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Buying a car, is better to buy it outright or make payments?

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Im in the market for a newer car, I have been saving for years. Is it better to write the dealer a check for the full amount or give half down and finance the rest? The answer would be obvious if I had "extra" money. Write a check = no payments but little left over or give half, and finance the rest = cushion in the bank. I know it would depend on the interest rate, maybe i'm cheap but its hard to let go of a big chunk of change all at once.

Thanks in advance.

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There are often those 2.99% or whatever interest rates.  If you can latch onto one of those, it's better to keep your money.

 

The other mistake most people make when buying a car is not putting down at least 25% of the total cost.   If you do not put down that much, you really should get gap insurance because your insurance won't pay off the entire note if the car gets totaled or stolen.    Also, with 25% down, pretty much at any point until it's paid off, you can sell it for more than you owe on it and get clear of the payment.

 

Finally, if you finance for 24-36 months, you win, if it's longer than that and you don't have a killer interest rate, the bank wins.

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Since USAA is giving out 36 month car loans for 1.39%  (0.75% if you use their car buying service) that to me means financing is a no brainer.

 

That being said I have serious hatred of any kind of debt (having a mortgage is bad enough,) so if you can fiscally support paying off a vehicle in full then I wouldn't stop you.  To me OWNING something outright outweighs the generally minimal financial "gains" possible from playing the financing game, sometimes.

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Go with the Cushion. Working for a living in the 21st century is risky. I have been laid off 3 times in 7 years. I always have money in the bank and do not use it for frivolous things.

 

There is good debt, and there is bad debt. Cars and homes are good debt (within reason).

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If you can invest your money and get a better return than the interest rate you are better off financing it and having the rest in the market, otherwise it's kind of a wash

^^^^^^^^This is the winning answer, the others are almost all based on emotion.  Money is the ultimate fungible commodity, you use the cheapest money - period.

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There are some benefits to buying with cash. You have a better position to negotiate from for total cost of the vehicle. You also could take advantage of more manufacturer rebates and what not (you have to do your research). Lots of rebates and incentives don't apply to financed cars. Car payments suck - no worry about late fees or repo god forbid you lose your job, etc. No credit hassles or fees associated with less than stellar credit.

 

Yes, it seems great to get a low finance rate but financing adds cost to your deal. If it didn't the financier (and everyone in between you and said financier) wouldn't be making much money. As far as the comparison of the rate you are getting vs rate of return on other investments... two major issues: 1. What will future ROI be (almost impossible to answer)? and 2. will the funds be liquid in the future? Concering number 1: Any investment that is going to pay a much higher yield will be unstable and could possibly lose you money in the long term. More stable investment, bonds, etc and the ROI is going to suck so it wouldn't be worth it. 

 

I operate on the principal that if you walk into a car dealer and they push you in a certain direction... it will be the more expensive direction because it benefits their wallet. That being said...

 

My advice, pay cash for a cheaper car so you have "extra" cushion left over. My friends used to bust my balls like nothing else because I drove the same car for 14 years. It was a $15k car when I bought it. Obviously 10 years after purchase I was making way more money so they would harass me about upgrading. I used to tell them when I can afford a porsche I will buy a bmw. When I can afford a lamborghini I will buy a porsche. What I mean by that is, I prefer to live well under my means and just because I can buy something, doesn't mean I can truly afford it - at least not keeping in line with my priorities.

 

Also, if you're interested check out a book like "Social Influence" by Cialdini for information on some of the tricks sales people (good ones) use on customers.

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It is always better to finance it these days, as much as you can stand.  Not only are you establishing a credit score, showing you can be trusted to meet your debits, you will be paying back the loan with cheaper dollars due to inflation.  While still having the your money for a rainy day fund.  Keep the loan for more than 2 years, and then if you wish pay it off.  By keeping it two years you have established or added to a credit history.

 

Biggest mistake people make today is not establishing a credit score.  Nothing moves without it.  At some point, your creditors will want to see this record.  They don't care if you paid cash all along the way, they want references to see if you can be trusted.  Even employers now will do credit checks for employment.  No borrowing history or history of borrowing and owning too much is a red flag, even if you are the best candidate for the job.  Score shows you can be trusted.

