Driven crazy by car loans

My long commute means my car has a lot of miles on it. Right now, it's cruising up to 180,000 miles and still going strong. While we're hoping to make it to 250,000, approximately 30,000 miles goes on the odometer each year.

My Car-Buying Philosophy

In a rare piece of verbal financial advice from my father, he told me to always pay for my vehicles with cash. He said, since they depreciated, I should pay for basic cars with cash and throw my money at something that appreciated.

Since my father is deceased and I can't get any more advice from him, I've tried to adhere to his advice. It's not easy, though, and it keeps getting more difficult. So far, I've owned four used cars. The first two were inexpensive, paid for with cash and thoroughly unimpressive.

My third car story was slightly better. My first year out of college, I kept my low-consumption lifestyle. With no debt and a decent income, I was saving at least $1,000 a month. My goal? Save up enough money to pay for my third car with cash. When it came time to buy the car, I followed personal finance blog advice. Used. Check. The least expensive car that still met my needs. Check. Buy and hold approach. Check. Cash. Big check.

I had that car for six years and expected to drive it for several more. Because I didn't plan on replacing it so soon, I saved no money for another car.

Then the unthinkable happened.

About five minutes into my commute one foggy morning, I was crawling along until a “T” intersection sign materialized through the fog. I slammed on the brakes, jumped the ditch, and ended up in the field.

Unhurt, but scared, I called my husband. “I just wrecked the car. Can you come get me?”

A few minutes later, I heard a truck approaching the intersection too quickly to get stopped. He slammed into the ditch.

It was my husband.

When I called the insurance company later that day, I begged the guy not to tell anyone about the crazy couple who wrecked at the same intersection on the same day. He just laughed.

Because I failed to plan on an emergency, we had to finance our fourth car. We paid double some months and quadruple other months, so we ended up paying off the car months early.

Even though we had shaved almost three years off our loan, those 26 months of car payments drove me crazy. I didn't want to finance a car again. Still, it took us 18 months after we paid off the car to start saving for the next one, the one we're planning to buy in a couple of years.

Cash for Cars

I don't know about you, but purchasing a car with cash feels overwhelming. Sure, I'd done it three times, but that was before a mortgage, higher standard of living, more expensive cars, etc. It's harder now.

But I really disliked having a car loan. And I didn't want to do that again.

So in May 2011, we started a new car ING savings account, automatically depositing money each month. Because our car payment had been about $300, we started with that. When things got tight, we dropped the monthly contribution down to $100, but as soon as we could, we increased it again.

As of today, we have almost $4,800 saved for the next car. If our car makes it for another 26 months, our current savings rate will add another $7,800. At 250,000 miles, our current car will be worth little to nothing, so I can't expect much there.

Hmm, somewhere around $13,000. In two years, our family dynamic could look very different. $13,000 may not be enough to meet our vehicle needs at that time. Plus, our income may be significantly lower by then, so do we want to tie up that money?

And that brings me to my burning question: Does paying for cars with cash really make a difference to my bottom line?

I mean, I'm either paying $300 to the bank or $300 to my savings account. What's the difference?

Interested in Saving Money

Well, interest for one thing. As of today, my car savings account has earned $31.38 in interest over 20 months. By using The Motley Fool's “Should I finance or pay cash for my vehicle” calculator, I found that my last car would have cost me $2,219 in interest over the length of the loan (if we hadn't paid it off early). Current savings interest rates mean I should earn almost $120 by the time it's time to buy a new car. And while that's not much, it's better than paying $2,219 in interest.

But here's where it gets less simple. What if I found another investment that paid me more than I paid the bank for my car? If I were disciplined enough to invest elsewhere for a higher return, financing the car makes sense.

And even more complicated is how our life may be changing. Right now, we have a little emergency fund, no dependents, no consumer debt and 2.5 very stable jobs. As you know, we're adding to our family. When our financial picture changes, we may not want to put $13,000 into a car; we may need it for something else. Our emergency fund isn't large – but that's because it hasn't needed to be. Maybe we'll need to merge the car savings account and our emergency fund.

I don't know the future, but I do know myself. I want to do everything in my power to avoid a car loan, so I don't care if it doesn't make sense: I wouldn't take out a car loan and invest the money somewhere else. As far as the emergency fund, I'll wait and see on that.

In the meantime, we will try to

  • Increase our savings rate
  • Drive our current car longer
  • Keep our eyes open for a less expensive car

Do you think it's important to pay cash for cars? Have you ever financed a car that you could have purchased with cash, just to have a cash cushion?

