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      08-04-2010, 09:44 PM   #1
cheesy9
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Question Financing vs. paying cash

I'm in the fortunate position where I could pay cash for a new M3, but I'm considering financing to help build up my credit, and interest rates are pretty low right now.

From a purely financial perspective (ignoring the benefits to my credit ratings) what are the pros and cons of financing a car vs. paying cash? If the interest rate is lower than the expected returns of investing the money then it makes sense to finance it right? 0.9% or 1.9% APRs are certainly lower than the usual expected returns from investing, no? Or can I get a better deal from the dealership if I offer to pay cash? How can they offer such low APRs?

Forgive my ignorance, this is my first new car purchase.
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      08-04-2010, 09:52 PM   #2
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I would never pay cash for a brand new car because of the depreciation hit you would take. If you plan to keep the car 5-7 years then it could make sense but with .9-1.9% interest rates I would put minimal down and invest the rest of the money. Maybe compromise, put $20k down and invest the remainder so you wont have 65-80k tied up in a depreciating car.

You are in a great situation regardless
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      08-04-2010, 09:55 PM   #3
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if you have the money to buy the car outright, I would venture to guess that you can just finance the car at .9% and at the least put the money in a money market account and earn more intereste then that on it, and pay the payments from it.
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      08-05-2010, 07:32 AM   #4
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does money market funds earn more than 1.9% APR now? It's close.

http://www.investopedia.com/articles...56240832&close

http://www.bankrate.com/funnel/savin..._MMA10KSavings


I paid cash for mine, but i bought a slightly used one, so I dont' eat the biggest part of the depreciation. Most economists anticipate the Fed to be on hold at least through Q2 of calendar year 2011, so these savings rates are fairly stable up to then, you can probably lock in a CD rate for 6 mos without kicking yourself if the rates go up.

http://www.bankrate.com/funnel/cd-in...al_cd_6moCD_V1

i say take a 3 year loan, invest money in 6 mo CD, then at maturity see what the investment condition is and repeat if neccessary. Of course if you can stomach the vols in equities, your returns could be even better, but equities has pretty much been flat calendar year to date.

Last edited by mdosu; 08-05-2010 at 08:46 AM.
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      08-05-2010, 08:11 AM   #5
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i put about 1/2 down on the car. I plan on keeping it for at least 4-5 years minimum.

With the low interest rates I don't see why you would want to drop all the money up front when it can be used better right now to gain interest or some other activity.

Question also is, do you want a car payment?
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      08-05-2010, 09:57 AM   #6
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Not trying to lecture or be the wiser...but you asked for input for a first purchase....so I ask why do you need to build your credit? If you are that young and thinking at all about future purchases (house, marriage, kids, school etc) then chunking down $65k cash on a car seems a bit risky IMO...maybe even buying the car in the first place is questionable. That is not for me to decide or judge...but if I'm in your shoes then I'd think more about your long term goals and why you need the credit....please factor that in your decision so we don't see you back in 6 mos with a "what's my car worth" post. It will also help you gauge future cash flow needs that may impact your decision to finance.

BTW, some of the same advice here is similar to taking an interest only loan on a house that supposedly will never depreciate and investing the rest. You never know what happens down the road and that little nest egg will probably get earmarked for your next big purchase. If you can pay cash then do so and you'll never worry about making a payment and they'll never repo it either.

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      08-05-2010, 03:02 PM   #7
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It's very unlikely that you'll get a better deal if you pay cash. Typically, the dealer gets a little kickback from the manufacturer's financing company, so there is an incentive to make you finance it versus paying in cash.

Also, most loans do not have an early payment penalty, so if the interest rate is as low as it is, you might as well finance it. Keep the cash for an investment, or just to have it readily available in case of any emergencies.

My intention isn't to preach, but below is my philosophy on car purchases (i.e. what I feel is right for me and may or may not be right for you).

