Ask HN: Should you buy a car with cash if you can afford it?
9 comments
Buy used and pay cash. Usually loans are expensive in terms of interest and additional charges. Also, people tend to buy a more expensive car than they need since the payments seem affordable. Lastly, your time has value. The time used to make the monthly payments is time best used on something else. I argue that even a minute of Netflix is a better use of your time.
This is the correct answer. I have done it all over the years and nothing beats buying a used car and paying cash for it. Don't let people tell you that oh you can make more money in interest outside blah blah. They forget to tell you that what if you need to sell the car quickly for any reason, then what ? You could end up being under water comapred to the loan. If you finance a car, you are paying a lot of interest for nothing.
Here are my steps:
1. Look for a used car (reliable brands only like honda/toyota) on craigslist/facebook or directly from a seller. Check values on KBB.com or similar websites to compare what you should pay for a car like that.
2. Get a mechanic to check it for like $100/$150.
3. Buy it out with certified check to the seller. If dealing with a dealer, do not add any extra warranty crap. Just buy the damn car. If you are buying a reliable brand, it shouldn't matter.
You can do Step 1 with a dealer also and then you may not need Step 2 BUT dealers will always add a premium to the total cost. If you don't want the hassle of dealing with individual sellers, dealers are your best bet. DO NOT GO TO scummy auto centers that are not proper dealers. They would mostly sell you crap.
Here are my steps:
1. Look for a used car (reliable brands only like honda/toyota) on craigslist/facebook or directly from a seller. Check values on KBB.com or similar websites to compare what you should pay for a car like that.
2. Get a mechanic to check it for like $100/$150.
3. Buy it out with certified check to the seller. If dealing with a dealer, do not add any extra warranty crap. Just buy the damn car. If you are buying a reliable brand, it shouldn't matter.
You can do Step 1 with a dealer also and then you may not need Step 2 BUT dealers will always add a premium to the total cost. If you don't want the hassle of dealing with individual sellers, dealers are your best bet. DO NOT GO TO scummy auto centers that are not proper dealers. They would mostly sell you crap.
This may not be the correct choice in the current market. Usually this is true but used car premiums are insane and the discount may not be worthwhile. The car market is messed up right now so you might be able to get a better deal on new If you can find one in stock close to msrp
It really depends on the financing rate. At below 3.0%, it doesn't make sense to put too much cash into a depreciating asset like a car when your money could be put toward other investments that can probably net more than 4% return.
I still feel better paying off a car in 3 years rather than 5, so I usually suggest making a few extra payments to make that happen.
You will get a better deal with more incentives with dealer purchased cars if you finance. They may give you more for a trade and negotiate more on the final price. Perhaps even give you a few extra options for free.
I still feel better paying off a car in 3 years rather than 5, so I usually suggest making a few extra payments to make that happen.
You will get a better deal with more incentives with dealer purchased cars if you finance. They may give you more for a trade and negotiate more on the final price. Perhaps even give you a few extra options for free.
Weird. Why would they do that?
The manufacturer has several reasons to push the buyer to financing.
More options to adjust pricing with dealers.
Repayments provide steady cash flow when sales are lagging. A auto finance business can become a general finance business (see Ally née GMAC) which may experience different business cycles than the auto business.
Loan servicing provides a marketting channel and a legitimate interest in monitoring borrower credit (which could be used to tailor marketting).
Promoting purchasing vehicles on credit may encourage borrowers to consider a new purchase when the loan is paid off.
More options to adjust pricing with dealers.
Repayments provide steady cash flow when sales are lagging. A auto finance business can become a general finance business (see Ally née GMAC) which may experience different business cycles than the auto business.
Loan servicing provides a marketting channel and a legitimate interest in monitoring borrower credit (which could be used to tailor marketting).
Promoting purchasing vehicles on credit may encourage borrowers to consider a new purchase when the loan is paid off.