More about...Debt, Budgeting, Transportation

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AMW
AMW
7 years ago

This is a subject that I am sure will be hotly contested. My husband and I have bought both new and used cars. Our current strategy is to buy new and drive it til it can’t be driven anymore. While in general it is true that cars depreciate a lot when driven off the lot, it is not true with our vehicle of choice, a Honda Odyssey. There is only a $2000 difference between a brand new one and a two year old one…not significant enough for us to inherit some strangers maintenance habits. Our current van has 11 years… Read more »

isaac
isaac
7 years ago
Reply to  Lisa Aberle

what other cars have you found to be in that New > slightly used catagory? was there an easy way to assess this or did you just pick a car, then price 2013 and 2012 versions?

Charlotte
Charlotte
7 years ago
Reply to  Lisa Aberle

I wound up in this category too — in 2003 when I went to buy a car used Subaru Outbacks were only about 5K cheaper, and the interest rate was 3 times as high. So I bought a new one with a low interest rate (plus they gave me a good deal on my Honda Accord). I’ve owned it outright for 4 years now, and because I work at home, it’s only got about 90k miles. So for me, a new car that I’m going to drive until it dies made sense …

Jen from Boston
Jen from Boston
7 years ago
Reply to  AMW

I buy new and drive it until it’s dead as well. I’m always worried I’ll get snookered if I buy used. At least with a new car you have the warranty. I figure it’s a reasonable compromize between financing a new car and paying cash for an old one.

Lindsey
Lindsey
7 years ago
Reply to  AMW

Our strategy as well. My husband’s car was bought new, is almost 10 years old, and runs very well for its age/miles (he does the regular maintenance). It will probably need to be replaced in the next 3-5 years, so once we pay off our current car loan, we will just shuttle that “payment” into a savings account. We bought a new Nissan Pathfinder for our growing family in 2011. We had planned to buy used and spent 9 months making a “car payment” to a savings account to be sure we could afford to finance, since we knew we… Read more »

sasha
sasha
7 years ago

While I think paying cash is smart for cars for exactly the reason your father said to – I don’t quite understand why there were so many gaps in your savings plan for each car.

To make this sort of plan work, you need to basically have a “car” savings account that you contribute to every month. Even after you buy a car, you need to continue to contribute to the “new car” fund every month.

Chase
Chase
7 years ago

You need other savings accts for those other expenses. That way you don’t have to rob your vehicle acct.

Merging them is the opposite of what you should do.

Jon
Jon
7 years ago

It gets more and more painful every year to try to pay cash for vehicles. I have a 13 year old diesel pickup that I feel like I ought to replace soon, and the equivalent in a new truck is now over $50K! I really really don’t want to spend my hard-earned savings on something that expensive, but if I don’t, I lose the hauling and towing capability that I’ve come to take for granted. My wife and I usually buy vehicles that are about 1 year old, and finance them for as short a period as we can, at… Read more »

Jerry
Jerry
7 years ago

I don’t like loans and have just decided that I’ll only pay cash from now on. It leads to more security on my end knowing I don’t owe anything to anyone and since they are cars that are usually a year or two older the insurance is cheaper, too. It’s a win-win.

Jennifer
Jennifer
7 years ago

I think its absolutely vital to pay cash for anything you possibly can. And I mean cash, in the sense of real money rather than by card. This is weird for people I imagine, especially in the US, but for me it makes me feel the value of money more. I notice when Im running low and need to get to the ATM, and it discourages spontaneous spending. But I digress. Car loans are a horrible idea, especially because – as you say – your life may change substantially over the time of the car loan. I hate loans. Naturally,… Read more »

Student Loans Worked Out
Student Loans Worked Out
7 years ago
Reply to  Jennifer

Huh? 13K is too much for a car? Well, I would LOVE a cheap, reliable car, safe car, but I failed to find an acceptable car for less than $18K. Would appreciate any advice. My requirements: * Extremely reliable * Easy and affordable to maintain * Good gas mileage * Safe! Safe! Safe! * 4 wheel or all wheel drive (to be able to drive in snow/ice) * The car must be spacious enough to accommodate 4 people + some camping gear Can anyone point me to a car model like this for less than $13000? Please share – good… Read more »

Laurel
Laurel
7 years ago

That is exactly what I will be looking for, with an emphasis on good mileage and 4W/AW drive. Please share!

jim
jim
7 years ago
Reply to  Laurel

If you’re looking for a good, safe car with 4wd, I’d suggest a subaru station wagon. We bought one in 1992 when our son was 2 years old. That car is still going (pushing 300,000 miles). In addition to being the “family” car, it got our daughter thru high school, college and her first year out of college. Then it got our son thru the same. He was 2 years old when we got that car. With any luck, it will get him thru law school. “Old Sal” just won’t die.

