Should You Finance A Car Or Pay Cash

"Margin Of Error" (marginoferror)
10/09/2015 at 20:47 • Filed to: LETTERS TO DOUG

Hello everyone, and welcome to Letters to Marvin , your weekly Oppo column wherein someone submits a letter to Douglas DeMuro, and then Marvin responds with helpful, reasonable advice that makes the world a better place.

So the answer is quite simple ... All scenarios are based on a $25,000 car purchase

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Scenario 1 :

Financing for the car is at 2%, but you can invest your money at 5%

FINANCE THE DAMN CAR

Scenario 2 :

Financing for the car is at 5%, but you can invest your money at 2%

PAY CASH

Scenario 3 :

Financing for the car is at 2,5%, but you can invest you your money at 2.5%

GO HALF AND HALF, YOUR FINANCING WILL STAY AS IS, YOUR INVESTMENT CAN FLUCTUATE IN BOTH DIRECTIONS, WORTH THE RISKS

SCENARIO 4 :

Financing for the car is at 2,5%, but you can invest you your money at 2.5%, but you also have $20,000 in credit card debts at 18%

PAY YOUR DAMN CREDIT CARD AND BUY A USED P71, CASH

Moral of the story : You need to take you whole financial situation in consideration and make the wise, sometimes even leasing a car at a low interest rate and buying back later can be a wise move if it allow you to pay high interests debts faster. Sit down and do your homeworks, and calculate the total cost of ownership. Going with preconceived ideas could cost you dearly.

Marvin Oliver Eubanks is a freelance writer, essayist, automobile historian and civil aviation Guru. Follow him on Twitter !!!error: Indecipherable SUB-paragraph formatting!!!

DISCUSSION (70)

 > Margin Of Error
10/09/2015 at 20:56

Everyone on crownvic.net be like scenario 4 bruh.

Margin Of Error >
10/09/2015 at 20:59

They all have loaded CC ?

 > Margin Of Error
10/09/2015 at 21:00

Probably though I wouldn’t know, I drive an LX.

Margin Of Error >
10/09/2015 at 21:03

Excellent choice

TractorPillow > Margin Of Error
10/09/2015 at 21:05

I agree. And keep em coming!

Margin Of Error > TractorPillow
10/09/2015 at 21:06

Will do !

thanks !

Chariotoflove > Margin Of Error
10/09/2015 at 22:21

Good advice, Mr. Eubanks! Don’t carry CC debt. Pay that off before you buy anything else big, cash or otherwise.

Also, was wondering if your screen name should be changed to “Marvin of Error” to advertise your new column, but then realized that might be the wrong kind of advertisement for the purpose.

krhodes1 > Margin Of Error
10/09/2015 at 22:24

Nicely done, I agree completely!

You forgot one scenario - friend of mine recently bought a KIA Sorrento (yeah, not my choice either but he likes gadgets). In exchange for an extra $1000 rebate, he financed it with KIA Financial at 5%. BUT, he only had to keep the note with them for 90 days to keep the rebate. So on the 91st day he refinanced it with his credit union for .9%. Or he could have just paid it off, but why would you with a .9% loan? And in general, dealerships get a kickback on the financing, so they are often more willing to give a bigger discount with that extra coming on the back end.

Just always put enough down to never have to worry about being underwater. I shoot for 20-25% combined discount off MSRP and down payment on new cars.

I'm Abe Froman > Margin Of Error
10/09/2015 at 22:27

I prefer your .gif to Doug’s. Sorry, Doug.

I'm Abe Froman > Margin Of Error
10/09/2015 at 22:29

Do you know we are all wondering why you didn’t give the hyperbolic example of a 0% loan and average 7%+ ROI of available funds?

Bultaco's JMOD TownCar drives his pa to drinkin > Margin Of Error
10/09/2015 at 22:29

I’m Sparticus.

desertdog5051 > Margin Of Error
10/09/2015 at 22:43

If you have $20K in credit card debt, at those rates, you should not even be thinking about a new car. Pay your CC debt down. Fix your old car and get out of debt.

Boopadeedoopadee > I'm Abe Froman
10/09/2015 at 22:44

My car loan really is 0%!

Matt Brown > Margin Of Error
10/09/2015 at 22:50

Inflation

valsidalv, reminding you that infiniti is an option > Margin Of Error
10/09/2015 at 22:59

Also, if you, like, you know, if you don’t just happen to have 20, 30, or 80 grand in cash just lying around for your maid to dust off with a Swiffer which you plan on putting towards a new car... you might just want to finance in that situation.