 

I would finance as much as I could, at the lowest rate possible, and just get used to making monthly payments.  Remember, you can end the load any time you want if you have the cash to back it up.  Make early payments if you want, but these do not help credit scoring.  Believe it or not, a good time to buy is in the winter, people are not thinking about buying cars then, they are thinking about how they are going to cover that holiday nut.  Wait till spring with the good weather and so are a dozen other people, making deals tougher.  Either way, dealers need to sell cars to make money.  If they sell their quota the day you show up, your not getting a good deal.  I would do my homework, and go on Monday of Presidents Weekend.

 

Last new car I bought I did all on paper.  Walked in looking, left with a new car, zero percent financing, not a dime out of pocket.  Cars, taxes, license, fees all financed.  I put high mileage on my cars, so residual for trade-in is not an option.  I run them till they die.  This one is still going eight years later. 

 

I buy new because when you buy used you pay less but have to set aside some money for problems which may or may not happen.  If they do happen it leaves a bitter taste, and you end up spending the money you thought you saved.  For that I buy new, take care of them and keep running them.  Cars today are lasting longer with less maintenance. 

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Building a credit history is a separate issue.  If you have to do that then do that, but there is a cost to it.  The issue of paying back with cheaper dollars is not an issue for two reasons.  First, inflation is very low these days, second when the choice is pay with credit or pay with cash well the cash you have now will also be worth less later - it loses the same value under the mattress.  For most people these days it is really a moot point as interest rates on both sides of the equation are very low.  Those of us that have been around the block a few more times have good memories of when interest rates were 15% to 20%, then these things really came into play.

 

I recall the first time I went to Brazil in the 1980's when they had hyper inflation and prices were higher in the afternoon than in the morning. That is when this issue really becomes important.

 

As for the best way to save money, buy a good two or three year old used car and drive it until it won't go anymore - that is the cheapest lifecycle way to get from point "A" to point "B".  The other thing is don't fall in love with a specific car (well you can but don't let it show).  Be prepared to walk out of the show room.  I have done this a few times and you would be surprised at how many phone calls you get begging you to come back and the price seems to drop with each phone call.

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I also agree you should finance, like it has been said before you need to establish good credit and the best way is to have loans. However you really need to do your homework and find the best rates, best pricing for the car you are interested in. Also sometimes it is much better to get a great deal on a 2yr old car coming in off a lease. Quite often you can get one with low milage and a cetified preowned warrenty. 

My last 2 cars I bought certified got 2.4%financing for 5yrs 100,000 mile extended drivetrain warrenty and other items. My acura I got out the door for $15,000 off the original price with only 18,000 miles on it. My wife is still driving it 10yrs later with 180,000 miles on it and I even had the trans replaced under the extended warrent which would not have covered it if I had bought new.  

My second car a nissan maxima I did not do quite as well I jumped a little quick from selling my truck the day before, but I still got a decent price about $12,000 less than new it was 2 yrs old it had 22,000 miles on it. I do not drive a whole lot but 3 yrs later its only has 58,000 miles and is worth $5,000 more than I owe on it so I can bail out of it at any point if I need to for any reason.

I could have bought either of these cars new but the finance rates were not much better and they both actually had worse factory new warrenties then their certified ones.

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When I bought my mustang in July, I got 1.5% from pnc. I had 1.6 from boa walking in the door. They said they would match, but told them if they wanted to make $$ on the finance end, they'd have to beat it. Hence the 1.5. This was a 60 month loan btw.

 

My credit score is pretty high.

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One other thing you should never rule out is finding a great older used vehicle. Sometimes these can be a real steal if you have any mechanical abilitys.

I have a 3rd "weekend" truck a 1995 GMC suburban I picked up 4yrs ago for $2500. It only had 125,000 miles on it, it was rust free but needed a paintjob due to having that white paint peel GM had issues with back in the 90's, needed the AC fixed and the 4wheel drive looked at... I fixed all those things 4yrs ago and drive this truck every weekend to the stores, Lowes, Vacation, etc... I have put 30,000 miles on it with relativly few issues, it is only $450 a yr to insure gets between 14-16 mpg so not counting gas it has only cost me under $1500 an year to own and if I were to sell it tomorrow I could get about half my money back making it around a $1000 a yr cost of ownership... Which I love to point out to some friend who have prius's and are paying thousands per yr just in their loans for a vehicle that has no resale value.

