Is it ever a good idea to pay in cash??

[Bades]

IF you can get a good interest rate??

Looking at a new car (used car). I could pay for it in cash, but I have excellent credit and could probably get a rate close to 3%. My investments do better than 3%.

So I would have to assume if you can get a rate lower than what you can get on returns from investments then it would always make sense to get the loan?

[greentea]

I guess my question is are these investments guaranteed at a certain rate or are variable? past doesn't predict future so if you're earning more in the stock market, you may actually lose money if the stock market decreases.

[bigdaddybus]

I have two cars financed right now. One at 1.7% and one at 1.9%. I could pay them both off if I liquidate my non retirement brokerage account but my annual rate of return there has averaged the mid teens (16.4% the last time I checked) including dividends. (since opening it in 2008).
Thus, I dont find having the title in my hand adequate incentive to pay off the vehicles.

That being said, I dont think I would ever finance a vehicle 4.99% or greater.

[dczech09]

Obviously, no one ever pays sticker at a car lot. You can always talk down the price. However, if you finance (even at low rates), you lose bargaining power.

Think about it:
If a car lot issues you a car on a loan with a very low rate, where are they getting that money? From a bank. And the bank charges interest. The car lot needs to cover the cost of capital on their end, so even if you take on a car loan with 0% APR, the car lot still has capital to cover. So how are they supposed to cover it? By building the cost of capital into the price of the car.

Even if you finance at 0%, you could still end up paying much more in the end as the car lot will build the cost of capital into the sticker price and will not accept a price that will cause them to lose money.

Paying cash is always the best way to purchase an automobile. Your bargaining power with cash is extremely high and you can negotiate for a lower purchase price than if you were to finance the car or (even worse) lease it. In theory, you can negotiate to a price that eliminates any cost of capital that was built in their pricing model. If only you could figure out that number And if they won't go down on price, go to a competitor.

When you have cash, you are a king in the car lot.

[snafu]

I think it's smart to see what your bank or CU offers and then talk to the dealership to see what deal you can get. I know GMAC no longer exists but I'll guess that the dealerships have something similar to move the vehicles they need gone.

[autoxer]

I was prepared to pay cash on my last vehicle until they started teasing a 1.3% interest rate in front of me. I took the loan and then a month or two later, the bank started sending me letters saying that my insurance didn't conform with the loan and they wanted me to decrease my deductible. That annoyed me enough that I just paid off the loan.

[CrisAdams]

I think it can make sense to finance if all of the following conditions are met:

- You have a full Stage 2 emergency fund
- You are able to secure a low interest rate on your loan (about 0-2%)

and either:

- The full difference in up-front cost between paying cash and borrowing will be invested for the long-term,

or

- You want the difference in up-front cost available for another big near-term purchase (e.g. other car or home)

[elessar78]

Margins on new car sales are so slim now that dealerships actually make more from financing than the actual car sale.

Plus the dynamics of car dealerships, they get a bonus on NEW units sold from the manufacturer.

So, based on my research there's no advantage to buying a car for cash.

[dczech09]

So, based on my research there's no advantage to buying a car for cash.

Correction: there is no advantage FOR THE DEALER to SELL a car for cash.

If they make more money on financing than actual sales, that means it would be more inexpensive for the consumer to just buy a car without financing.

I get what you are trying to say. If a dealer makes more money on a financing deal, they would have more room to go down in price. And that is true. However, the cost of financing comes from you as the consumer. So essentially they would be willing to go down in price with you only because you are paying them more money in the first place. It is a shell game.

Dealers always have a base number where they draw a line and say "we will not accept anything less than this." You can get a heck of a lot closer to that number with cash than with financing. Financing will always be the base number PLUS the cost of capital. Dealers MUST charge enough to cover the cost of capital otherwise they would go out of business.

Another way to think about this...

Credit carries risk for the dealer too. What if you do not pay on time? What if the bank won't purchase the contract for full price? What if you do not get approved for a loan? There are many risks that they want to cover when drafting up a deal on financing.

When you pay with cash, they have the money immediately.

Cash always wins.

[elessar78]

That makes a huge assumption that car dealerships are cash-poor—they might be.

Flip the situation, why do we save and invest? Would we rather have our money now or more money later? The dealer gets a markup (or some other incentive) on making the loan. If the buyer qualifies for 3%, then the dealership can markup to like 3.5% and pocket the difference.

When I go in with a finance situation, I carry in with me my own financing. My credit score gets me really low rates so I have them beat it and they usually do. If there was no incentive for them to hold my financing they wouldn't compete.

Assuming you check credit scores and history, the dealer is making an educated guess that the buyer is likely to pay. Yes, there will be some deadbeats in the pool but you're banking that the majority will be good payers.