Just make sure you have enough monthly income to make those payments and have a bit left over for food (you can live in your car so you don’t need rent money foo’).

Cronus > Margin Of Error
10/09/2015 at 23:02

Kinja'd!!!

Dear Marvin,

What is the best treatment for Parkinson’s disease?

PatBateman > Margin Of Error
10/09/2015 at 23:12

I would like to clarify that, unless you’re buying a bond (and holding it to maturity) or a bank CD, you don’t know what your return on investments will be in the future. Therefore, I offer you an alternative to the two low yielding items above: Roulette.

Lucky 13 pays 35:1, and betting it all on black gets 2:1. YOU LITERALLY CAN’T LOSE*!!!!

Don’t be a chump; get your ass to Vegas and be somebody.

*Only applicable in a world where statistics and odds don’t real.

Margin Of Error > PatBateman
10/09/2015 at 23:14

Take me to Vegas with your Learjet !

HolmerS > Margin Of Error
10/09/2015 at 23:19

Unless you’re one of the lucky few who has an income over 100k, chances are, you can’t really afford a new car. Oh, you may have enough income to make the payments easily, but that isn’t the same thing. For example take me. I’ve never felt poor, but I’ve never topped 75k in a year. And I’ve had too few of those years. Right now, I have perfect credit, and a house and car that is paid for. What I don’t have is a retirement fund. I have very little in the bank because I made decisions earlier in life to spend money I didn’t really have to. Sure, it’s nice to drive a BMW, but is it worth it if you have to work until you die because you didn’t plan for the future? Hell yes!! Retirement is over rated.

PatBateman > Margin Of Error
10/09/2015 at 23:21

Learjet? LEARJET?! What am I, a simple millionaire, all impoverished with an S-Class instead of my Rolls Royce?!

Gulfstream G650 or nothing.

Margin Of Error > PatBateman
10/09/2015 at 23:24

Global 7000 ?

Kinja'd!!!

Margin Of Error > I'm Abe Froman
10/09/2015 at 23:26

This article is to help people, go on !

PatBateman > Margin Of Error
10/09/2015 at 23:27

The G650 is faster. Time is money.

SirRaoulDuke > krhodes1
10/09/2015 at 23:50

Same thing as above: opportunity costs. He can play with the balance of that payoff vs the monthly and make more than he is paying in interest.

herald > Margin Of Error
10/09/2015 at 23:53

Nope, ALWAYS pay cash. That way if something happens to your cash flow (ie you lose your job), you don’t lose your car too. Want an expensive car? Invest and save up to get it. I have done this for every car I have bought since I was 17, starting with a POS Pinto, and have never regretted it.

Cyclone > Margin Of Error
10/09/2015 at 23:55

I would expand total financial picture to includ having an emergency/rainy day fund. Even with no credit card debt, if you don't have an emergency fund, go with scenario 4!

Margin Of Error > Cyclone
10/09/2015 at 23:58

Very good point

I'm Abe Froman > Boopadeedoopadee
10/10/2015 at 00:13

EXACTLY!

I'm Abe Froman > Margin Of Error
10/10/2015 at 00:15

Give me a moment, Good Sir.

I'm Abe Froman > I'm Abe Froman
10/10/2015 at 00:20

Exacly

Unbearable Pain > Margin Of Error
10/10/2015 at 00:21

Basically, how good is your credit? If it’s good, and you’re apart of a credit union that finances cars at 1.74% like mine, Finance the ever living f**k out of the sunnuva b*tch. You’ll be paying so little extra it’s not worth it for cash.

I'm Abe Froman > Margin Of Error
10/10/2015 at 00:28

Here is an example for a person purchasing a $350,000 automobile (not too crazy these days....fully-optioned Huracan , nice FF or Rolls-Royce, etc.)

If one puts $50,000 down and places the $300K into a high-yield account making a measly 10% annual return on the decreasing loan pay-off balance:

Y1 - $300,000 x 10% = $30,000G

Y2- $200,000 x 10% = $20,000G

Y3 - $100,000 x 10% = $10,000G

(y = year, g= annual gain)

You essential purchased the $350K vehicle for $300K WHILE having a cash reserve in the case of an accident (these are automobiles not artwork).