Student Loans Worked Out
Student Loans Worked Out
7 years ago
Reply to  Laurel

Thanks, Jim. Subaru is good car, we are considering that. Toyota’s are good as well. The have a good resale value, too – I did not find any “cheap” ones yet. And I do not want to buy a really old car, 4 years old max (so that the manufacturer’s warranty is still there …)

kymell
kymell
6 years ago

you can drive almost anything in the snow if you have the right kind of tires,don’t have to have all wheel drive

Sam
Sam
7 years ago

We are a cash car family. We buy nused, we save for cars kind of the same way we save for vacations. We always have cash going into a car account, but when we have car purchase plans we up the contribution. The money we send into the car account each month can be used for car repairs, upkeep, etc. But, its also a savings account for the next car. If you buy new and keep the car long enough the depreciation issue becomes a non issue. But we still prefer to buy nused. The last car I bought I… Read more »

morgang
morgang
7 years ago

I’m not so sure it makes sense anymore to pay cash for a vehicle. With interest rates approaching 0% I’d rather have the money in the bank or invested. You would only pay a couple hundred dollars on a 4 year loan at 1% APR for a 15000-20000 loan (or less if it’s paid off early. I would much rather pay a couple hundred then sink thousands of my hard saved money into a car. It really is not too difficult to get a return rate above what a car loan is finaced at now with rates so low. I… Read more »

Mrs PoP @ Planting Our Pennies
Mrs PoP @ Planting Our Pennies
7 years ago
Reply to  morgang

That’s about how we’ve managed our car buying. We bought a new car when we were in the middle of investing in real estate (we bought as much as we could in the crash in FL), and having the emergency cash on hand was well worth the super low interest rate we’ve paid on the car during that time. One additional thing to remember if using this tactic is to try and buy a car so you have a decent chunk of equity in it up front (down payment, or buying well under KBB). If everything goes to hell, the… Read more »

Stacie
Stacie
7 years ago

I take a middle approach. I have a car savings fund, but I’m ok with only saving 1/2 the loan and taking a 3 year loan at a low interest rate. I will probably look to buy new, since I’ve seen some late-model used cars of reliable brands actually cost more than NEW cars of the same model. Even if I could pay for a car with all cash, I probably wouldn’t, unless all my other savings goals and emergency fund were where I wanted them to be. I think paying a few dollars in interest is worth the peace… Read more »

adult student
adult student
7 years ago

I think this depends partially on income. My household income is low enough that taking out a loan for a car would be unwise, as it would probably be a large portion of our yearly income. The current car may be the best deal I’ll ever get – purchased at trade-in price from a relative who maintained it incredibly well, now going on 15 years old and still in good shape – but next time I’d consider something in worse shape to stay out of debt. Keeping monthly bills low is a huge source of stability if you don’t have… Read more »

Tracey H
Tracey H
7 years ago

We pay cash for all of our cars whether they’re new (we once got a Nissan Sentra for below dealer cost because my brother worked for the company and we also bought a Honda Odyssey new in 1999–it’s still running–because it was the first model year where it was as large as it is today with the seat that folds into the floor at the back–and we could afford to pay cash for it). We’ve also had many used cars over the years and none has been a lemon. You mention it’s better to invest the money and take a… Read more »

Shawn G
Shawn G
7 years ago

My wife and I are currently looking for a minivan. We sold our old car, have a decent amount saved up and have been waiting to find a deal that is good for us. That is an important part of the whole process; because we do not need the minivan today we can wait until we find a good deal. It was the same when it came to selling our old car. We did not need to sell it right away, so I was willing to wait for someone who would purchase it at a price I was comfortable selling… Read more »

Kathryn
Kathryn
7 years ago

I grew up in a cash car family, but in my 20s I did finance a Toyota Camry for 3 years at a very low rate, allowing me to keep building my savings and retirement accounts. After marriage and kids, we bought several minivans with cash (I agree the Honda odyssey is better purchased new but we got great deals getting year-end markdowns). Now our family has three teen drivers and four vehicles. I totally support buying used, basic cars but even that adds up making it a challenge to pay in cash (while still having enough to cover the… Read more »

Christina
Christina
7 years ago
Reply to  Kathryn

My advice is to never, ever borrow from a 401-K, especially not for a depreciating asset!!!

WWII Kid
WWII Kid
7 years ago

I live in a part of the country where a new car every three years (leased) is a requirement, and that car has to be high-end (BMW, Benz, Audi).

Maybe that’s why I drive a Subaru. I can beat the crap out of it and it comes back for more. And it’s paid for.

Sandra j
Sandra j
7 years ago

Required? Where? Why?