They make that extra X% on the loan. For a 30k car at 3% that's nearly 1k. Also, the loan could be worth more due to potential late fees, etc
The first part isn't really helpful to me though- if the APR is 3% I'll just factor that into the price up front and then any "deal" they give me will be (theoretically) the same as or worse than paying up front. Unless I take the loan deal and then immediately pay it off, I guess
The second part might make sense if they're "betting" on getting late fees from me while I know there won't be any
The second part might make sense if they're "betting" on getting late fees from me while I know there won't be any
There's nothing stopping you from buying it with financing, and then immediately paying it off before you incur too many interest charges. My parents do that with every car purchase. It makes the deal making process and all negotiations way smoother, while ensuring they don't incur any unwanted debt.
The last time I bought a new car with a loan, which was in 1993, the interest was pre-computed. I tried to pay it off early, but I wouldn't save any money on interest. I don't think they do that anymore, but read the fine print.
You guys assume a lot of self-discipline. I see a large amount of cash in my bank account, I'm going to be buying a lot of unnecessary luxuries and some unnecessary necessities (insurance, air conditioner, leather seats for that new car...)
But if it's really a necessity, just buy it rather than trying to optimize for that 1% extra income.
But if it's really a necessity, just buy it rather than trying to optimize for that 1% extra income.
The answer should be obvious.
Is the return from investments more than you would pay in interest on a car loan?
If yes, then take out a loan for the maximum amount possible and invest the remaining, available funds that would have gone toward the car and you will come out ahead. Otherwise, just forget the loan and pay cash.
Is the return from investments more than you would pay in interest on a car loan?
If yes, then take out a loan for the maximum amount possible and invest the remaining, available funds that would have gone toward the car and you will come out ahead. Otherwise, just forget the loan and pay cash.
There's a critical piece missing to the above comment: who can predict the returns in the future from investments? The investing market is massively inflated currently, what if it crashes? Remember the person giving you a loan is making money on it as an investment of their own. They have all the same options you do (and often way more knowledge of investments), but they do this anyways.
I would recommend avoiding an auto loan if you can.
I would recommend avoiding an auto loan if you can.
...who can predict the returns in the future from investments?
Low risk investments are available. For example, high quality corporate bonds.
But there's a critical piece missing to the above comment: who can predict the value of the car in the future? Cars are a depreciating asset with significant value losses and other associated costs.
Thus paying cash for one involves risk too. Assume a 10-20% loss almost immediately. And if the owner should die in the near future, the need for the car will be negated and significant additional cash value may be lost for his estate/heirs.
The point being --- anything is possible either way. Risk is ever present and requires a personal judgment.
Low risk investments are available. For example, high quality corporate bonds.
But there's a critical piece missing to the above comment: who can predict the value of the car in the future? Cars are a depreciating asset with significant value losses and other associated costs.
Thus paying cash for one involves risk too. Assume a 10-20% loss almost immediately. And if the owner should die in the near future, the need for the car will be negated and significant additional cash value may be lost for his estate/heirs.
The point being --- anything is possible either way. Risk is ever present and requires a personal judgment.
If you can get 0% apr for 60/72 months, why not do that? Also seems like there is more negotiation done when financed vs cash.
https://www.carfax.com/blog/0-apr-car-deals
https://www.carfax.com/blog/0-apr-car-deals
It’s not really a zero percent loan. To test that, tell the dealer you are paying cash, make your best deal, and then at the last minute say you changed your mind and want a zero percent loan for the same price. See how that goes.
The money that goes to purchase your car, is invested money that earns a non-zero return, whoever it comes from. If you have the cash, you be that investor, and you earn the return.
The manufacturer, and the dealer, have a bunch of dials they can twist to get the most money out of you while convincing you that you are getting a good deal. It’s win-win, except you don’t actually win. Paying cash takes the dials away.
They do this dozens of times a day, every day, and they don’t play to lose money. You’re not going to beat them.
The money that goes to purchase your car, is invested money that earns a non-zero return, whoever it comes from. If you have the cash, you be that investor, and you earn the return.
The manufacturer, and the dealer, have a bunch of dials they can twist to get the most money out of you while convincing you that you are getting a good deal. It’s win-win, except you don’t actually win. Paying cash takes the dials away.
