Buying a car is always stressful partly because of the vast numbers of cars available on the market. Then, you’ve got to deal with the dealers and that tiny office where they start throwing numbers at you. At this point you have to dig down deep and negotiate on your final price. This can be exhausting and, depending on what car you’re looking for, can even stretch over several days. You’ve got to plan all this out before you actually get into the tiny office because then you’ve got to decide how you’re actually going to pay for your car.
So, the question we’re here to help you with is whether to buy your car with cash or to lease the car. Each has benefits and each has drawbacks, so it depends on your perspective.
In the early days of personal finance gurus, the standard line was very simple: never buy a car with a loan. The idea was basically that if you couldn’t pay for it with cash then you couldn’t afford it. This line is largely still around, and maybe it has some merits.
The question of paying cash or getting a loan really boils down to your personal ability to choose. If you have the cash on hand to buy a car and you really don’t want to worry about a loan hanging over your head, then cash is probably the choice for you.
However, it’s worth noting that interest rates are ludicrously low right now. While that may not always be the case, it is certainly a factor to consider right now.
Let’s say you want to buy a brand new $20,000 car, and you have that much in cash ready to pay for that car. Obviously there are taxes and other fees, but round numbers are easier. If you pay cash up front, you are paying your hard-earned money for a depreciating asset. Not only will depreciation eat into any value your car has from the moment your drive it off the dealer’s lot, but it will continue to depreciate with each passing year. Your $20,000 will be less than $10,000 within 3-5 years.
Alternatively, consider that interest rates are extremely low right now and inflation is higher than normal, as of the most recent reports. Some auto loan rates are as low as 1.99% though the average might be closer to the mid-2% range for high-credit-score buyers.
If you were able to secure an interest rate of 2.5% on an auto loan, invest that $20,000 in a low-risk robo-advisor fund like Betterment or Wealthfront, you might easily be able to return 2.5% on that money and cover the interest charges.
Also, car manufacturers and dealers obviously make money on interest payments you make, so they tend to get a better deal if you finance. If you go into the dealer willing to finance, they may be more willing to work with you on the price of the car or other costs. More on this in a bit.
The used car market is typically a bit different because the interest rates for used car loans are a bit higher. If you’re in the market for a used car, you may want to consider doing a bit of math to see if your interest rate is worth it. Also consider that the original buyer of a slightly-used car will have absorbed the majority of the depreciation, so it may be a bit cheaper on the sticker price. The best thing to do is compare the total cost of the loan at your quoted interest rate compared with what you might expect from investing that money.
Negotiating with a dealer can be difficult. However, as we mentioned earlier, dealers make money when you finance your car. Whether you have the cash available and intend to buy with cash or you are hoping to finance, it might be worth it to finance because the dealer might work with you more on the out-the-door price of the car.
If you have the cash ready, you may want to consider financing the car at first and see if the dealer will work with you on the price. If they do, then go ahead and set up the loan via your dealer’s financing, then pay off the loan after the first payment or two.
Be forewarned – some manufacturer’s in-house financing contracts have an early payoff fee/penalty, so make sure you read the fine print before going through with this method.
In today’s super-low interest environment, there is little reason not to consider financing a car. If you have the cash, then just invest it and withdraw what you need every month for the car payment while making your own interest. Whether you pay with a loan or pay in cash, it definitely takes some homework to make the best decision, so be ready for a little bit of math.