Car: buy cash or financing?

[lillo9546]

Hi there!
Let's discuss which is better:
1) buy cash
2) financing

Let's say you usually buy a new car every 5y.
So you buy the car for 20k, and usually resell it for 10k after 5y.
This means you payed 10k for the car.

Now, let's compare if you bought the car cash vs financing.
Apart the fact you need the 20k with the cash option, while with financing you only need 20/30%, the cash option will be cheaper by a 20%.
I've calculated that if you kept the car for 60 months, you had to pay a montly fee of 165€ with cash option, while 200€ with financing option.

But financing is convenient, because if you don't have the money, you can basically buy a better car, and also with higher value, that could sell better in the future.

What do you guys think?

[Scott 2]

Why treat the vehicle differently from any other asset purchased using leverage?

Optimal depends on expected future value of the asset, utility, cost of ownership, loan terms, your cost of capital, transaction costs, value of your time, etc.

Minimum possible cost probably goes to an informed buyer, making a private party cash purchase, from a motivated seller.

Drive a vehicle that's a very small percentage of your net worth, for a long time, and minimizing the cost doesn't really matter.

[macg]

My vote is don't buy a car at all lol.

Also, I'd be surprised if many in this forum get a new car every 5y, or even 10.

[delay]

There's more to cash or finance than financial optimisation. When you finance, you end up owing someone. This burdens your outlook. YNAB has a nice way to portray this, like in Debt & Your Budget.

Cash changes your perception for the better. If you pay cash, you are more likely to:
- buy a smaller car
- buy a second hand car
- avoid additional insurance products
- take good care of your car
- not buy a car at all
- correctly estimate the total cost of the purchase

Financing trades the future for the now, and will trouble you for years on end. A cash purchase is simple and final.

[lillo9546]

Thanks all.
But a cash purchase it's still to be "dilated" in the period of usage of the car, right?

[Dream of Freedom]

"dilated" as in enlarged or widened? I think the word you seek is depreciated. Well, that is how it's usually done in accrual accounting, not cash accounting. So it is a viable way to look at it*. Equipment is depreciated over its expected life.

you can basically buy a better car, and also with higher value, that could sell better in the future.

Cars lose resell values at different rates depending on make and model. The more expensive model could lose value faster or slower so you would want to research what has happened to the value of previous years' cars.

Personally, I don't see the point of paying more unless your car is your way of making money. Also, going carless shouldn't be too hard. It's far cheaper and you get exercise built into your life in a way that takes less willpower than going to a gym.

*Buying in cash doesn't obligate you to use cash accounting

[Scott 2]

By dilated, I assume you're describing the following:

Let's assume $10k in cash to start.

1. Buy a $10k car. Now that's all you have.

2. Buy a $10k car, putting $2k down, to get an $8k loan. Invest $8k. Now you have a $10k car, $8k loan, and $8k investments.

So in option 2, you use the car as an asset, to secure $8k to invest. The question becomes - can you produce a greater return on investment than it takes to service the loan?

That depends on the loan terms and your investment options. At the most basic level, if it was possible, why wouldn't the bank put their money there instead?


So there needs to be something unique about your situation, that allows beating the market. Maybe:

1. You have high interest debt, like a credit card that needs to be paid

2. You can invest in parallel in an asset that also takes your labor as input, yielding especially high returns. Education or a business.

3. There are financing incentives that bet upon you not paying the loan early. IE 0% interest for 5 years. These are tricky, because the cost can end up embedded in the vehicle price.

4. There are tax incentives you can take advantage of. Maybe an electric vehicle credit, the requires purchase of an $18k vehicle.

5. You know something the market doesn't AND the inefficiency corrects before you need pay your loan. Unlikely without insider information.


At the end of the day - your decision tree is not specific to a vehicle. The chain of thought applies to acquiring any asset or liability.

The highest return scenario is likely more complex, as you adapt to exploit market inefficiencies. But there's a price to managing the overhead of that complexity. Often it's not worth maximizing financial returns.