Rail
Rail
7 years ago
Reply to  Sandra j

I think WWII kid was being very snarky in his comments :). I live in a part of the country where you can drive a 64 chevy pick em up truck and nobody gives a poop! My 82 Buick is running like a clock and its a great work car, 30 mile round trip on county roads and gravel. I inherited the car almost 5 years ago and have maybe a thousand in tires and maintinance in it. Im shooting for at least another 10 years with old “Dorthy”. Old cars Rock! Old cars also are cheap on insurace and… Read more »

Peach
Peach
7 years ago

I have a car acct that I add to every month, and I’ll probably always have one, because it takes a long time to save for a car. I’ve never bought one with cash outright, but I’d like to finance as little as possible. One of the things that made me poorer in the past was paying interest charges on my home and car. When I bought my last car in 2004, the interest chg was 6%, and after I refinanced several years ago, my mortgage was at 5%. Since I’ve sold both, it doesn’t matter any more, but my… Read more »

Emily @ evolvingPF
Emily @ evolvingPF
7 years ago

I’ve only ever bought one car and I had to borrow $3500 to do it. That car payment wasn’t painful so I guess I would say working hard to find a good, inexpensive car at a good deal is more impactful than the cash vs. financing question. I do want to pay cash for cars throughout our lives, but as we don’t have a car savings account right now if our car was totaled we would probably have to finance our next purchase. When my husband graduates we’ll start our first-ever mid-term savings goal, and it will probably be for… Read more »

Jonathan
Jonathan
7 years ago

It seems to me that someone who pays into a car savings account every month like clockwork, whether in the market for a car or not, in order to pay cash for a car, is in fact giving themselves a PERPETUAL car payment. As someone who has successfully developed a “savers” mindset rather than a “spenders” mindset, I save and invest all unspent money eventually. Unlike the author, I don’t have to worry about whether I would actually invest money that I would have by not paying cash for a car – I would. To me, buying a car with… Read more »

Evan
Evan
7 years ago
Reply to  Jonathan

Hmm, I believe very little of what this person says.

You’re making 15-20% in real estate now? You should have been running for prez.

Jonathan
Jonathan
7 years ago
Reply to  Evan

Evan, I run into people skeptical of real estate all the time. The fact is, right now is the best market for real estate investment in at least a decade and possibly much longer. Ever heard the mantra, “buy low, sell high?” Well, right now real estate is LOW. Also, financing rates are LOW (and financing is fairly unique to real estate as an investing class). So put aside what you hear in the news about real estate values being so low and realize that what you’re seeing is OPPORTUNITY. Now, as to how to get 15-20% returns – it’s… Read more »

jim
jim
7 years ago
Reply to  Jonathan

While I don’t doubt you are getting a great return on your properties, you don’t seem to be counting the other costs such as vacancies, repairs, maintenance, etc. One broken furnace, delinquent tenant or leaky roof could wipe out those returns. Again, it sounds like a great investment but you need to be honest about your costs. How much will it cost to replace the carpets in a few years? Repaint the exterior? Put on a new roof in 10-20 years? You can’t just count 100% occupancy rent minus mortgage as your cash flow.

BD
BD
7 years ago
Reply to  Evan

Evan:

What Jonathan is doing is popular with successful corporations.
Do you know that many corporations, such as airline corporations, do NOT own most of their vehicles (airlines don’t own most of their planes)? They *lease* the majority of them. This way, it frees up cash to invest, just as Jonathan is doing, and earns the corporations more money, if they can invest successfully.

I just learned that this semester in one of my accounting classes. 🙂

Jonathan
Jonathan
7 years ago
Reply to  BD

Jim – You’re right, of course, I left out some of the costs. It wasn’t relevant to my point…Those costs will reduce my return slightly. I also left out potential (and very likely) appreciation on the property over time, which will boost the return back up.

Regardless, the point was, it is far more prudent and lucrative for me to finance a car than buy it with cash.

Wm
Wm
7 years ago

My dad gives me the exact same advice: “Never take loans, pay cash”. It does make sense and to buy smaller items it’s easy to save up first until you have enough. But when it comes to big ticket items like a house or car, saving the entire needed amount would be harder and so it makes more sense to me to have a significant down payment and then use a loan to cover the remaining expense.

Alexandria
Alexandria
7 years ago

We only pay cash for cars. I find when trying to discuss with non-cash-payers they just don’t *get* it. The reasons are not purely the interest savings. Hardly! A paid for car, for one, will make us seriously consider affordability. Much more than the average person who would finance a car. As evidenced that we have always paid very little for our vehicles. Secondarily, it just means more flexibility. Will never end up with an “upside down vehicle,” will never have to answer to any third party (loan company), and paying ourselves a monthly payment is hardly a burden. For… Read more »

Jen from Boston
Jen from Boston
7 years ago
Reply to  Lisa Aberle

Going along the same lines, how many think mortgages prod us to buy more home than we need? I haven’t thought is through, but odds are I bought a larger home than I needed because I was financing. If I had to pay cash or mostly cash I would probably hold a harder line on what my must haves are, and how much stuff I really need.