It's also not an unsecured loan—they can repo the car for non-pays and that's a write-off for the bank, not the dealership.

[dczech09]

That makes a huge assumption that car dealerships are cash-poor—they might be.

Flip the situation, why do we save and invest? Would we rather have our money now or more money later? The dealer gets a markup (or some other incentive) on making the loan. If the buyer qualifies for 3%, then the dealership can markup to like 3.5% and pocket the difference.

When I go in with a finance situation, I carry in with me my own financing. My credit score gets me really low rates so I have them beat it and they usually do. If there was no incentive for them to hold my financing they wouldn't compete.

Assuming you check credit scores and history, the dealer is making an educated guess that the buyer is likely to pay. Yes, there will be some deadbeats in the pool but you're banking that the majority will be good payers.

It's also not an unsecured loan—they can repo the car for non-pays and that's a write-off for the bank, not the dealership.

I am not sure what you are trying to get at. You're trying to argue that it is better that to finance a car as opposed to buy a car with cash. Yet, you have not made any argument to support your claim.

How does a dealer being "cash poor" have anything to do with financing being a better deal for the consumer?

Paying with cash will always be better than financing (for the consumer). It will always be less expensive. More bargaining power. Higher liquidity for the dealer. Less risk.

You completely missed my central arguments.

[dczech09]

Let's say that a dealership is selling a car and their bottom line price is $10,000. This is not their sticker price, but the least amount they will accept. They will not accept anything less than this amount on a cash deal as this will cover the cost of the auto, closing, and commission.

If you were going to purchase the car for cash, you could (in theory) negotiate all the way down to $10,000.

However, if you financed a car, then the cost of capital would have to be added in. Let's say that the bank is obtaining credit from their bank at a rate of 3% per year on a 5 year note. That would be a cost of capital of $1,500. It is costing the dealer $1,500 to offer you the deal on credit (whether they issue you a loan at 0% or 10%). They need to include that $1,500 in their base making their bottom line $10,000 + $1,500.

Remember, if a dealer is offering financing, that financing costs money. And money does not come free from a bank. Even if the dealer is charging you 0%, that does not mean that the bank is charging the dealer 0%. The bank is still charging independently and that poses a cost to the dealer. That cost must be transferred to the consumer.

This is all semantics that I am writing about. However, the principle is that cash deals allow for steeper negotiating because it COSTS the dealer less money when you buy on cash as opposed to credit. When the dealer does not have the extra costs to cover, they can transfer the savings to you.

So when you buy with cash, you have more power. Not only are you saving the dealer money in terms of capital costs, closing costs (it costs more to close a loan), and risk, but you are also giving them the whole "immediacy" factor. As a result, there is more savings for the dealer to deliver you in terms of discount.

[MKKShah]

IF you can get a good interest rate??

Looking at a new car (used car). I could pay for it in cash, but I have excellent credit and could probably get a rate close to 3%. My investments do better than 3%.

So I would have to assume if you can get a rate lower than what you can get on returns from investments then it would always make sense to get the loan?

IF you get a good interest rate,
THEN it is a great idea to finance the car.

If you are not disciplined enough to save and invest the money, then it is better to pay cash

[MKKShah]

Obviously, no one ever pays sticker at a car lot. You can always talk down the price. However, if you finance (even at low rates), you lose bargaining power.

This is simply not true. Dealers make money on the front end (profit on the sale of the car), and the back end (kick backs from insurance companies, Auto finance institutions, GAP insurance sale, trade in etc).

So a dealer might offer you a great pricing on the car, in the hopes of making a back end commission by getting you to finance with him. I always use this a bargaining chip. Go with the dealer (even if I have a great pre-approval from my own bank), but use the back end to get a steal on the upfront car pricing. Then go ahead and refinance (if the rates offered by the dealer is not competitive). Nowadays auto loans do not have any cost (fees) associated with them.

Paying cash is always the best way to purchase an automobile. Your bargaining power with cash is extremely high and you can negotiate for a lower purchase price than if you were to finance the car or (even worse) lease it. In theory, you can negotiate to a price that eliminates any cost of capital that was built in their pricing model. If only you could figure out that number And if they won't go down on price, go to a competitor.

When you have cash, you are a king in the car lot.

Again, simply not true. At least not anymore. If you "pay cash" then the dealer loses out on his back end profit opportunity and will be less willing to negotiate a lower price for you. So in general "paying cash" is not a good option for a well qualified (i.e good credit) buyer.

If you agree to finance with the dealer, and use that back end profit in reducing the upfront cost/ purchase price of the car, then it is the best deal. (provided you pay it off immediately or refinance to a new low rate loan).

[MKKShah]

I think it can make sense to finance if all of the following conditions are met:

- You have a full Stage 2 emergency fund

Could you please elaborate on this? what is a "stage 2" emergency fund?