[lillo9546]

By dilated, I assume you're describing the following:

Let's assume $10k in cash to start.

1. Buy a $10k car. Now that's all you have.

2. Buy a $10k car, putting $2k down, to get an $8k loan. Invest $8k. Now you have a $10k car, $8k loan, and $8k investments.

So in option 2, you use the car as an asset, to secure $8k to invest. The question becomes - can you produce a greater return on investment than it takes to service the loan?

That depends on the loan terms and your investment options. At the most basic level, if it was possible, why wouldn't the bank put their money there instead?


So there needs to be something unique about your situation, that allows beating the market. Maybe:

1. You have high interest debt, like a credit card that needs to be paid

2. You can invest in parallel in an asset that also takes your labor as input, yielding especially high returns. Education or a business.

3. There are financing incentives that bet upon you not paying the loan early. IE 0% interest for 5 years. These are tricky, because the cost can end up embedded in the vehicle price.

4. There are tax incentives you can take advantage of. Maybe an electric vehicle credit, the requires purchase of an $18k vehicle.

5. You know something the market doesn't AND the inefficiency corrects before you need pay your loan. Unlikely without insider information.


At the end of the day - your decision tree is not specific to a vehicle. The chain of thought applies to acquiring any asset or liability.

The highest return scenario is likely more complex, as you adapt to exploit market inefficiencies. But there's a price to managing the overhead of that complexity. Often it's not worth maximizing financial returns.

So interesting!
What would you do if you need to buy a car for 15k?
Would you keep and sell every 5 year?
Would you keep for 20years?
How would you buy?

[Scott 2]

I personally opted to buy an ~5 year old used car from a dealer, accept their trade in price on my old car and pay cash. I'll drive it until a severe mechanical failure develops, probably 10-20 years. This was a small percentage of my net worth, I had high income at the time, my existing car was failing, and I had little time to spend on the transaction. Maybe I left a few thousand on the table?

In my case, minimizing hassle was the most important criteria.

[Sclass]

There are a lot of knobs to turn.

My feeling with borrowing to buy new is higher cost. You’re going to pay interest that is commensurate with your credit rating. If you’re trying to avoid high interest debt because you already have high interest debt you can find yourself in a conundrum. Also auto lenders will require enhanced insurance packages to cover “their” vehicle. There are more subtle costs associated with buying new such as registration which is proportional to the value of the car and silly things like the creeping cost of tires due to the trend in increasing wheel diameter for almost every kind of car over the last twenty years. Civic tires are 16” standard and 18” optional. Replacements aren’t cheap like on my 1979 Civic that used 12”.

You need to find out what works for you. A super reliable five year old car may not cut it for somebody trying to maintain the image of success. I think my friend in sales was required to get a new car every two years and his boss paid for half up to a certain cost.

My wife used to be really self conscious of our old cars. Her car shaming friends have come and gone. Good riddens. The new Accord I bought her is now twelve years old. Her latest girl pal says she and her husband have never owned a paid off car unless it was totaled out by their insurance company. They happily live paycheck to paycheck.

So yeah, agree with Scott. Buy a used car cash that doesn’t break. The art is getting the cheapest one you can get away with while still feeling secure in.

[loutfard]

When getting a cheap car, another thing to mind, at least in part of Europe, is emission zones. Examples:

- from 20250101, no driving in the Brussels region, Antwerp, Ghent in a euro 5 (2015) car
- from 20260101, no driving in Wallonia (southern half of Belgium) in a euro 4 (2010) car.
- from 20280101, no driving in Wallonia in a euro 5 (2015) car

[lillo9546]

Hello!
I need to buy a car and have budgeted 20k euros.
I'm considering borrowing 20k euros from a friend at an 8% fixed interest, resulting in a total repayment of 21.6k euros over 120 installments, or 180€/m.