- Don't finance any purchase for which you can't pay cash up front.
- Finance over no more than 36 months.
- Put enough down such that you are never upside down on the loan (on a car loan, this may not be as big of a deal, but I do it more for personal discipline than anything else).
- Try to time the loan payoff with the warranty period (i.e. if you will be putting 50K miles in 36 months, don't get a 48 mo loan). This ensure that you have more cash available every month when repairs are necessary.
- Factor in expendable items, such as tires, which will cost upwards of $1200 or more, per year (a conservative approach) into you monthly expense for the car, along with insurance, gas, and registration. If you really want a true cost of ownership, plug in the depreciation as well. This will give you a very good idea of how much you really are spending on your car every month.

After tabulating all of these numbers, if it still makes sense, then go for it. If not, make the necessary changes (i.e. add/delete options), and calculate it again until you are happy with the numbers.

So it sounds like you have the cash and don't need to finance, so use that to your advantage to get a better price on the car. Specify that you will be paying cash and indiciate that you are willing to finance if you get a more favorable price.

And above all, keep in mind that buying anything like the M3 is simply because it's something you want, and not something that you need.
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      08-05-2010, 03:28 PM   #8
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Quote:
Originally Posted by piloto View Post
It's very unlikely that you'll get a better deal if you pay cash. Typically, the dealer gets a little kickback from the manufacturer's financing company, so there is an incentive to make you finance it versus paying in cash.

Also, most loans do not have an early payment penalty, so if the interest rate is as low as it is, you might as well finance it. Keep the cash for an investment, or just to have it readily available in case of any emergencies.

My intention isn't to preach, but below is my philosophy on car purchases (i.e. what I feel is right for me and may or may not be right for you).

- Don't finance any purchase for which you can't pay cash up front.
- Finance over no more than 36 months.

- Put enough down such that you are never upside down on the loan (on a car loan, this may not be as big of a deal, but I do it more for personal discipline than anything else).
- Try to time the loan payoff with the warranty period (i.e. if you will be putting 50K miles in 36 months, don't get a 48 mo loan). This ensure that you have more cash available every month when repairs are necessary.
- Factor in expendable items, such as tires, which will cost upwards of $1200 or more, per year (a conservative approach) into you monthly expense for the car, along with insurance, gas, and registration. If you really want a true cost of ownership, plug in the depreciation as well. This will give you a very good idea of how much you really are spending on your car every month.

After tabulating all of these numbers, if it still makes sense, then go for it. If not, make the necessary changes (i.e. add/delete options), and calculate it again until you are happy with the numbers.

So it sounds like you have the cash and don't need to finance, so use that to your advantage to get a better price on the car. Specify that you will be paying cash and indiciate that you are willing to finance if you get a more favorable price.

And above all, keep in mind that buying anything like the M3 is simply because it's something you want, and not something that you need.
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      08-05-2010, 05:21 PM   #9
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^ I'm glad you find it amusing. I take it you're laughing at the fact that the majority of Americans don't do either.
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      08-05-2010, 06:08 PM   #10
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Buying a car is not a wise decision. The car loses a significant chunk of value the moment you drive it off the lot, and you're stuck with it for 5+ years, not to mention the depreciation it endures during the length of ownership.

If I had $70k just laying around like you appear to have, I'd lease the car for 3 years @ $1000 / month = $36k (with $36k left over to invest elsewhere). That $36k I have left over I would make into $55k + within those three years. Be smart with your money, don't waste money on a car.

Invest your money elsewhere...
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      08-05-2010, 06:27 PM   #11
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Quote:
Originally Posted by kaykay View Post
Buying a car is not a wise decision. The car loses a significant chunk of value the moment you drive it off the lot, and you're stuck with it for 5+ years, not to mention the depreciation it endures during the length of ownership.

If I had $70k just laying around like you appear to have, I'd lease the car for 3 years @ $1000 / month = $36k (with $36k left over to invest elsewhere). That $36k I have left over I would make into $55k + within those three years. Be smart with your money, don't waste money on a car.

Invest your money elsewhere...
I'm not disagreeing with you, but what if a person plans to drive over 15K a year, say 20K a year. I don't see how leasing would be right for that person. Also, what you're saying above is not entirely true, in that a financed purchase at a very low finance rate (e.g. <=1.9%) will allow you to keep your cash and invest it much like a lease would.
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      08-05-2010, 07:27 PM   #12
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Quote:
Originally Posted by kaykay View Post
Buying a car is not a wise decision. The car loses a significant chunk of value the moment you drive it off the lot, and you're stuck with it for 5+ years, not to mention the depreciation it endures during the length of ownership.