A lease sounds like the best option but one doesn’t want to risk being nickel-and-dimed by the actual owner of the car.

dataPOG > Margin Of Error
10/10/2015 at 00:53

I’m to tired to google it...what difference between 2,5% and 2.5%?

factsonly1 > Margin Of Error
10/10/2015 at 01:08

Never pay cash for a car or especially a home. If you do, you’re on the hook in the event the value plummets suddenly. For example, a drought causes a mass exodus that kills property values or a diesel scandal causes a vehicle to become worthless. Dont do that to yourself. Finance these things and let the bank be on the hook. If disaster strikes just walk away from the item.

NO > Margin Of Error
10/10/2015 at 02:25

Scenario 5:

You started a business. Your financial situation is chaos forever. You’re either doing really well or everything is going to collapse tomorrow, you’re pretty sure it’s one of those.

none8239487234 > Margin Of Error
10/10/2015 at 03:49

The reality is it’s a lot more complicated of a question than just the math people are doing on the interest rates. Some things to consider.

Lets say you are sitting on a lot of cash and you want to buy a car. You buy the car and then get laid off from your job. That extra cash could have come in handy in that situation and you now have it all sunk into a car that you now probably have to sell to survive. Of course selling a depreciating asset in a hurry is always a losing proposition especially if the economy took a dump at the same time. Depending on the situation that “asset” you have could be pretty worthless.

Lets say you are sitting on a lot of cash and want to buy a car. You buy the car in cash and then are presented with an opportunity to buy something you can’t secure financing on through your bank. You are plain out of luck. Banks love cars as collateral while other stuff not so much.

Lets say you are well off and have lots of money and want to go “all cash”. That’s quite noble but what’s that going to do to your credit rating long term? Just because you don’t use it does not mean you might not want to use it in the future. Regular loans regardless if you need them or not give you extra buying power in the future.

I’m not a big fan of debt myself but there’s smart ways to go about debt and not so smart ways to go about it. Despite their evils loans do provide people the opportunity to buy things and minimize their personal risk. That comes at a cost of course but the bank is hedging a lot of the risk.

Businesses that have massive amounts of cash often take advantage of financing. Don’t get caught up in the emotional aspects of cash vs credit. Credit is a tool. Use it to your advantage and don’t let it become a disadvantage.

WanderingWheels22 > Matt Brown
10/10/2015 at 04:34

This is my biggest gripe about this stuff. The “whole picture” of finances bit is rubbish when you’re ignoring basic macro drivers that do impact the value of cash being held in accounts or on hand.

Until the Fed raises rates sometime in the next 20 years (if they even get that bold) anything below 2.5% is a steal, and below 1% and it is very nearly like the bank paying you to borrow.

Whitesmoke > Margin Of Error
10/10/2015 at 07:05

Cool thing is - when you pay off your credit card debt and pay off your house you can pay cash for a vehicle. Took me until almost the age of sixty to accomplish that feat but after all those years damn does it feel good! There was a lot of working two and three jobs and passing on things I wanted but didn’t need to get to that point (cue old man theme song). But I did manage to have some fun along the way as well.

kulak > Margin Of Error
10/10/2015 at 07:25

0% or low interest isn’t always low interest if it causes you to pay more for the car. Why do you think some offers are 0% or $2000 cash back but not both.

I personally would only pay cash for cars and any thing going down in value.

You can get mathematical about it but your examples don’t factor risk. What if you loose most of your money in the market? You’re still having to make your $500 0% payment.

athought123 > PatBateman
10/10/2015 at 07:54

Odd of black on roulette isn’t 50%. “0” and even “00” are green so it’s slightly less than 50:50 to win. So statistically, you are bound to lose money. Lesson of the day? Casinos aren’t stupid. They know how to take your money

The Dummy Gummy > dataPOG
10/10/2015 at 08:22

One way is how Europeans/Arabs/etc denote decimal place the other is how the U.S. denote it.

Why the author interchanges? Probably a typo that the author then copied and pasted that line multiple times while not resizing there was a typo.

Shoop > Chariotoflove
10/10/2015 at 08:49

SEE? I’M NOT THE ONLY ONE

Lichtbau > Margin Of Error
10/10/2015 at 08:51

If you are buying from a dealer, finance through them to get all the financing incentives/free options/best price. Then pay it off the first month. Check the paperwork first for prepayment penalties. This has worker well for me.