Tom
Tom
7 years ago

I realize the choice is probably more psychological than logical, and also depends on where one is in their financial life, but I would not put the money into a low-interest savings account. Instead, I would invest the money and sell off enough stock if/when I need to buy the car (unless I can get a very cheap car loan, that is). My most recent purchase was a new economy car model, which ran about $16k. Since my new car purchases have lasted more than 10 years apiece, this seemed pretty reasonable and avoids inheriting other people’s problems. I called… Read more »

LeRainDrop
LeRainDrop
7 years ago
Reply to  Tom

Oh, man, I didn’t even realize that you could put a new car on a credit card! Had I thought of that, I definitely would have charged the portion I was paying in cash and then paid off the card in full before the due date. Doh, all those missed credit card rewards 🙁

Tom
Tom
7 years ago
Reply to  LeRainDrop

I had heard of it being done, but I made no assumptions. The day before I made the transaction, I called the credit card company to notify them of the impending charge – to prevent it from being initially declined for suspicious activity. Also, I verified with the dealer (after we settled on a price) that I planned to purchase the car on my card, rather than finance. I know venders have to pay some percent of the sale to the credit company, so that was the most important check to make. I was working with the dealer’s internet sales… Read more »

Random Hangers
Random Hangers
7 years ago
Reply to  LeRainDrop

I think it depends on the dealer and how skittish they are. I wanted to put my husband’s car on our credit card for the rewards in Nov 2011 (I think $14k out the door) but they would only allow us to put $4k on it. We had the cash to cover the whole thing, so it didn’t really bother us (though I was sad about losing the rewards, lol).

Jen from Boston
Jen from Boston
7 years ago
Reply to  LeRainDrop

I thought of that, but since I was getting my car for $2k below invoice I decided to be nice to the dealer… And I didn’t want any weird hassles with using a credit card. But, yeah, the 1-2% cash back would have been nice 😉

On the flip side I’ve heard of farmers paying cash for their trucks and tractors… Literally. As in cash they had buried in cans. The dealers would just do the transaction at the bank so the money only needed to be delivered and counted once. And it was pretty stinky….

Tom
Tom
7 years ago
Reply to  Tom

BTW, I got $670 cash back from this CostCo Amex credit card this year (1%, about $160, for the car purchase, plus up to 3% for all other purchases).

Keith and Kinsey's Real Estate Update
Keith and Kinsey's Real Estate Update
7 years ago

In my opinion, we should pay cash for everything except for real estate. Paying cash forces you into buying only what you can comfortably afford. For example, a couple years ago, my wife and I were looking for a new car. We had saved up about $14,000 (excluding our emergency fund). So, we were limited to a car of that dollar value. If we had financed a car, we likely would have ended up with a $30,000 car. So, at the point when we bought our new (used) car. I inherited my wife’s old Civic with 100,000 miles, and I… Read more »

Rob
Rob
7 years ago

We paid cash for our cars last year–A 2006 Corolla with 38k miles for $8,900, and a 2005 Subaru Outback with 56k for $12,900. I had been scrapping and saving for a few years to do so. We bought from private sellers on Craigslist. Got about $8,000 total for the Xterra and 2-door Civic we sold private party. I avoided dealers because I thought I could get a better price from an individual and didn’t need the financing. We still have a good cash cushion for emergencies. Not having a car payment was a foreign concept to my wife, but… Read more »

kymell
kymell
6 years ago
Reply to  Rob

keep up the good work

Rachel
Rachel
7 years ago

We have always paid cash for our cars. And… a thought… we have never paid more than $4000 for a car. (Actually, never more than $2K per car, but then add in a couple repairs) Sure, we’d like a nicer car, but these old things are working just fine! We save only $100/month for a new car and our monthly repair envelope only gets $100/month too. We own a 1996 Dodge Caravan (minivan – we have four kids) and a 1999 Honda Accord for getting my husband to work. We don’t expect to replace either of our cars for several… Read more »

Shari
Shari
7 years ago
Reply to  Rachel

We do pretty much the same thing! We have three vehicles, two 1998 minivans and a 2007 Mazda 5. The 2007 is the newest car I’ve ever owned….I almost always get cars that are 10 years old or more. I know a lot of people don’t like to do this because then you are paying for repairs more often, but it doesn’t come anywhere near what a monthly car payment would. My husband’s co-workers used to make fun of his 1986 Ford Taurus until he mentioned that he only paid $2,000 for it. Over the 5 years he drove it… Read more »

LeRainDrop
LeRainDrop
7 years ago

My car-buying history includes: (1) Paid cash for a two year old car after my sophomore year of college. I had just been saving my baby-sitting money forever, without any particular goal except the idea that it’s better to save than spend on frivolties. (2) Eleven years later, college car’s repair costs were getting frequent and outrageous. I had the cash for my new car (excluding my emergency fund), but because I could get a 2.14% loan for four years, and I still had a student loan left at 4.3%, I put about 2/3 down and put the other 1/3… Read more »

Kestra
Kestra
7 years ago

We recently bought a new car and were planning to pay cash. But the car loan was at 0.9% and our savings accounts are paying 2%. So it seemed reasonable to finance, which my husband preferred. I could argue it either way in our situation.