If I had $70k just laying around like you appear to have, I'd lease the car for 3 years @ $1000 / month = $36k (with $36k left over to invest elsewhere). That $36k I have left over I would make into $55k + within those three years. Be smart with your money, don't waste money on a car.

Invest your money elsewhere...
I'm not following this line of reasoning, especially if one intends to keep a car for 10 years (like most people).

Also, that'd be quite a trick to be able to guarantee a turn of $36K into $55K in 3 years (15% annual rate of return).
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      08-05-2010, 07:31 PM   #13
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Quote:
Originally Posted by piloto View Post
It's very unlikely that you'll get a better deal if you pay cash. Typically, the dealer gets a little kickback from the manufacturer's financing company, so there is an incentive to make you finance it versus paying in cash.

Also, most loans do not have an early payment penalty, so if the interest rate is as low as it is, you might as well finance it. Keep the cash for an investment, or just to have it readily available in case of any emergencies.

My intention isn't to preach, but below is my philosophy on car purchases (i.e. what I feel is right for me and may or may not be right for you).

- Don't finance any purchase for which you can't pay cash up front.
- Finance over no more than 36 months.
- Put enough down such that you are never upside down on the loan (on a car loan, this may not be as big of a deal, but I do it more for personal discipline than anything else).
- Try to time the loan payoff with the warranty period (i.e. if you will be putting 50K miles in 36 months, don't get a 48 mo loan). This ensure that you have more cash available every month when repairs are necessary.
- Factor in expendable items, such as tires, which will cost upwards of $1200 or more, per year (a conservative approach) into you monthly expense for the car, along with insurance, gas, and registration. If you really want a true cost of ownership, plug in the depreciation as well. This will give you a very good idea of how much you really are spending on your car every month.

After tabulating all of these numbers, if it still makes sense, then go for it. If not, make the necessary changes (i.e. add/delete options), and calculate it again until you are happy with the numbers.

So it sounds like you have the cash and don't need to finance, so use that to your advantage to get a better price on the car. Specify that you will be paying cash and indiciate that you are willing to finance if you get a more favorable price.

And above all, keep in mind that buying anything like the M3 is simply because it's something you want, and not something that you need.
REALLY good post guy. Like the lease vs. buy threads, it's a very nuanced decision one has to make, and universal declarations about "yes" or "no" are so hard to make because everybody has a different set of circumstances going into the procurement of the car.
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      08-05-2010, 07:38 PM   #14
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Quote:
Originally Posted by piloto View Post
I'm not disagreeing with you, but what if a person plans to drive over 15K a year, say 20K a year. I don't see how leasing would be right for that person. Also, what you're saying above is not entirely true, in that a financed purchase at a very low finance rate (e.g. <=1.9%) will allow you to keep your cash and invest it much like a lease would.
Your comments make sense, although a 15k / year lease is certainly do-able and won't drop the residual by much (3%).

Financing is for people that want to own a car for 6+ years. Personally, I'm done with my cars after 3 years. Different school of though - to each his own.

Quote:
Originally Posted by schoy View Post
I'm not following this line of reasoning, especially if one intends to keep a car for 10 years (like most people).

Also, that'd be quite a trick to be able to guarantee a turn of $36K into $55K in 3 years (15% annual rate of return).
I don't know what "most people" you know but "most people" where I live keep cars for 3-4 years. In fact, I don't know ONE person that has had a car for longer than 4 years (aside from my buddy who is on his 5th year of owning an SLR, but that's a true exotic and doesn't fall into this equation). This includes friends with regular BMWs, Mercs, Audi's and even the ridiculous friends with 599s, Scuderia's, Bentleys, Rolls', etc.

Who keeps a car for 10 years? You're going to be driving an E92 in 2020? The warranty on that car will expire in 4 years and your maintenance costs might skyrocket. Never forget maintenance - never.