And dont carry any credit card debt.

PardonMyFlemish16 > Margin Of Error
10/10/2015 at 09:17

With depreciation I feel like as long as you can get rates under 5% it doesn’t matter. You’re going to lose. Hell even at 0% you still have to get full coverage insurance, and with it new you are going to take a mondo depreciation hit. So IMO it’s best to just see how you can bleed the least. A $10-15K used car has nowhere near as far to fall as a car double that, and cars today are pretty robust.... you should get a few years out of such cars no problem.

It also has to factor in your appetite for essentially wasting money. As much as I love cars I personally can’t do that. Rather save or put money elsewhere.

jks > Margin Of Error
10/10/2015 at 09:39

I financed a used pickup once. But only once. I had the money to pay cash but I didn’t want to liquidate other investments to generate the cash. The bank pestered me relentlessly. Every week they needed this; now they need that. They need my grandma’s maiden name. I was making the payments in full and on time but they found something new that they needed every week. The final straw came when they sent me a letter saying they had no record of my insurance (a lie) so they bought me some—$2500. I already had yearly insurance for $600.

I finally did what I should have done in the beginning; liquidated the investment and paid in full. Banks are evil and stupid. Don’t do business with them if you can avoid it.

Now_looking_for_a_cheap_car > Margin Of Error
10/10/2015 at 09:40

I came here expecting a funny possibly sarcastic write up and found sound useful and very meaningful financial advice instead. Screw you guys i’m going home

Piggystyle > Margin Of Error
10/10/2015 at 10:10

You obviously don’t understand the concept of simple interest vs compound interest.

Your car loan is simple interest, whereas your investments are most likely going to be compounded. So if both rates are equal at 2.5%, you are still better off taking the car loan and investing the money.

SaveTheClassics > Chariotoflove
10/10/2015 at 10:33

This is the biggest one and I’ll never understand why people carry ANY credit card debt. I know people get in over their head, but I’ve had friends who have thousands in credit card debt and yet I see them buying car parts or going out drinking all while paying high interest rates on the card(s). I’d pay off credit card debt even before I paid into the loan on my house.

I haven’t been in high school in ~15 years, so they might already do this, but if they don’t, they need to start teaching personal finance at the high school level. Not a two hour long one time thing, but an actual full length class.

gin-san - shitpost specialist > Chariotoflove
10/10/2015 at 10:46

I use my CC a lot but it’s paid off, every month. CC interest is one of the most fucked up things in existence (although not as bad as payday loans, I suppose).

staghounds > Margin Of Error
10/10/2015 at 10:55

And when calculating the investment value of your money, remember the taxes you’ll have to pay. A return of 3% is really only 2% after Washington takes its third off the top. And if there’s a state income tax, add that.

soundman98 > SaveTheClassics
10/10/2015 at 11:01

many schools do that, but most people don’t pay attention. in hs, i never saw a need for the information they were giving me..

it wasn’t until i had $3,000 in credit card debit and lost my job that some of it started sinking in. but many take much more then that..

406z > Margin Of Error
10/10/2015 at 11:08

Nonsense the only answer is to buy the cheapest beater you can, invest the rest in beer, and harbor freight tools that will break after .79 uses...die peacefully of liver failure waiting for a tow. You’ll save money on the car and retirement!

spookiness > Margin Of Error
10/10/2015 at 11:11

I am of the pay-cash mindset now, but for some people financing (at a low or no rate) is probably a good idea, if nothing else just to build a good credit history.

PatBateman > athought123
10/10/2015 at 11:43

That’s literally the only way that the casino wins. If you had a 1 in 35 chance of getting a number, or black (or red) had a 1 in 2 chance of hitting, the casino wouldn’t have the game. There would be zero edge.

Thus, green and 0/00.

Goofnik > Chariotoflove
10/10/2015 at 11:45

>Don’t carry CC debt. Pay that off before you buy anything else big, cash or otherwise.

Moreover, if you never pay an interest on your CC, you can take advantage of your CC’s rewards and have them save you money. I get 6% back on my groceries and prescriptions, 3-5% back on gasoline, and 2% everywhere else by using the right card for the purchase, and then paying them off so I never pay interest. Used properly, credit cards can save you money on your normal everyday purchases.

gokstate > I'm Abe Froman
10/10/2015 at 12:31

Doug’s looks like the shower scene from Psycho. Eee-Eee-Eee!

indianamarathoner32 > Margin Of Error
10/10/2015 at 13:02

Was this article written 10 years ago? Do you realize interest rates are near zero?

