tag:blogger.com,1999:blog-29777096.post116744245775640164..comments2024-03-26T14:17:31.841-04:00Comments on Earl Stewart On Cars: SHOULD I PAY CASH OR FINANCE MY CAR?Earl Stewarthttp://www.blogger.com/profile/11435950589034528205noreply@blogger.comBlogger24125tag:blogger.com,1999:blog-29777096.post-17657339572757616552012-10-23T13:44:22.979-04:002012-10-23T13:44:22.979-04:00Hi. My husband and I are very seriously looking in...Hi. My husband and I are very seriously looking into purchasing a new vehicle, and we are having a difficult time determining whether we should pay cash or finance. We are young and both have good paying jobs. We have about $50K in savings, currently rent, and have no debt. We are looking at a vehicle that costs about $25K, so we have plenty to pay cash, and still have an emergency fund. But on the other hand, we don't know if it would make more sense to keep the money in the bank and pay a monthly car payment. What's the best way to decide whether or not to pay cash or finance? I like the idea of having the peace of mind of no debt, which we are used to. But I also am concerned about keeping savings for a bigger purchase, such as a home. Your thoughts?<br />- KAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-29777096.post-36760904361139551092012-08-13T08:37:50.480-04:002012-08-13T08:37:50.480-04:00Thanks for your reply Earl. The finance is actuall...Thanks for your reply Earl. The finance is actually from Esanda so sounds safe.<br /><br />EAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-29777096.post-67750546931168552122012-08-12T08:26:07.446-04:002012-08-12T08:26:07.446-04:00Just one word of caution, E.
You said "ther...Just one word of caution, E. <br /><br />You said "there is a DEALER with a special offering 0.5%." In most cases DEALERS don't finance cars. Banks and manufacturers' captive finance companies (Ford Motor Credit, Toyota Motor Credit Corp., etc.) do. If it is the dealer offering a very low finance rate, beware that he may be "buying down" the interest rate with the real lender. Buying down an interest rate means the dealer pays the bank an amount of money so that he can offer you a lower rate than the bank would normally permit. Of course the dealer passes this cost along to you by raising the price of the car. <br /><br />Be sure the low interest rate offer is truly coming from a real finance institution and not the dealer.Earl Stewarthttp://www.earlstewarttoyota.comnoreply@blogger.comtag:blogger.com,1999:blog-29777096.post-78957172086989427912012-08-12T06:45:27.424-04:002012-08-12T06:45:27.424-04:00Hi Earl,
I've been looking all over the inter...Hi Earl, <br />I've been looking all over the internet for a take on this side of the story and have finally found it. Hopefully I'm not just happy to find you agree with me.<br /><br />So, if I have $19K to spend on a car, and there is a dealer with a special offering 0.5% (yes, half a %) finance for 36mths, then that is preferable to taking the $19K out of a mortgage offset account attached to a mortgage accruing interest at 5.99%...? This is on the assumption (and my intention) that it would be paid off within the 36 mths. <br /><br />From what I can see, it's even better as I am not paying tax on what I am saving, as would be the case if the money I'm borrowing from myself were in an interest earning account.<br /><br />Thanks for the interesting topic.<br /><br />EAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-29777096.post-3033682767999726772012-07-24T16:54:41.397-04:002012-07-24T16:54:41.397-04:00This comment has been removed by a blog administrator.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-29777096.post-87730589827723750842012-07-03T04:46:02.155-04:002012-07-03T04:46:02.155-04:00I just read. Very interesting and informative, Ear...I just read. Very interesting and informative, Earl. Thank you!Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-29777096.post-62727213961059449942012-05-05T03:14:56.880-04:002012-05-05T03:14:56.880-04:00Loans with no early payoff penalty are out there, ...Loans with no early payoff penalty are out there, but they are very rare and usually available to only those witht high beacon scores and usually not offered by banks. Credit unions are more likely to offer this. Remember that a bank does incur costs when a loan is paid off earlier than scheduled. They almost always will charge you, at least, a cancellation fee to cver their administrative costs.Earl Stewarthttp://www.earlstewarttoyota.comnoreply@blogger.comtag:blogger.com,1999:blog-29777096.post-88753461108544250082012-05-04T17:52:53.146-04:002012-05-04T17:52:53.146-04:00buy it on a credit card get your miles and then pa...buy it on a credit card get your miles and then pay off with cashAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-29777096.post-88918664599293328092012-05-04T17:52:02.924-04:002012-05-04T17:52:02.924-04:00I know for a fact that loans with no early payoff ...I know for a fact that loans with no early payoff penalties are out there. Both for my last three loans a camper and 2 cars purchase were both that way and were payed off prior to the first loan payment was ever made.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-29777096.post-60419171546227147232012-04-13T06:59:12.676-04:002012-04-13T06:59:12.676-04:00Thanks for your question, Al.
