You need a car. What’s best? Should you finance or pay cash for a new car? Well, me being a fugal guy and
determined not to spend more than I have to, if we were chatting face to face, and I saw that you were determined
to get a brand new car, I’d blurt out, “Pay cash!” You’d probably be shocked, because that would be a huge outlay of money at one time. Most people think making regular—so called “affordable”—payments is being frugal.
I know the arguments for financing a new car—even if you have the cash to pay for it. I’ll cover a couple of the main ones:
–The advertisement 0 Down 0 Interest for 60 months
–Take your money and invest to get interest/dividends paying at a greater rate than the interest you’re being charged on the car loan.
As you read about these financing strategies, I want you to keep this thought in mind: “What happens if I lose my job, get injured, or ill? What if I can’t work?
The 0 down 0 interest for 60 months promotion
I see this notice again and again when I look at newspaper ads for new cars. It’s on TV and the radio. 0 Down 0 Interest for 60 months. I’ll admit it’s a real attention getter, and since it’s interest free, it looks like you don’t have to pay to use somebody else’s money. (That’s what a loan is—the use of somebody else’s money.) The idea of getting value at no cost almost always pushes my “I want button”. But, there’s always a catch. I investigated this scheme a long time ago. Here’s how this marketing trick works:
Essentially, the dealership adds the equivalent of the interest you would pay over the 60 month life of the loan to the price of the vehicle. Sometimes that amount is just added to the sticker price. Sometimes, non-standard features and luxury packages are added to the car and up-priced. An example of up-pricing would be an undercoating job that would normally cost $150.00 to have done elsewhere. You, however, are charged $300.00. A common practice is to combine up-pricing of the vehicle and add-on packages, along with charging for services or products that are supposedly “standard” to the vehicle.
To get a new car for the 0 Down 0 Interest for 60 months deal, you go to the dealership. You find a new car you like, and get introduced the loan officer (lucky you). IF you meet certain criteria, you are granted an interest free loan for 60 months. So, for 5 years you will make monthly—inflated—payments (paying 0 Interest, of course!) on your new—over-priced—vehicle.
Now, suppose you go in with cash. Do you think they would knock off the amount of interest they added to the price of the car? The answer: Not on your life. (Oh, they might give you a “bonus package” of some sort, but its value won’t come close to the amount the price of the vehicle has been increased.) That said, if you are determined to have a new car it’s best to pay cash for it: Stress from the obligation of payments does not need to become a factor in your life.
If it looks to good to be true…
Finance the car/Invest your cash
I hear another financing proposal all too often: Finance the car and invest your cash for a return greater than the interest rate you’re paying on the loan. It sounds good, but there are some pitfalls. First of all, I’d like to ask you a personal question: Are you an investment guru? Some people are, but most of us—no. So, if you follow this plan you risk the loss of your invested capital. Also, as with any gambling game, there are rules to follow. Consequences if you don’t—fees and penalties, especially for taking money early. Another consideration is the time it takes to see success—if you see success. If your alternative was to have used the funds you invested to pay cash for a new car, where is the money to make your loan payments going to come from? (Note: Even if you are immediately successful, most investment plans are not very effective if you are constantly siphoning off the profit—and there are those penalties to think about.) Once again, if you have to have a new car, it’s best to pay cash for it.
So, here I am, making a really big deal about paying cash for a new car, but I’ve titled this post “Don’t pay cash for a new car.”
What’s up is that I’m into frugal living—planning ahead, saving, being prepared, figuring out what’s better than “best”. Given the financial environment we live in, what follows is 1 good reason to pay cash for a new car and 1 great alternative.
Not able to work
What if you lose your job, or cannot work for some reason? You financed your new car for 60 months. (And, by the way, your car won’t be very new at the end of 5 years.) For 48 months you have made every payment on time. Then it happens: You lose your job or for some reason you can’t work. You’re really screwed. The 48 monthly payments you’ve made probably took most of your disposable income and now there’s little or no money coming in. You can’t finish paying for your car. Your car is going to be repossessed, and it’s a fact, 100% of all repossessed cars have a balance due. You are facing life in debt, payment delinquent, without money, and without a car: This will be your burden and your handicap—even when you can return to work. It happens all the time.
If you had paid cash for your new car, you would (at least) own the car. You could sell it if you needed to, or it could make it easier to find another job. (And, please don’t tell me about loan insurance: it’s just another way to get your money.)
That’s all pretty bleak, but there is an alternative…
Don’t buy a new car. Don’t finance or pay cash for a new car. >>>>>>>>>>>>>>>>>>>>>>>>>> Cars always age, deteriorate, depreciate. Plan ahead. The alternative: pay yourself a monthly car-payment. Sometime in the future you will have enough money to pay cash for a car (debt free), and not strap your lifestyle.
I don’t understand why people feel they need to buy a new car when its time to replace old faithful. What we need is reliable transportation. Qualities like sweet, cute, pretty, sexy, and new are optional, and you can be sure you’ll pay for them. Used cars have proven themselves—for good or bad. Do some research. As new cars become used a lot of information is reported on handling, performance, durability, safety, fuel efficiency, etc. Find a make and model that will meet your needs: Those needs should include good fuel mileage and something that’s economical to work on. (Those are qualities that will save you money.) Good used cars are not hard to find. They’re the trade-ins people bring when they just have to have a new car.
Pay cash for a reliable used car. Avoid interest—obvious or hidden. Why would you want to pay to pay? Plan ahead. Dedicate funds. And here (ahead of any immediate need for those funds) is where you could do some investing: if you can afford some risk: if you have a backup plan.
I’ve given you 3 reasons you should pay cash for a new car and one alternative. The 0 Down 0 Interest for 60 months is a sham. The finance-your-car-and-invest-your-cash can have some very dire effects, and loss of income means you’ll probably lose your car. So, yes. It’s better to pay cash for a new car than to make payments, but it’s better to go with the alternative: Don’t pay cash for a new car. Pay cash for a new-to-you, reliable, used car.