SaveTheClassics > Margin Of Error
10/10/2015 at 13:04

If you can manage to achieve exemplary credit, something like 800+ score (it’s not difficult, just takes time and responsibility) many manufacturers nowadays will offer you zero percent interest even if they aren’t advertising it. Of course you’ll have to negotiate, don’t be afraid to walk away, remember the buyer has the power, you just have to appear that you really do have the power, don’t be a sales victim.

IGetPwnedOften > factsonly1
10/10/2015 at 15:11

Or end up in negative equity paying for a house that’s now worth half what you owe on it...

You can’t just “walk away” from a finance agreement.

Jawny Bravo > SaveTheClassics
10/10/2015 at 16:09

Real life scenario: I lost my job at a really bad time; a ton of stuff—like car insurance, rent, utilities, and more—all came due at once. I could have cleaned out my bank account to pay the bills, but I opted to dump it all on a 0% APR credit card instead. Neither situation was ideal, but keeping some cash in the bank with an uncertain immediate future seemed like the better option.

SaveTheClassics > Jawny Bravo
10/10/2015 at 18:42

I understand that, in my opinion credit cards are there for two reasons:
1) Daily use, provided that you pay it off before the interest hits each month.
2) Genuine emergencies (such as yours)

I was mostly criticizing people that have jobs, and have money, but still choose to carry credit card debt while going out drinking or spending money on car parts.

theRealRealMikeyG > herald
10/10/2015 at 19:50

so never build credit up and always pay cash huh?

bad advice.

its much better to finance things you can afford to and actually nuild credit because then when it comes time to buy large purchases, like a house, you can get better rates because yoiu have good credit.

paying cash doesnt build credit and there are very few people in this world who can afford to pay cash for a house (and most of those wouldn’t anyway).

And if you are a smart purchaser, you can always liquidate items if your cash flow changes enough to require it.

theRealRealMikeyG > IGetPwnedOften
10/10/2015 at 19:53

yes you can, it will affect your credit rating, but there were a large number of people in areas very hard hit during the housing bubble burst that simply let their houses be foreclosed on and bought a cheaper one (like half the value cheaper) a block down the street.

It actually got so bad that banks just started reducing peoples mortgages to stop this from happening and causing them the headaches and cost of foreclosing on properties.

Miles Archer > factsonly1
10/10/2015 at 20:56

You’re on the hook either way. If you default on the loan they take the collateral, sell it for far less than you could have, and then you still owe the balance. If you’re broke the bank might not bother coming after you. If you could have paid cash because you have savings or other assets they’ll be coming after you to get that balance.

Jimmy Joe Meeker > kulak
10/10/2015 at 21:02

Indeed. The only way in the world of ZIRP to make more than the loan interest rate is in risk assets. Making more than the loan cost (if it’s not zero) plus cash incentives means a pretty good chance of losing principle.

Chariotoflove > gin-san - shitpost specialist
10/10/2015 at 22:25

Me too. I never carry a balance, ever. It’s the way my parents raised me. But I realize that I’m probably a minority.

MuchWagon > Margin Of Error
10/11/2015 at 08:57

I think part of the answer has to respect that the smart move if you are going to finance is not to purchase more than you could outright buy.

vegasstyleguy > Margin Of Error
10/12/2015 at 04:08

I recently bought a brand new car. My credit rating was zero because I’ve never bought anything on credit. It would have been better if I’d had some credit debt. But other than my car I’m the only person I know with no debt

No Name Joe > krhodes1
10/16/2015 at 17:47

dealerships get a kickback on the financing, so they are often more willing to give a bigger discount with that extra coming on the back end

I negotiated two car transactions with Toyota dealers, and they did not give up a single penny when I offered to finance the car. Granted, both times the finance was at 0%, and I already had a pretty low price, but offering to finance had no effect

krhodes1 > No Name Joe
10/16/2015 at 21:36

I didn’t say every time, said often. Chances are if the OEM is offering 0% the dealership is getting nothing on the back end. The flipside is CERTAINLY true though, paying “cash” gets you nothing. The dealer is going to get cash regardless, whether it is directly from you, a bank, or a captive finance arm makes no difference. In fact, a personal check from you is almost certainly the slowest way for them to get paid.