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Right now leases are so low that is a very good way to go. Just do not run over the milage. every three years you have a new car with full warranty..

And payments that never end.

 

If your budget and your mindset allows that, more power to you!

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My son just bought a used Audi S4 ...a Certified pre-owned, at over $20K under sticker.  Got the gap insurance.  He's establishing a credit history (just 24, first car loan), and was able to get 3.28% apr on a 60 month note.  Not the best apr, but he had virtually NO credit history (except for two small cc's).  I think he did well, since his car payment is low enough to still save for the house and engagement ring.  He's covered until 140K miles with the extended warranty, so not too worried about HUGE repair bill.

 

Every situation is different, depending upon where you are in your life-cycle.  As Jon said, if they want to give you "free money", take it!

 

Dave

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Last new car I bought I did all on paper.  Walked in looking, left with a new car, zero percent financing, not a dime out of pocket.  Cars, taxes, license, fees all financed.  I put high mileage on my cars, so residual for trade-in is not an option.  I run them till they die.  This one is still going eight years later. 

 

 

And if you total the thing 10 minutes later, you're on the hook for the gap.   There's the immediate depreciation of driving it off the lot, plus the taxes, fees, and the kitchen sink.  If you've got the 5-10k in your bank account to cover that, more power to ya.

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If you can find it, some car manufacturers offer 0% financing on left over, last year models. I know VW does this every year. That is the same as paying cash, however, you might not get dealer incentive rebates. I bought a 2008 passat in sept 2008 with 0% for 5 years.

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And if you total the thing 10 minutes later, you're on the hook for the gap.   There's the immediate depreciation of driving it off the lot, plus the taxes, fees, and the kitchen sink.  If you've got the 5-10k in your bank account to cover that, more power to ya.

And, if I paid cash for it, there would still be a gap, taxes, etc., new or used. Point?

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Buy a two to four year old car in good condition for which you can afford to pay cash. It's great not having to be a slave to monthly payments.

 

This...buy a gently used car that somebody else paid the deprecation for.  When buying a new car you immediately lose like 10% the moment you drive it off the lot.  I say buy a 3-5 year old car with low milage.  If buying used and you are going to finance part of it, shop around at banks for a loan with a favorable rate and line up financing before heading to a dealership.

 

If you want to save even more, purchase from a private seller (non-dealer).  Just make sure owner is okay with taking car to mechanic (of your choice) to have checked out.  My 2nd to last car I did this and saved tons.  Drove the thing until it was almost unsafe and then got rid of it.  I think dealer gave me $1k in trade in...thing was beat to hell, I had like 5% left on rear breaks & no front breaks, had a dent in rear bumper that I never had fixed (insurance company gave me $3,500 to fix it & never did).  I think I paid $5k for that car about 12 years ago.  Drove it for 5 years and hardly put a cent into it. 

 

Nice used cars rule.

 

There are plenty of deal out there.  If you can hold out a little longer I think November & December are suppossed to be some of the best months to go car shopping because nobody else really is and dealers want to move stuff.

 

What are you thinking about getting?  Good luck!

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And, if I paid cash for it, there would still be a gap, taxes, etc., new or used. Point?

 

The point is, if you have to finance the entire package up front, you don't have the cash to cover the gap.    Suggesting that people finance everything, without a dime out of pocket doesn't work for MOST people.   If you can pay cash and get a good finance rate, that's one thing.  That however doesn't apply to the majority of buyers.   It's stuff like this why poor people stay poor and rich people stay rich.    It's asinine to 100% finance a vehicle unless you can cover the gap with cash and get a really attractive finance rate.

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At the risk of sounding liberal, the answer depends on what the meaning of the word 'better' is.

 

To me it means lowest cost of ownership per month. And I just went through this whole exercise. Consider these real numbers from my 163 month old 158,000 mile car history.

 

$32,231         New 2000 model year car total purchase cost

$18,700         Maintenance and repair (only)

$3,000           Cash back at sale

 

All that equals:

 

$294 per month (for 13+years) or 30.3 cents per mile.

 

And that's to have a progressively older car every year.