Rosa
Rosa
7 years ago

We’re cash-only for cars, for exactly the reason your dad gave – no reason to pay interest on something that depreciates. We manage it by not being dependent on the car. We usually have a car, it’s nice to have, but in a pinch (such as when our last car died suddenly), we can get by on bike/bus/borrowing until we find the car we want and can afford. If you’re dependent on having a car, there are times when you’re going to end up borrowing for it, or spending down your cash reserves either replacing or repairing it. They’re expensive… Read more »

SLCCOM
SLCCOM
7 years ago
Reply to  Rosa

The problem with borrowing is that if something happens, you are morally obligated to make the lender whole. That can get really expensive.

Ryan Collins
Ryan Collins
7 years ago

I’m always surprised at the people that believe they “need” a 4 wheel drive vehicle and will pay extra for it. I live in northwest Ohio, and that’s not even an afterthought on what we look for in a car. Granted, you may live in an area that has perpetual snow throughout winter, but even in Ohio there are only one or two days a year that it would be nice to have 4 wheel drive, but never required. If it’s required, then we must be under a level 3 snow emergency and it is illegal for us to be… Read more »

Student Loans Worked Out
Student Loans Worked Out
7 years ago
Reply to  Ryan Collins

I agree that a 4WD is unnecessary for city driving (unless there is snow, and snow here in Northwest is not fun, people are forced to leave their vehicles on the road and walk home in heavy snow – brrr), but didn’t mention of “camping gear” give our intentions away?

Jen from Boston
Jen from Boston
7 years ago
Reply to  Ryan Collins

I have to say, I’ve been really impressed with the traction control on cars! My ’96 had it, and so does my new car. It’s helped me get going on some snowy roads that my first two cars would have had trouble with (an ’84 and a ’92).

Andrew
Andrew
7 years ago

I was on the side of paying cash for cars several years ago, but today, interest rates are so low that it makes sense to finance them.

Afterall, if you get in a jam, you’d really wish you had that chunk of change sitting in the bank as opposed to having it all tied up in a car. The last time I checked, most companies don’t accept tires or steering wheels as payment.

As long as you’re using financing to improve your cash flow and not for purchasing something you can’t afford, it’s a wonderful tool.

thethriftyspendthrift
thethriftyspendthrift
7 years ago

I try to avoid loans at all costs. When I purchased a vehicle over three years ago with my now-husband, we paid with cash. The car was only two years old and was a great deal. I think the problem with paying with financing is that I don’t think you will get the best deal. If you are paying everything up front, you have a bit of a negotiation point that you can use to your advantage. Go to a few dealers/sellers, ask who will offer up the best price and your savings might be greater than if you’d take… Read more »

LeRainDrop
LeRainDrop
7 years ago

Ah, but that’s why you need to negotiate and lock-in the “out the door” price BEFORE you even discuss financing. Using the dealers-compete-for-your-business method is SO MUCH EASIER than I ever expected. It really can get you a phenomenal bargain, I guess because relatively few people bother to do it, and most do the old-fashioned method of going to one dealer and negotiating only with them. That in itself can be a far bigger mistake than financing a car.

Cwjohn777
Cwjohn777
7 years ago

The problem with buying new and financing is that you pay too much, which in most cases is more than you can afford. Most people buying new look at the payment and not the cost. I recently was looking for a 4WD SUV. These are like 60 – 70k new. I could have easily afforded the payment. We found several used options at dealers that were in the 25k range, but then we found a great one on Craiglist for 15k. We had it inspected by mechanics and it was in great shape. The point is I saved 50k buying… Read more »

Earin
Earin
7 years ago

I guess everyone has give his opinion now so you can decide if you should pay cash or by loan. But there are 2 things that imho are more important. 1. Needs vs. wants. Rethink your needs and get them down as much as possible so you can get a cheaper car. 2. Get that commute distance down. Srsly this it the best way to get more out of your car. There were times when I did 30k+ km per year. After a move I’m down to less then 4k km now. That way I can keep my car for… Read more »

Kitty
Kitty
7 years ago
Reply to  Earin

Excellent advice about getting the commute distance down. I had never thought of it that way. My husband bought a 49cc scooter and now takes that to work, which is about 12 mi roundtrip. Since we only had one car, I was driving him there and back every day, for a total for 25 mi per day. I cannot tell you how few miles we’re putting on oar as a result of his having the scooter, b/c I work at home. We amortized the cost (it was used) in about six months, I think. It gets 110 mi per gallon.… Read more »

KS
KS
7 years ago

car buying has been such an area of trying and somewhat failing for me. We have the idea to buy used, drive it as long as possible. But we live in a city and have had 3 cars stolen in the last 22 years, so that changed the equation. I never got to see how long those cars would last which is a source of huge satisfaction to me. Our last purchase a year ago seems to be a success. I took 12 hours to go to an auction, brought a mechanic with me who gave me the thumbs up… Read more »

