Monday's collection of car links sparked more discussion than any link dump I've ever posted. A lot of you have strong opinions on the subject. Katie writes that all the talk about cars made her think about her own situation.
My husband and I have both saved enough money to cover the price of the new car that we want (plus taxes and fees) and have a comfortable amount left over — at least three months' living expenses plus a good cushion in savings. We're also at least five years away from buying a house, due to the transience of early jobs in academia.
A good friend of mine — also a grad student some years away from home ownership — recently bought a car, and her bank recommended that she take out a loan even though she could pay for the vehicle up front. The bank's logic was that regularly paying off a car loan would build her credit rating, and thus leave her in a better position to buy a house down the road. I'm a bit skeptical about this logic, though — is it really worth negotiating for years of car payments that aren't even necessary, just for the sake of possibly boosting my perfectly OK credit rating?
My gut response is that the bank is just pulling a boondoggle. Of course they're going to recommend a loan — they don't make any money when people pay cash! On the other hand, it is true that carrying a car loan can help build your credit rating. But if you already have good credit — as Katie does — then the benefits seem minimal (or non-existent).
Have you ever financed a purchase when you could have paid cash? Would you do so if you could? Wouldn't it eat you up inside to pay interest when you know you didn't have to?
Author: J.D. Roth
In 2006, J.D. founded Get Rich Slowly to document his quest to get out of debt. Over time, he learned how to save and how to invest. Today, he's managed to reach early retirement! He wants to help you master your money — and your life. No scams. No gimmicks. Just smart money advice to help you reach your goals.