Paying Cash vs Financing?

[///M///]

So the majority of the folks in the US seem to finance their cars. That has always been the way of living here in the US. However, the availability of financing almost always opens up the possibility of going for vehicles that could be just out of reach from a affordability perspective.

That said, I come from a different school of thought where I don't like to pay any interest and like to live within my means.

Can anyone explain why it may be better to finance vs paying cash? Here are some of the obvious reasons I know will favor finance......

1) The car is a depreciating asset. The cash is tied up in a depreciating asset.

2) If you crash the car in the first few months, the insurance will pay out much less than what you paid for a new car. So you just lost all that cash.

3) If the interest rate is low enough you could make more money by investing that cash elsewhere.


And here is my thinking on why i need to go the cash route.... Assuming the new M3 will be 65k OTD (my build)

1) If I finance it on current rates (3%), unless the rate is less than 1.5% I don't see the money I invest making anything substantial for me anywhere else. Not unless I put it in the stock market but that is way too risky and stressful.

2) If I put it in a CD/Mutual Fund, I can't touch it for X number of years and that locks the money up. In this scenario, I don't think I am comfortable paying over 1k in car loan payments every month. That is just a bit too much.

Would it make sense going 50/50? Looking forward to hearing everyone's opinions.

Thanks.

[jimbethesda]

Only #3 makes sense, but you also have to consider the risk the investment has.

I'm paying cash.

If BMW was offering a below market rate (.90% or lower), then it might be worth it.

You should take out a 36-month loan for your first car and then keep it for 6-10 years. When the loan is paid off, keep making the "payments" by putting the money in a savings account. Then you'll have enough cash for your next car.

[///M///]

Originally Posted by jimbethesda

Only #3 makes sense, but you also have to consider the risk the investment has.

I'm paying cash.

If BMW was offering a below market rate (.90% or lower), then it might be worth it.

You should take out a 36-month loan for your first car and then keep it for 6-10 years. When the loan is paid off, keep making the "payments" by putting the money in a savings account. Then you'll have enough cash for your next car.

Thanks. My usual approach on M3's has been as follows. As an example on the F8X......

Buy at 65k cash
Put aside $500 in car savings every month.
Keep for just under 4 years 48-49k miles and sell with a few months warranty. Selling it at this stage ensures a better price vs selling after 50k miles or no warranty. Going by past experience, I would guess 38-40k would be realistic.

Take out 10-12k from the 24k savings over 4 years, add the 38-40k to it and buy a 2 year old F80 with very low miles (under 20k miles). Keep saving that $500/month. Use it for 2 years and then sell it again before the warranty expires. This again will fetch a good price. By now 6 years have passed and you are ready for the ED on the next generation M3.

So this works like a $500 car payment except it is going in your savings account or some other interest making account vs a lenders pocket with interest. The key is to not buy a loaded car with over the top options, but just add the necessary options and then selling the car at the right time and being a little patient buying the used car.

[OneRib]

I don't see anything wrong with your thought process. I can be applied to any large purchase. Most people (including myself) aren't that disciplined. You have set yourself up for a lifetime of great cars at a reasonable price.

As I see it, most times financing is a way to get something now that you can't afford to pay in full. I think its fine as long as you are not overdoing it, pretty much like everything in life.

I just try and pay myself first (savings, retirement), don't over extend myself with credit, and finance at reasonable rates. I understand I will be paying interest I could avoid, but I do get more time in the cars I like because I don't spend time saving.

[///M///]

Originally Posted by OneRib

I don't see anything wrong with your thought process. I can be applied to any large purchase. Most people (including myself) aren't that disciplined. You have set yourself up for a lifetime of great cars at a reasonable price.

As I see it, most times financing is a way to get something now that you can't afford to pay in full. I think its fine as long as you are not overdoing it, pretty much like everything in life.

I just try and pay myself first (savings, retirement), don't over extend myself with credit, and finance at reasonable rates. I understand I will be paying interest I could avoid, but I do get more time in the cars I like because I don't spend time saving.

