Buy a car in cash or low interest car loan?

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#1

Hi, I have a family with three young kids and we are need of a larger car with three rows for family travel. I am open to buying a used car vs. new to save some dollars, but it is likely a car that we will keep for hopefully 8-10 years. I have the cash available to buy it outright but I am not sure if that is the best move vs. taking on a low interest car loan (my last car loan was 2%) and keeping more of my cash in investments.

Using your fun analogy, Amanda and Amy both purchase a $50K car.

Amy purchases the entire thing in cash and now has $0 in index funds over the next 6 years but also has no car payments.

Amanda puts down 20% ($10k) and finances 80% ($40K) over 72 months @ 2% APR. She has $40k to invest in index funds over the next 6yrs but also has taken on debt and has a monthly car payment for the next 6 years.

Who made the better move?

#2

I’m in the same boat. Right now is one of the worst times ever to buy a new car. The answer may actually not be a financial one, but a car deal one. Most dealerships want you to buy with financing, its how car companies make money after all, so they are more likely to give you a better deal if you finance than if you pay with cash, but youll have to shop around to find out what the actual rates are.

What have you seen are current loan rates? My last car, in 2015, I got 0% apr, so it made sense to finance 100% of it. But I imagine with how short stocked car companies and dealerships are right now, they arent giving away such good rates.

#3

Yes the dealers don’t want their customers paying cash for their cars. Typically you’ll pay more if you do.

If you do get an auto loan, watch out for pre-payment penalties. Very common these days for dealers to almost force buyers into a loan, and you’ll pay a pre-payment penalty if you want to pay it off early

#4

Hey @sfarquharson!

I’ll cover this in tonight’s office hours (9/1/2021) with the recording available afterwards on the course site!

If you’re not signed up for office hours, you can sign up here.