Cash for car vs low interest rate

[jzunic]

We need to purchase a new vehicle because our only car was totalled in an accident. Fortunately, we have more than enough in savings to buy the car outright. However, I'm wondering if it makes more sense to finance it. Our savings is currently in an Emigrant Direct account at 5.05% APY. Although we have more than needed for an emergency fund, our income is decreasing because we just had our first child and I'll be a SAHM for awhile. It would be nice to have a sizeable emergency fund, just in case. If we can finance the car at a rate lower than 5%, does it make more sense to do that, so that the money in savings keeps working for us, and is also there if needed?

Obviously, if we can't get a rate lower than 5%, we'll pay cash for the car. I'm just thinking about the best plan if we can get, say, a 3% rate for the car loan.

TIA!

[Ima saver]

Yes, if you can find a lower rate than 5% then finance the car and let your savings keep earning the 5.05%

[MonkeyMama]

Agreed. I just took on a 3% loan for a year - WELL worth it. I paid it off a little faster than if it was 0% or something, but sure beat draining most of our savings for a paid for car.

[Coleroo]

I'll go against the grain -
If you have the money to buy it outright, do so. period. The savings between what you'll earn in interest and what you pay out is puny at best --- especially since you pay taxes on what you earn anyway. Theres way too many things that can go wrong as a stay at home mom that would make you wish you didnt have that payment.

What if something happens and you lose access to your spouse's source of income (layoff, accident, termination)? You'd still be saddled with a payment. Your emergency fund could get wiped out much more quickly than you've anticipated too (baby emergency, unexpected baby expenses, complications, higher cost of living, etc) - then you'd have a payment, one source of income and no extra money. If something happens and you miss that payment you'd also have creditors to answer to and your credit record could get damaged. Also, it may be too tempting to buy a "little more expensive" car just because it is financed.

I see no reason not to buy it outright, regardless. To me, the "sense of security" of a little bit more padded bank account may be a false sense, in light of everything that could go wrong by taking on (unecessary) debt and a payment in a one income household.

[jmjj215]

especially since you pay taxes on what you earn anyway

We had a similar discussion a while back and that point was missed about taxes. Earning 5.05% w/ a 20% tax bracket turns into 4% and then when you have a loan at 3% and you were wanting to buy, let's say, a $15,000 car...You're talking about $150...

If I had a spread of 4% I'd do it, but w/ 1%? Nah...

But to your other point -- any way you can boost up that EF even more in preparation for being a SAHM for a while?

[jzunic]

Thanks for the feedback. It makes sense just to pay cash - I'd much rather not have a car payment, I was just wondering if it made sense to finance at a good rate if we found one.

As for the emergency fund, I'm hoping to do some part-time work from home as a SAHM, so hopefully we won't have to dip into it anytime soon. Fortunately, we have no debt and minimal monthly payments (other than our mortgage), so with a modest lifestyle, we should do fine cutting back to one salary...

[poundwise]

If you are looking at the math that closely, I'm not sure why you are planning to buy new.

That is, you are comparing the idea of having a 3% loan v. 5% savings but you are failing to consider that a new car depreciates 15% to 20% per year.

I believe that if you are really interested in achieving the best deal, "all rates" considered, you should be looking for a one to three year old car with low mileage.

Check out this article at Bankrate.com for more on the subject:

Understanding auto depreciation

My advice, for the best deal overall, is buy a gently used car with cash.

[MonkeyMama]

It depends how much you would still have in your e-fund though after paying cash. If you had $0 wouldn't you rather have a small monthly payment? I don't get draining a big chunk of your cash for "peace of mind" with such a big life change, etc. It may not make a lot of money, but it can buy some time for you to see if you really need the cash more, as you won't be losing money on the deal.

I personally had never paid consumer interest before but made the exception for a 3% loan so I didn't have to drain my savings below what I felt comfortable - don't regret it a bit.

It sounds like you feel comfortable paying cash and is probably the way to go for you.

Oh yeah but I am totally with poundwise too. I would go used.

[George23]

My advice, for the best deal overall, is buy a gently used car with cash.

Good advice - I would just add to be careful about not having an adequate emergency fund.