With 20 thousand euros invested, I could withdraw 5%, covering near half of the monthly installment. I can't ask my friend for a repayment period of more than 10 years, and I can't increase my stock investment as I need cash for a real estate investment soon. What do you think? Any other strategy?"

[chenda]

If you need to borrow money to buy a car then you can't afford a car.

[Seppia]

Hello!
I need to buy a car and have budgeted 20k euros.
I'm considering borrowing 20k euros from a friend at an 8% fixed interest, resulting in a total repayment of 21.6k euros over 120 installments, or 180€/m.

With 20 thousand euros invested, I could withdraw 5%, covering near half of the monthly installment. I can't ask my friend for a repayment period of more than 10 years, and I can't increase my stock investment as I need cash for a real estate investment soon. What do you think? Any other strategy?"

The actual interest you’re being charged in this scenario is around 1.6%, not 8%.
So either your friend is terrible at math, or you are

If those are indeed the terms that you have agreed to, and you’re paying 1.6% interest on a 10 year loan, you should borrow as much money as you can, put it in 10 year government bonds, and pocket the spread.

In any scenario, my opinion is that spending 20k on a car is not a great decision (based on what you shared regarding your finances). If you absolutely need a car, buy a low mileage second hand panda.

[macg]

If you need to borrow money to buy a car then you can't afford a car.

+1 to this.

If you actually need a car, then go with the (I think, if I remember correctly) Dave Ramsey theory - buy a car that you can pay for right now with cash. Take whatever monthly payment you think you can make and put that into a "car fund" (where that is held can be argued by people here on the forum who are better versed than me). Do that until you have enough cash to trade in the car, add the cash, and upgrade to a better car. Continue as needed.

I'd also say investigate non-car options - bicycles, e-bikes, mopeds, etc.

[delay]

The actual interest you’re being charged in this scenario is around 1.6%, not 8%.
So either your friend is terrible at math, or you are

Interesting, I can see where the OP comes from. 120 instalments of 180 add up to 21.600. That's 8% more then 20.000. So that's 8% interest over ten years.

If I start with your answer of 1.6%, I can see the first year costs 1.6% * 20.000 = 320 interest. Pay 12*180=2.160 and there is 18.160 debt left. The second year costs 1.6% * 18.160 = 290 leaving 16.290 at the end of the year. After ten years there is 217 debt left. So your answer is pretty accurate.

What's a good way to get to 1.6%?

[Seppia]

The OP comes from the world of wrong math
The calculation 20000x8% = 1600 would be correct if he borrowed money for 1 year at 8% and paid it back in one single shot at the end of year 1.

Mathematically there’s a formula that synthesizes it that I had studied years ago and promptly forgotten.
Using excel it’s very easy to just get there using your methodology.
20000 over 120 payments is 166.67 per payment
Cell A1 is 20000
Cell A2 is “cell A1-166.67”
Cell A3 is “cell A2-166.67”
And so on till cell A120
Cell B1 is “cell $D$1 x cell A1”
Cell B2 is “cell $D$1 x cell A2”
And so on till cell B120
Cell C1 is “cell A1 + cell B1”
And so on till cell C120
Cell C121 is the sum of all C cells
Cell D1 is your interest rate
Modify cell D1 till cell C121 approximates 21600

Or you can do the same with an online calculator lol

[delay]

Modify cell D1 till cell C121 approximates 21600

Haha yeah that was my approach too.

It looks like the Libre Office function RATE does the trick. Number of periods is 120 months is 10 years, yearly payment is twelve times the monthly payment, so:

Code: Select all

=RATE(120/12,180*12,-20000)
1.42434%%

Simulating 1.42434%% leaves a remaining debt of zero after ten years.

[Sclass]

The actual interest you’re being charged in this scenario is around 1.6%, not 8%.
So either your friend is terrible at math, or you are

Huh. Good catch. I checked it on my HP 12. Looks like it’s 1.54% in Begin mode, 1.58% in end.