Yes but the time saving was only spent for the first M3 that I bought (E46 M3) while I drove around in my college maxima since then I have never been without a great car aka M3. The saving all happened while I was still using the car. Over the years I have gotten so used to the $500 not being there I don't even notice it. It goes straight to my M3 account from my employer that way I don't even get tempted. The hard part is not to dig into it for mods This time around I have no choice but to wait because I never buy the first year model and also I want to do my first summer ED

[OneRib]

Originally Posted by dsm918

Yes but the time saving was only spent for the first M3 that I bought (E46 M3) while I drove around in my college maxima since then I have never. Been without a great car aka M3. This time around I have no choice but to wait because I never buy the first year model and also I want to do a summer ED

I know you only waited once. I just know most people can't even do that. We may see each other next year as my plan is also to aim for a 2016 summer ED.

[Launch Control]

I think there's lots of theories on which is better but I hate debt. I'm a huge fan of Dave Ramsey and He's a big believer in paying cash for everything.

In my own experience, I enjoy driving a car I own more than one that is leased or financed.

[OneRib]

Different stokes for different folks. Key is moderation. Ugh I sound like a Weight Watcher's ad.

[GrussGott]

If you lease:

1. For only a monthly incremental payment you secure full use of the car
2. You eliminate your risk to depreciation or market collapse
3. You get compound interest on your large sum of money
4. You can renegotiate the car price at lease end - if the market has sunk you get a second bite at purchase price

It really is a personal choice but I'm beyond understanding - FINANCIALLY - why you'd want to tie up so much money you could be earning interest on.

Think of "afford" as afford the cash flow - if you have the monthly cash flow why forego the passive income and take on risk at the same time?

[///M///]

Originally Posted by GrussGott

If you lease:

1. For only a monthly incremental payment you secure full use of the car
2. You eliminate your risk to depreciation or market collapse
3. You get compound interest on your large sum of money
4. You can renegotiate the car price at lease end - if the market has sunk you get a second bite at purchase price

It really is a personal choice but I'm beyond understanding - FINANCIALLY - why you'd want to tie up so much money you could be earning interest on.

Think of "afford" as afford the cash flow - if you have the monthly cash flow why forego the passive income and take on risk at the same time?

Lease never made sense to me cuz the car doesn't feel like it belongs to me. Feels like I am renting a car. The other dilemma is that if I tie the cash in investment, I would need to come up with $1100/month in car payments.

[GrussGott]

Originally Posted by dsm918

Lease never made sense to me cuz the car doesn't feel like it belongs to me. Feels like I am renting a car. The other dilemma is that if I tie the cash in investment, I would need to come up with $1100/month in car payments.

Yup, best lesson I've learned: don't mix feelings with finances.

Super hard to do but the bottom line is I rent everything now because renting is financially smarter depending on your risk of moving, your location, etc.

As to the coming up with $1100/mo ... well, that's how you know if you can afford it!

Gotta have the cash flow to:

(1.) Pay yourself first and get that passive income going,
(2.) take care of everything else,
(3.) have a very few nice things.

Future self who's going to really want to retire early (or well) or take that year off of work or pay for that huge wedding or pay your medical bills or pay for your sick parents or whatever will thank you.

[JNoSol]

In Vietnam, there isn't really a credit system and the F80 would cost $160k USD (high tariff tax). They would have to pay cash, it's the only way. In the U.S., you can get a car loan for under 3%. My stock portfolio has always been over 25% annual return, I would never have cash tied up paying a car in cash. Money now is more expensive than money later, with 3% is barely keeping up with inflation so I would always finance.

There are safe high returns stock out there. The trick is not day trading stock, you're in it in the long run.

I do agree with you that an average American get themselves in trouble really quickly because of how easy it is to get a loan. You seem like you have good self control, dump half your cash in a good stock and keep the other half in secured bonds. Finance the car, by the time the car loan is up you'll have more money than you begin with. The 8th wonder of the world is compound interest...

[///M///]

Originally Posted by GrussGott

Yup, best lesson I've learned: don't mix feelings with finances.

Super hard to do but the bottom line is I rent everything now because renting is financially smarter depending on your risk of moving, your location, etc.

As to the coming up with $1100/mo ... well, that's how you know if you can afford it!

Gotta have the cash flow to:

(1.) Pay yourself first and get that passive income going,
(2.) take care of everything else,
(3.) have a very few nice things.

