually the car (inside, outside, engine) for you before you buy it. Sorry I can’t remember the name, but it seems like the price was fairly reasonable for the security that you’re not about to buy a lemon.
Sam says
On the surface, I would agree with Jesse. If you have a three month emergency fund, in general, it would be better to pay cash for a new vehicle…
BUT… These days there’s a difference between jobs. If you’re both teachers with tenure, or otherwise in very secure jobs, then BY ALL MEANS pay with cash! If, on the other hand, only one of you works, and for a small start-up, I’d go with financing, or buy something used. Truth is, most people are having six month+ job searches. A three month fund is only good insurance if you’re in a low-turnover industry, where being laid off would be out of the ordinary. If your family depends on something more speculative, I’d make sure you have six months emergency funds before spending any of your cash on a new car.
Lana says
I agree-my husband was recently inemployed for 9 months and in all that time he never even had so much as an interview. You do not realize what the job market is like until you do not have a job. We were fortunate in the fact that the company who let him go realized they needed his expertise and the people overseas who now had his job did not know what they were doing. If you work in IT your job could go be offshored at anytime. I am not being gloom and doom as I know god was in control of our sotuation but those are the hard and cold facts these days. Teacher jobs have not been safe in our state due to downsizing, we know some who have lost their jobs due to new larger class sizes.
Rachel says
I agree, pay cash! Having no car payments is definitely a wonderful blessing!
angela says
We just faced this decision as well. We had the cash in savings, as well as plenty to cover our emergency fund but the 3 year rate we were able to get through our credit union will only cost us a total of $300 for the entire length of the loan. We bought an older car and traded in so the loan was minimal and we also enjoyed some tax savings. In our case, $300 seemed a small price to pay in order to keep our emergency fund well-supplied. However, not everyone will be able to get such a low rate or such a small loan so then cash may be the way to go.
Emily says
I agree. If you can get a very low interest loan, it’s more conservative (and in my opinion) and better. You’re able to keep your emergency fund higher. If you have children, I think it’s most important to keep your emergency fund higher than normal.
I’m a huge believer of paying cash for things, BUT sometimes with a low interest rate, you end up spending a small amount more but end up with financial security.
Erin says
I would definately take Jesse’s advice and pay cash! You will love your vehicle so much more if your not making payments on it!! : )