Banks and most len...Thanks for your question, Al. <br /><br />Banks and most lending institutions penalize you severely for paying off their loans early. They use a mathematical formula named "The Rule of 78". Simply put, it means that the early monthly payments you make are applied almost entirely to the total interest due on your loan. It isn't until you get toward the end of the loan that you are paying more principal than interest. There is also a flat cancelation fee when you cancel a loan early. <br /><br />If you did save money on the price of the car by financing it instead of paying cash, you would likely lose more than you saved by the penalties for early payment. <br /><br />It's also no sure thing that a dealer would charge you less for the car because you financed it instead of paying cash. Whereas it's true the dealer makes more money when you finance it, that's not to say that he will offset that advantage because you finance. The dealer will just use that as an opportunity to make even more profit.Earl Stewarthttp://www.earlstewarttoyota.comnoreply@blogger.comtag:blogger.com,1999:blog-29777096.post-49315692750384583272012-04-12T19:37:22.290-04:002012-04-12T19:37:22.290-04:00So let's say I can pay cash for a new car, but...So let's say I can pay cash for a new car, but decide to finance in order to get a better price. What prevents me from paying off the load in full on the 1st payment.<br /><br />AlAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-29777096.post-6188534307469812302012-01-26T06:56:52.234-05:002012-01-26T06:56:52.234-05:00David,
You have a very "good problem". ...David,<br /><br />You have a very "good problem". Unfortunately few people these days have been as careful and frugal with their fiances as you and your wife. <br /><br />Interest rates are at historic lows. My guess is that you have excellent credit and can borrow money for a new car for 3% or less. You're probably paying close to 4% to your father-in-law on your home mortgage. <br /><br />It's hard to find a place to safely put your money these days that will earn you a safe 4% You can earn close to 3% with US Treasury notes. I would recommend that you finance your car for 3% unless you have a safe investment that would earn you more. <br /><br />It's almost a toss up and if you would have greater peace of mind by paying off your house, that would be the tie breaker.Earl Stewarthttp://www.earlsewarttoyota.comnoreply@blogger.comtag:blogger.com,1999:blog-29777096.post-86732870497136049072012-01-26T02:23:48.254-05:002012-01-26T02:23:48.254-05:00also, we wont have to pay capital gains on our &qu...also, we wont have to pay capital gains on our "profit" from our sale. we have lived here 7 years.davidhttps://www.blogger.com/profile/03665560301714674042noreply@blogger.comtag:blogger.com,1999:blog-29777096.post-26163632440451096312012-01-26T01:16:33.858-05:002012-01-26T01:16:33.858-05:00is this a good idea? my wife and i are selling our...is this a good idea? my wife and i are selling our house and buying her fathers. we will make about 30k off of the sell of our house. i will put 10k down on fathers house. we have a 15 passenger van that is paid for, worth about 10k on trade or 12 if i sell outright. we need something smaller, such as suv for our kids. we want a nice one as we plan on keeping it for at least 12 to 15 years. i want to take the 20k plus trade in and pay cash for a new vehicle. we have two other cars we just paid for and after 6 years of car payments, we want to only owe on our house. or would it be better to put the full 30k down on house and finance car?davidhttps://www.blogger.com/profile/03665560301714674042noreply@blogger.comtag:blogger.com,1999:blog-29777096.post-62057918626539136102011-12-30T18:37:56.400-05:002011-12-30T18:37:56.400-05:00What if you had bad credit?What if you had bad credit?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-29777096.post-37959704341102742132011-03-17T05:37:55.450-04:002011-03-17T05:37:55.450-04:00Tiffany...let me guess. You're a loan broker!