Future self who's going to really want to retire early (or well) or take that year off of work or pay for that huge wedding or pay your medical bills or pay for your sick parents or whatever will thank you.

The $1100/month is less about affordability for me and more about a comfort factor. I typically don't like to be tied down by mandatory monthly payments incase in those 5 years I decide I want to spend some money elsewhere. Don't like been tied down by too much debt and payments. I think we come from totally different school of thoughts when u said you prefer to rent vs own. It is not all about money for me when it comes to living. Where I live and the surroundings my kids will from up is really important to me. Buying our first house 4 years ago was probably the best decision I had ever made. My loan rate is 2.5% and no! I did not buy any points to bring it down. The house has appreciated 19% in the last 4 years. Guess I just bought it at the right time. I have bought it a neighborhood where homes sell quickly so I don't feel like I am tied down. Have too many family ties here (Eagles) so don't think I will be moving anytime soon.

That said, let's keep it to cars. I have never really looked into leasing and want to better understand how leasing makes more sense. Let's work with an example of the M3 and assume the price is 70k OTD. Walk me through it.

[///M///]

Originally Posted by JNoSol

In Vietnam, there isn't really a credit system and the F80 would cost $160k USD (high tariff tax). They would have to pay cash, it's the only way. In the U.S., you can get a car loan for under 3%. My stock portfolio has always been over 25% annual return, I would never have cash tied up paying a car in cash. Money now is more expensive than money later, with 3% is barely keeping up with inflation so I would always finance.

There are safe high returns stock out there. The trick is not day trading stock, you're in it in the long run.

I do agree with you that an average American get themselves in trouble really quickly because of how easy it is to get a loan. You seem like you have good self control, dump half your cash in a good stock and keep the other half in secured bonds. Finance the car, by the time the car loan is up you'll have more money than you begin with. The 8th wonder of the world is compound interest...

25% return? That's incredible. Am pretty tempted to dump some of it in apple but I have already a lot invested in that company

[KevinM]

Cash. In fact, cash on a 2-3 year old model is the best deal going on any car!

That said, I definitely agree with different strategies depending on goals. There are so many variables...It's true than you can invest the money and realize a return that brings in more money than the car loan interest as long as you are willing to make the effort and take the risk to make this happen. This is definitely doable these days due to very low interest rates.

Leasing may be desirable for the non-hassle factor if you are not sure I want to keep the car long-term or are worried about losing money if the car is in an accident, etc. I haven't leased a car in a very long time, but am considering this for the F8X as I hate selling and/or trading in cars and I'm not sure I will be keeping it long term (unlike my M5 and M coupe, which are lifers).

GL!

[GrussGott]

Originally Posted by dsm918

I think we come from totally different school of thoughts when u said you prefer to rent vs own.

Well I don't prefer renting, in fact it drives me nuts, but the data says what it says.

As to walking you through leasing ... there's lots of threads on how it works so I'll just game out a scenario:

Let's say the M4 is $85,000, over 3 years (typical lease term) @ 8% = 107,000 ...i.e., a 22,000 jump. That's a lot of car payments.

Looked at differently, if you have $168,000 (roughly double) as car "seed money" and it earns 8% every year, that's $1120/mo!

You're in M4s for the rest of your life.

[JNoSol]

Originally Posted by dsm918

25% return? That's incredible. Am pretty tempted to dump some of it in apple but I have already a lot invested in that company

You can't go wrong with AAPL/EMC/CERN. Technology and Healthcare will always have demands. CERN for example, has doubled in price every 2.5yr and will continue to grow (it outperform AAPL, if you had $10k in CERN in 1988 you'll have $1.7M+ today). Also have some money for short term trade, not to be confused with day trading. I watch for instances where the average stock traders would overreact to a media event, then take advantage of it.

Examples: BP oil spill, people thought BP would bankrupt driving the stock price to half. I bought it then waited for a couple years til it doubles. TSLA car burned down, people freaked out and thought Americans would lose trust in the company. Their stock took a dive, I bought it at the bottom and waited for the company to recover then sell.