Dave Reed
Dave Reed
7 years ago

As motivation to save. I promise myself that I will spend no more money for the “next” car than what is in the car fund. This motivates me at the beginning so I won’t end up buying a junker “next time.” When I get $5000 in the fund I am allowed to raid the fund up to $1000 (3.5 months of saved car payments) to keep my current car going and to buy time to save for a better car. I try to use $1000 of car equity a year. So a $7000 car would need to be kept 7… Read more »

jill
jill
7 years ago

My husband and I just bought a new-to-us 2009 Pontiac Vibe with no money down, even though we had the cash to pay for the whole thing. I had always had it in my head that “student loans are okay debt” but “car loan is bad debt”. When it came time to buy a car though, the rate we could get for a car loan (3.5) was almost half of my rate for part of my student loans (6.8). So we financed the entire car and put all that saved up cash toward the student loan. Our monthly obligation is… Read more »

jim
jim
7 years ago

I financed my first car and paid cash for my second. I’ve bought 2-3 year old used cars and driven them many years. I generally agree that cash for used cars is the best route. But with interest rates as low as they are right now and the cost of some used cars being nearly the same as new cars I could see financing new.

Angie
Angie
7 years ago

If you can’t afford to pay cash you can’t afford car ownership. Plain and simple. But for those who are contmeplating “but I can make more on my savings than the 0.9% the car loan will cost” I still think paying cash is preferable because it means you are forced to assess your needs becuase parting with a huge chunk of savings/investment money… as a result, you will spend as little as possible to meet your needs. Here in Australia, it’s generally good to buy a car at 100,000Kms (62,000 miles) and sell at 200K (125M). This is the sweet… Read more »

phoenix1920
phoenix1920
7 years ago
Reply to  Angie

I really don’t understand the statement “If you can’t afford to pay cash for a car, you can’t afford car ownership.” What can’t you use that same blanket statement on? You could easily say, “If you can’t pay cash for college, you can’t afford school” or “if you can’t afford to pay cash for a house, you can’t afford a home.” I completely agree that you should not base your car buying purchase on the monthly payment, but I see no difference in having a perpetual saving draw for a car as opposed to paying a car loan. I used… Read more »

Christina
Christina
7 years ago

I’ve struggled lately with “wanting” a new vechicle. Both of my paid for cars are almost 6 years old, one over 100K miles. I’ve thought about consolidating to one single new car. A deal I’ve found is a demo car on a dealer’s lot, 2000 miles on it and they’ve offered to sell it to me at a triple net discount so I’d actually pay less than one would be if it were a 2 year old model. The “thing” is, it’s a GMC…I have read mixed reviews about its reliability and I’ve never owned a GM car. I’ve always… Read more »

W King
W King
7 years ago

I strongly believe in paying cash. However, I also live alone, have a significant commute and have zero desire to repair old cars. So for each car buying event, I weigh the pros and cons and sometimes finance a portion to get me to the car I feel I need. I usually pay for a good portion up front so the interest isn’t all that big of a deal for the peace of mind as the car ages.

Kitty
Kitty
7 years ago

Wow, this is exactly what I need to be reading now. We had our car stolen last month and panicked b/c we had nothing saved for a new car and didn’t want to take the money out of our retirement funds. The car was recovered, so the crisis passed. I immediately started an ING savings acct for a new car. The car I want is a Prius, and I want to find one w/about 50,000 miles and to pay no more than about $12 – $15K. The deal with the Prius, though, is that we would be saving a lot… Read more »

Alex
Alex
7 years ago

Car with a loan requires full insurance coverage. So if life of your loan is 5 years, it comes to about 25% of your vehicle.
So, everytime your finance a car, add 25% to the price sticker.

It is always cheaper to pay cash and self insure.

Eileen
Eileen
7 years ago
Reply to  Alex

Can you elaborate? Are you saying that you wouldn’t want full coverage for a new car? Wouldn’t that mean that you’d have to have *another* chunk of saving available immediately after you’d paid cash for a car, in the event that your car is damaged in a wreck?

amber
amber
7 years ago
Reply to  Alex

I bought my first car in May, a used 2011.
I was SHOCKED to see how high my insurance is. The online calculators did not prepare me for that. I am financing with the goal to pay off within 1 year and I am well on my way. My plan once it is fully paid off is to renegotiate my insurance. I am expecting a significantly lower insurance bill in 2013!

