Car Loan or Pay Cash?

Jul 16, 2013 by

Question markI paid cash for the first car I ever owned. Well, co-owned actually. The summer between high school and college a buddy and I split 50-50 the $250 cost of a 1963 Cadillac Eldorado convertible. Red with a white leather interior, the car was in great shape and unbelievable to drive. It also got 9 miles per gallon and demanded premium gasoline. At the end of the “summer of fun” we sold the car for $350.

I Get a Car Loan

After college, not just broke but also rather seriously in debt, I borrowed even more money to buy a new Dodge Colt, a cheap but serviceable car that I needed to commute in the Washington, D.C. area where I’d landed my first job. Why I bought a brand new car, I don’t know. In retrospect I’d say that was dumb, especially considering my circumstances (again: broke and rather seriously in debt). But hey, they don’t teach you that kind of stuff in college; I had to self-educate!

I Get Another Car Loan

After working for a couple of years, I soon fell victim to that mostly male affliction: car envy. I fell in love with the redesigned VW Jetta. Not only did I love the car, being of Teutonic heritage, I always wanted a German-made car and VW was the only German brand I could afford. I couldn’t resist the Jetta’s siren song, and my income had steadily increased so I could readily handle payments (though I was still in debt!). I made another dumb decision and got rid of the Colt though it had only 45,000 miles on it, so I absorbed the first two years’ depreciation then “traded up” to the Jetta. And I got another loan to help pay for the Jetta, though I did make about a 50% down payment on it.

Here’s where I started getting smarter. I began to better understand that debt sucks. I accelerated payments on the Jetta loan and paid it off in about 18 months. Even better, I loved that car. I kept it for over 10 years and put over 250,000 miles on it, then sold it for $500.

My Last Car Loan

First me and then my wife and I have owned a few cars since the Jetta, but we’ve saved until we could buy the car outright for cash. No more car loans. And with one exception we’ve bought used. I once bought a Hyundai Elantra wagon new because it cost $12,000—comparable to the price I was seeing for similar small wagons of other makes. And until a guy made—unfortunately right in front of me—an abrupt U-turn across four snow-covered lanes of traffic on the busiest street in Minneapolis, the Elantra was a good car for us.

Save to Pay Cash for a Car or Get a Loan?

I know very well that some folks simply do not earn enough to both pay their current bills and save up enough to pay cash for a decent (used) car. But for those who can make the choice, what do you recommend?

You may be working hard to become debt-free. Taking on a loan when you could—even if over the course of a few years—save enough in a planned savings fund to pay cash for a car may rightly feel like a step backward.

But what if one of those 0% or 1% financing offers comes along and you think to yourself, “hmmm, I could finance the car, invest the $10,000 in our car fund, and come out ahead, even with the debt!” That may make mathematical sense—if you don’t have bad luck with your investment—but you can’t help but feel that taking on more debt is the wrong thing to do, no matter what.

Paying Cash for a Car Ties Up Your Money

Also, depending on your cash resources, borrowing money cheap could make more sense than spending a large part of your cash savings on a car. You need an emergency fund. If you’ve got $12,000 saved but spend $10,000 on a car because you don’t like debt, you may be shooting yourself in the foot if one of the household breadwinners gets laid off next week, to give just one example. You may be able to take a loan out on the car after purchase, but maybe not if household income has dropped and surely at a higher rate and with more fees than you could have gotten at purchase.

What Do You Think?

Do you save up to pay cash for cars, or do you always get a car loan? Even if you had the savings set aside, are there circumstances in which you’d suggest a loan would be a better way to go?

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