Use common sense. Big companies like BP wouldn't brankrupt, especially in a profitable oil business. Tesla is well funded and close to their customers relations, they would do the right thing to fix it (added bullet proof casing for their batteries). Apple wouldn't crash after the iphone 6 plus bending, they have one of the most faithful customers on the planet. Yet, an average trader would freak out then dump their shares (mostly day traders wannabe).

I'm not an expert and don't pretend to be one. You always need to invest in industries where you're close to. Healthcare, cars, and technology are my area of expertise. This is why I wouldn't trust my money with "professional" brokers.

[///M///]

Originally Posted by JNoSol

You can't go wrong with AAPL/EMC/CERN. Technology and Healthcare will always have demands. CERN for example, has doubled in price every 2.5yr and will continue to grow (it outperform AAPL, if you had $10k in CERN in 1988 you'll have $1.7M+ today). Also have some money for short term trade, not to be confused with day trading. I watch for instances where the average stock traders would overreact to a media event, then take advantage of it.

Examples: BP oil spill, people thought BP would bankrupt driving the stock price to half. I bought it then waited for a couple years til it doubles. TSLA car burned down, people freaked out and thought Americans would lose trust in the company. Their stock took a dive, I bought it at the bottom and waited for the company to recover then sell.

Use common sense. Big companies like BP wouldn't brankrupt, especially in a profitable oil business. Tesla is well funded and close to their customers relations, they would do the right thing to fix it (added bullet proof casing for their batteries). Apple wouldn't crash after the iphone 6 plus bending, they have one of the most faithful customers on the planet. Yet, an average trader would freak out then dump their shares (mostly day traders wannabe).

I'm not an expert and don't pretend to be one. You always needs to invest in industries where you're close to. Healthcare, cars, and technology are my area of expertise. This is why I wouldn't trust my money with "professional" brokers.

Nicely summarized. Thanks. yes I have a lot invested in Apple when it was at 200 pre split. Bough some more when it split at $90.

[GrussGott]

Originally Posted by JNoSol

Use common sense. Big companies like BP wouldn't brankrupt, especially in a profitable oil business. Tesla is well funded and close to their customers relations, they would do the right thing to fix it (added bullet proof casing for their batteries).

Alternatively for people who don't want to watch and manage all that (and bear the risk), there's low-cost, low-tax index funds.

$170k into one of those pays for M4s for the rest of your life. Rest & vest FTW!

[Launch Control]

Originally Posted by dsm918

Looking forward to hearing everyone's opinions.

Thanks.

Download the iHeartRadio App and listen to Dave Ramsey for a few hours. He talks a lot of financing cars.

There are no guarantee's in the market and Dave Ramsey's rule of thumb, is you should not buy a new car unless your net worth is over 1 Million. (Due to the amount the car depreciates in the first 2-years)

I worked hard, paid off my mortgage then saved up for my M3. Now the monthly income I would have spent on a car payment, goes directly into my investment accounts.

You'll get opinions on both sides of the spectrum. Good luck in your purchase! Don't forget to post some pictures when you get your new car!

[///M///]

Originally Posted by Launch Control

Download the iHeartRadio App and listen to Dave Ramsey for a few hours. He talks a lot of financing cars.

There are no guarantee's in the market and Dave Ramsey's rule of thumb, is you should not buy a new car unless your net worth is over 1 Million. (Due to the amount the car depreciates in the first 2-years)

I worked hard, paid off my mortgage then saved up for my M3. Now the monthly income I would have spent on a car payment, goes directly into my investment accounts.

You'll get opinions on both sides of the spectrum. Good luck in your purchase! Don't forget to post some pictures when you get your new car!

Thanks. The only reason to go new was ED want to get that experience once in my lifetime.

[GrussGott]

Originally Posted by Launch Control

There are no guarantee's in the market and Dave Ramsey's rule of thumb, is you should not buy a new car unless your net worth is over 1 Million. (Due to the amount the car depreciates in the first 2-years)

$1M Liquid? I'm guessing not since you said net. The problem with house money is it's risky - if you have to sell, you're a slave to the time you have to sell. If it's 2009 and you need your home cash you're fucked. Broad investing (index funds) is as close to a guarantee as anything in the World. Of course you might have to sweat through 10 years in a down time ... But anyway, index investing beats just about any alternative in the long term.