Peach
Peach
7 years ago
Reply to  amber

You can get quotes from other insurance companies at any time. Don’t have to wait till the end of your policy term. The difference can be huge.

dh
dh
7 years ago

My take as ive become a father is to take care of my family first. Savings is a must. Then on the car front i buy nicely used (low milage) cars and keep them for as long as possible (10 or more years). To pay for them i always have one car paid off and one financed at a low rate. If something crazy happens i have a choice,continue paying out of savings or let it be taken by the bank (still have the car that’s paid off for transportation).Again, number one responsibility is family, feeding them and sheltering them.

monica
monica
7 years ago

With my last car I got a 3 year 0% interest loan from Mazda. I could have paid in cash, but it made more sense to keep the money in an interest earning account. Really, if you can get a 0% loan, it makes the most sense to do it this way, even if the interest rate in your savings account is low, at least you get that money, instead of loosing interest money by forking it all over at once to the auto dealer. Plus, I assume it helps build your credit score.

Krishanu
Krishanu
7 years ago
Reply to  monica

That’s the way to go. With 0% (or close to 0%) interest rates on car loans why would one ever pay the lump sum in cash upfront? For my latest car purchase, we got a 0.9% rate on a 5 year loan, where if I stay on the full loan term, I will end up paying around $100 in interest. Having paid off my last car in 3 years (again on a 5 year 0.9% loan), this car shouldn’t be costing me more than $80 in interest payment.

Jen from Boston
Jen from Boston
7 years ago

I’ve financed a car and I’ve used cash for a car. There are pros and cons to each, but after paying cash I prefer that method. The first new car I ever bought was in 1996, when I didn’t have nearly enough cash to buy a reliable car. I bought a Pontiac Grand Am with a 5 year loan. The monthly payment was $330. Thanks to a career change that came with better income I paid the car off early. It was really nice NOT having a car payment!! I kept the car for 16 years. Yes, there were some… Read more »

Jonathan
Jonathan
7 years ago

“I opted to pay cash because I did NOT want the monthly obligation of a car loan payment. I didn’t want to run the risk of finding myself laid off with a $300-400/month car payment!”

Just a thought, but imagine you were laid off today. Would you rather have the $15k or so you’d still have left over today after a year of car payments, and have $400 more a month in expenses, or would you rather have none of that cash and no $400 a month car payment? I certainly would prefer to have the cash on hand!

Jen from Boston
Jen from Boston
7 years ago
Reply to  Jonathan

Good question! And it highlights the “personal” part of personal finance 🙂 Since I have a 7 month emergency fund, I already have a good chunk of change. And, at my current job, if I got laid off I’d get 6 months severance, so effectively I’d have a year’s worth of money to tide me over. In this case, I’d rather not have the $400/month leak. However, if I didn’t have the emergency fund and/or I had less seniority at my workplace I might prefer to finance the car and keep the cash. On the plus side, since my car… Read more »

julie
julie
7 years ago

I only buy new when there is 0% financing available, then I pay off as soon as I can and drive it until it is dead.

Gayle
Gayle
7 years ago

I want to tell you my car story. I always pay cash for my vehicles. I buy rebuilt vehicles with a salvaged title. I bought a 2007 Ford Fusion, rebuilt in 2007, For $9000.00. I drove it until Dec. 2012, when I totaled it, by hitting a deer.I had 140,000 Miles on it. I had full coverage insurance on it. State Farm paid me $8,137.00 for my Ford Fusion. So, I was able to purchase my next car. I was blessed. I did not expect State Farm to pay me that much. I purchased another salvaged vehicle and took out… Read more »

Darth Yoda
Darth Yoda
7 years ago

Cars are not what they used to be. Some time ago a car would easily last you 15-20 yrs and repairs were cheap as any local garage could handle almost everything. Today cars rarely have more than 10 yrs of safe and reliable driving in them and any maintenance has to be performed with expensive specialised parts in specialised garages. They are made to die quickly and not be profitable to repair. I happily owned a 1992 model bought new with cash for 17 years. I was responsible for maintaining it from day one and kept it in good shape,… Read more »

Shelley
Shelley
7 years ago

I’m with Morgang. We had about 1/3 of what we needed saved up for a new-to-us vehicle. We got 1.5% Financing for a total finance cost of about $500 over 4 years. I can make a lot more than that leaving my money in investments (stock market did 15% in 2012). I’d rather leave my money making money and take the ridiculously low rates (thank you Fed) for a car loan. I would NEVER do this if the rates were reversed but with Fed telling us they are keeping rates at next to 0 to 2015, it’s crazy to pay… Read more »

BC
BC
7 years ago

Do you think it’s important to pay cash for cars? No. But I think that like house buying you have to stick to your original budget and like other debt, you should work to pay it off quickly and keep the loan amount low. It’s easy in car shopping to buy more than you originally intended to. I just bought a 1-year old compact hatchback with 5,000 miles on it for $13,000. The rate on my loan is 3.3%. It’s a great little car for me as I mostly just need something to get around town (preschool, grocery, church). It’s… Read more »

WilliamDocker
WilliamDocker
7 years ago

Car loans are the best way to but your dream car. and now a days you can have EMIs too… nice post.

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