 

Those numbers drove me to take a hard look at leasing. Plug your own numbers in for comparison. Of course a lot depends on what kind of car you want to drive, and what you're willing to pay for.

 

If you want to compare owning to leasing, you must obtain the total cost of the lease, and then divide by the term months to get a legitimate comparison. Most dealers do not show you the total cost until you're actually signing, unless you demand it. The 'monthly payment' is just a detail, and usually designed to make you think you're getting a bargain.

 

Real example: a Toyota Camry with a $303 monthly payment actually cost $415/month to lease when total cost is divided by 36 months.

 

And one other thing about a leased car. If it's in an accident (especially a bad one) and repaired under insurance, at the end of the lease you turn it in and walk away. The fact that the residual value of the car has plummeted with the accident on record is the leasing company's problem, not yours.

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If you can invest your money and get a better return than the interest rate you are better off financing it and having the rest in the market, otherwise it's kind of a wash

 

 

That's one very valid way of looking at it. But do you have 6 to 12 months worth of expenses in cash? Excluding retirement and non-liquid assets. I don't. Until I do, I'll take the bank's free money if it is near the inflation rate. My car is not a cash reserve. I could sell it if I needed to, but then I would need another car.

 

I have to buy a car in May. With my luck, interest rates will be up by then. But I did refi my house at the bottom :)

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The point is, if you have to finance the entire package up front, you don't have the cash to cover the gap.

Whether I have the cash or not has no bearing if I finance the entire package or not.  They are separate issues. I like choices.  I would think that in almost all cases one would have some cash or why are they shopping for a car?  No lender will give you 100%+ financing unless your credit rating shows it.  If I add cash to the deal to eliminate the gap then, in a loss, this is money I loose anyway.  Then gap insurance is always available for those that want that comfort.

 

Suggesting that people finance everything, without a dime out of pocket doesn't work for MOST people.

Not saying it does or doesn't.  If available, it is one consideration.  In the world of business you always use other people's money first. Then yours.

 

If you can pay cash and get a good finance rate, that's one thing.  That however doesn't apply to the majority of buyers.

I will agree there because most people have poorly built credit ratings.  They allowed themselves to borrow to much for the wrong reasons. Of course rates change with the risk involved.  That's the name of the game, same as investing.

 

It's stuff like this why poor people stay poor and rich people stay rich.

Rich people are rich because they now how to make money.  Poor people are poor because they choose not to.  There is always money to be made for people who want to.  How much effort do you want to put in to make it?  The country is full of opportunities for poor people who want to go from rags to riches.  

 

It's asinine to 100% finance a vehicle unless you can cover the gap with cash and get a really attractive finance rate.

OK, I did. Zero Percent Financing for five years for everything.  Money I would have put down on the deal stayed in MY pocket, not tied up in a car.  Putting money down would not have changed the deal.  The point is finance as much as they will allow you, at an attractive rate.  Putting money down to lower the gap is money spent today, done gone. In a loss, its lost same as the finance company's money. So it will go towards the balance today or tomorrow, but its gonna go. So, until that day I have choices.  

 

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It's stuff like this why poor people stay poor and rich people stay rich.

Rich people are rich because they now how to make money - and they know how to spend it wisely.  Poor people are poor because they choose not to - that is an oversimplification at best.  There is always money to be made for people who want to.  How much effort do you want to put in to make it?  The country is full of opportunities for poor people who want to go from rags to riches.  

 

It's asinine to 100% finance a vehicle unless you can cover the gap with cash and get a really attractive finance rate.

OK, I did. Zero Percent Financing for five years for everything.  Money I would have put down on the deal stayed in MY pocket, not tied up in a car.  Putting money down would not have changed the deal.  The point is finance as much as they will allow you, at an attractive rate.  Putting money down to lower the gap is money spent today, done gone. In a loss, its lost same as the finance company's money. So it will go towards the balance today or tomorrow, but its gonna go. So, until that day I have choices.  Is Zero % financing all it's cracked up to be? People don't lend money for nothing and the finance and sales arms of auto companies are usually not the same - even if they share a parent company. They pretty much operate as separate entities so the financiers are not going to "take a hit" just so a sales guy can move a car. My guess is that you may not be paying for it monthly but the loss of interest on the financier's part was built into the cost somewhere.

 

 

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