...Tiffany...let me guess. You're a loan broker!<br /><br />Loan brokers like you get paid a piece of the action by the lender. You have no incentive to advise a car buyer if cash is her best option. In fact, the rate you obtain even if cash is the best option is likely to be higher. The higher the rate you charge the bigger your commission. <br /><br />Please don't use my blog to market your questionable services.Earl Stewarthttp://www.earlstewarttoyota.comnoreply@blogger.comtag:blogger.com,1999:blog-29777096.post-43383814138589387792009-04-29T17:20:00.000-04:002009-04-29T17:20:00.000-04:00If you had financed a car a few weeks ago and put ...If you had financed a car a few weeks ago and put the cash in the market you would have made 30% already. 4 years worth of interest covered in a few weeks. Of course, a year prior to that and you would have lost your shirt! All that said, examine your risk tolerance.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-29777096.post-22359454830106012382009-01-18T08:31:00.000-05:002009-01-18T08:31:00.000-05:00Dear Anonymous,When I wrote this column in 2006, C...Dear Anonymous,<BR/><BR/>When I wrote this column in 2006, CD's were paying considerably more than today, in 2009. And there was a much bigger spread between a CD and the rate for car loans. As you know, this severe economic crisis we find ourselves in has turned the yield curve upside down and what made sense 2 or 3 years ago does not today.<BR/><BR/>But if you owned a CD paying 6% today [of course you can't] and financed a car for 4 1/2%, why take the money out of the bank and lose that good rate of interest?<BR/><BR/>There is an argument that this is not a valid comparison because a car is a "depreciable asset" but that is only half the story. I don't consider an asset depreciable if you get equal or greater value to the amount of depreciation over the life of that asset. Also, you have a great deal of control over the rate at which a car depreciates. By selecting the right make and model and by properly caring for your car you can minimize the depreciation in more than offset it by the value you enjoy from its use. <BR/><BR/>When you rent or lease a car, you con't care about its depreciation because you are getting the value of your daily, weekly, or montly payment for the length of time that you rent/lease it.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-29777096.post-16251492069563985362009-01-17T19:57:00.000-05:002009-01-17T19:57:00.000-05:00I don't see the analogy of putting the money in a ...I don't see the analogy of putting the money in a CD compared with financing a car. The problem if you put the money in a CD, you can't use that money to pay for your car. So you have to make sure you have a enough in the monthly budget to make payments. How about having 25,000 in a cd for three years earning you the interest then taking that CD and buying that car.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-29777096.post-51152416751564909952008-12-17T15:31:00.000-05:002008-12-17T15:31:00.000-05:00"One argument in favor of financing a car is being..."One argument in favor of financing a car is being able to keep your money invested and earning a greater return than your interest cost of financing."<BR/><BR/>Can you let me know where I can invest my money for 3-5 years at a guaranteed 6.5% return (after taxes)? According to Bankrate, the current auto loan rates for 3-5 year loans are 6.74 - 6.81% 5 year CDs are paying a little more than 3% (before taxes). Simply put, you would be hard pressed to EVER find a guaranteed after-tax rate of return anywhere close to the interest rates you'll be paying on an auto loan. In other words, you are better off paying cash.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-29777096.post-59923771662992021142008-11-02T08:03:00.000-05:002008-11-02T08:03:00.000-05:00Dear Anonymous,I did not say that a car was not an...Dear Anonymous,<BR/><BR/>I did not say that a car was not an asset. It is an asset; but it is one which virtually always depreciates, unlike a house, a stock, or a bond. Also, it is an asset that, if you finance it, usually has a negative or zero value for most of the time you own it. Thats because cars almost always depreciate faster than you your principal payments can build equity for 75% of loan period. <BR/><BR/>I have no idea what you mean when you say you should finance a car if what you're earning on your cash investments is LESS tnan what it costs you to finance a car. Did you mean to day that?<BR/><BR/>Re-read this paragraph from my article and maybe this will clarify things for you:<BR/><BR/>"One argument in favor of financing a car is being able to keep your money invested and earning a greater return than your interest cost of financing. The often overlooked fallacy is not making the comparison realistic by understanding that when you pay cash you are really “borrowing money from yourself”. If you have a 3 year CD paying you 6%, on $25,000, you will earn $4775.40 at the end of 3 years. If you finance a $25,000 car for 3 years at 6%, you pay only $2,379.80. But, to compare apples and apples you would have to pay yourself back for the $25,000 you “borrowed from yourself” to pay for your car. When you paid yourself back with interest monthly over three years, the interest you earned would equal the interest paid on the car loan. If you can earn more than 6% with your money, than financing the car for 6% would be a good idea."<BR/><BR/>Get it?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-29777096.post-61600972859061128232008-11-01T23:09:00.000-04:002008-11-01T23:09:00.000-04:00Yes, a car is an asset. The value, less the liabi...Yes, a car is an asset. The value, less the liability you owe against, is considered part of your net worth. Where on earth did you come up with the $1m figure of net worth?? That makes no sense. What if my net worth of $1m is tied up in real estate and long-term investments and isn't very heavily cash-laden? <BR/><BR/>If you can pay cash for a car, you should do so if the cash you're using is earning LESS interest income than the interest you'd pay for a car loan. This is tough to predict unless you put money in a CD that locks in a rate. By the way, don't forget to factor in Federal and State income taxes on the interest income, which makes the analysis a little more interesting.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-29777096.post-17500768412232224272008-05-19T01:10:00.000-04:002008-05-19T01:10:00.000-04:00LOL...It IS an asset (it can be sold for cash); ca...LOL...It IS an asset (it can be sold for cash); cars mostly depreciate in value, but some appreciate. The liability is the loan. Bonehead decision not to pay cash?...not if the yield is more on your investments than the interest you pay on the financing.<BR/>Therefore with favorable financing terms buying new and financing could allow you to raise your net worth.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-29777096.post-20011032051278824302007-12-06T16:26:00.000-05:002007-12-06T16:26:00.000-05:00Going into debt on a liability (a car is not an as...Going into debt on a liability (a car is not an asset because it depreciates almost 20% annually) is a bonehead financial decision. Pay cash and never ever buy new unless your net worth is greater than $1M.Anonymousnoreply@blogger.com