15% annual rate or return is not that hard if you know what you're doing and make the right investments... That was a very conservative figure from me btw... You can also lose all of it just as easily, but a car forum is not a place for financial advice nor recommendations.

To each his own, if the OP wants to keep the car for 6+ years, finance with the 0.9%. I still wouldn't buy it outright.
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      08-05-2010, 07:40 PM   #15
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Quote:
Originally Posted by cheesy9 View Post
I'm in the fortunate position where I could pay cash for a new M3, but I'm considering financing to help build up my credit, and interest rates are pretty low right now.

From a purely financial perspective (ignoring the benefits to my credit ratings) what are the pros and cons of financing a car vs. paying cash? If the interest rate is lower than the expected returns of investing the money then it makes sense to finance it right? 0.9% or 1.9% APRs are certainly lower than the usual expected returns from investing, no? Or can I get a better deal from the dealership if I offer to pay cash? How can they offer such low APRs?

Forgive my ignorance, this is my first new car purchase.
cash always. never have an interest payment unless its deductable. whoever tells you different doesnt have the cash and shouldnt be in the car

Last edited by bobbyd1961; 08-05-2010 at 07:40 PM. Reason: spelling
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      08-05-2010, 07:41 PM   #16
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Anything could happen in life where that large amount of money would be better served in the bank rather then having a paid off car. With interest rates so low and great lease deals, whats the point of paying off the car? I dont get it.
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      08-05-2010, 07:54 PM   #17
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Quote:
Originally Posted by kaykay View Post
I don't know what "most people" you know but "most people" where I live keep cars for 3-4 years. In fact, I don't know ONE person that has had a car for longer than 4 years (aside from my buddy who is on his 5th year of owning an SLR, but that's a true exotic and doesn't fall into this equation). This includes friends with regular BMWs, Mercs, Audi's and even the ridiculous friends with 599s, Scuderia's, Bentleys, Rolls', etc.

Who keeps a car for 10 years? You're going to be driving an E92 in 2020? The warranty on that car will expire in 4 years and your maintenance costs might skyrocket. Never forget maintenance - never.
http://www.nytimes.com/2009/03/22/au...es/22USED.html

Now you know several million.

Quote:
Originally Posted by kaykay View Post
15% annual rate or return is not that hard if you know what you're doing and make the right investments... That was a very conservative figure from me btw... You can also lose all of it just as easily, but a car forum is not a place for financial advice nor recommendations.
Not saying it's not possible, but then one also cannot say that there's zero risk (to your credit, you did caveat). But hey, if you can do it, more power to you.

[BTW, if I gave you $X to invest, would you be willing to guaranty 7.5% return (i.e. splitting 15% in half) and keep whatever profit above 7.5%? I think a bunch of people here would be willing to make that kind of investment ]
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      08-05-2010, 07:55 PM   #18
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cash always. never have an interest payment unless its deductable. whoever tells you different doesnt have the cash and shouldnt be in the car
Thanks, we were waiting for the Lord to arrive and tell us what we should do. Might we PM to get the answers to life's other great questions? Please?

Last edited by BigHat; 08-05-2010 at 08:01 PM.
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      08-05-2010, 08:24 PM   #19
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^ I'm glad you find it amusing. I take it you're laughing at the fact that the majority of Americans don't do either.
I am laughing because most americans, financially, cannot to do either. To simply say "don't finance any purchase for which you can't pay cash up front and finance over no more than 36 months" is not realistic. If the public followed that advice, no one would drive cars. Must be good times in the OC.
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      08-06-2010, 04:01 PM   #20
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I am laughing because most americans, financially, cannot to do either. To simply say "don't finance any purchase for which you can't pay cash up front and finance over no more than 36 months" is not realistic. If the public followed that advice, no one would drive cars. Must be good times in the OC.
+1 especially in this economy.
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      08-06-2010, 04:02 PM   #21
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Regarding leasing vs buying, if you lease you can't make any significant modifications to the car, right?
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      08-06-2010, 04:04 PM   #22
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Regarding leasing vs buying, if you lease you can't make any significant modifications to the car, right?
You can, but you just need to return to its original condition upon turn-in.
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