They do this dozens of times a day, every day, and they don’t play to lose money. You’re not going to beat them.
It still is a zero percent loan, though. The price that you pay for the car isn’t the same, I agree, but the loan is 0 percent. The OP wants a way to preserve capital for other investments, so paying cash upfront defeats the purpose.
I didn't even realize 0% was possible (this would be my first time actually shopping for a car)
Yes, but sometimes the low interest rate financing is in lieu of rebates or discounts. You have to run the numbers both ways. Sometimes it is cheaper to pay the higher interest rate, and take the discounts and rebates.
Before going to the dealer, I recommend check with your local credit unions, and getting approved for a loan. They usually have pretty low rates. If the dealer can beat that rate, go with the dealers financing, otherwise use your credit union financing.
Before going to the dealer, I recommend check with your local credit unions, and getting approved for a loan. They usually have pretty low rates. If the dealer can beat that rate, go with the dealers financing, otherwise use your credit union financing.
Not always available for every model, and obv. credit-score has to be pretty good. good luck!
I once bought a VW and intended to pay cash. After the price had been fully negotiated, the salesman said he had done me favors on pricing and asked that I do him a favor by financing, which helped him. He asked that I keep the loan outstanding for at least 2 months so he would get credit for the origination. I agreed to do so only on the condition that they reduce the price of the vehicle by the amount of interest I would have to pay during those 2 months (I think it was around $250).
But it was all for naught; the car ended up being a lemon and VW of America bought it back from me soon thereafter.
But it was all for naught; the car ended up being a lemon and VW of America bought it back from me soon thereafter.
It is important to make the obvious note that a loan means somebody is renting you money and charging for it. It will always be bad. Now about buying a car.
The best financial decision is to not have a car, it only generates expenses and usually are high cost to maintain, as you need insurance, maintenance and so on. As public transport isn't available everywhere, let's go on with the list...
The second best decisionis to buy a used car and pay with cash, not getting a loan.
The third of buying a cheap used car and getting a loan.
The 4th is buying a new car without a loan.
And the worse being buying a car you can't really afford, brand new with a loan.
The value of the purchase value of the car is pointless. What matters is how long you intend to stay with it, because when you do. You can factor in insurance + maintenance + depreciation and divide it to understand how much you will spend per month(This is how companies do accounting, you should as well do for yourself!). A lot of cars you lose at least $1K per month. You want to reduce this value as much as you can. Get a car that gives you just enough comfort, has a good reputation of not breaking down and doesn't consume a lot of fuel.
Just imagine instead if you had that $1k per month for yourself, invested it and perhaps was lending it to a clueless person to buy their own car. This is wealth :-)
As you can see, buying a new car is a bad idea. Sometimes it is even better to get a loan to buy a used car. A lot of used cars are sold very cheapily after 2 years and most of its value is lost. A used car has actually a better resale value than a new car, supposing when you bought it it was used.
So even if you end up buying some crooked car with real issues despite being only 2 years old(uncommon), you can always resell and buy another 2 years old used car.
If you really like cars and driving... and want to drive expensive cars, it is likely cheaper to rent them, drive it for a while and return it. You even get to experience different cars.
Brand new cars is for emotional buys, people who don't really grasp economics or are just too rich to care about it. Are you any of those options?
The best financial decision is to not have a car, it only generates expenses and usually are high cost to maintain, as you need insurance, maintenance and so on. As public transport isn't available everywhere, let's go on with the list...
The second best decisionis to buy a used car and pay with cash, not getting a loan.
The third of buying a cheap used car and getting a loan.
The 4th is buying a new car without a loan.
And the worse being buying a car you can't really afford, brand new with a loan.
The value of the purchase value of the car is pointless. What matters is how long you intend to stay with it, because when you do. You can factor in insurance + maintenance + depreciation and divide it to understand how much you will spend per month(This is how companies do accounting, you should as well do for yourself!). A lot of cars you lose at least $1K per month. You want to reduce this value as much as you can. Get a car that gives you just enough comfort, has a good reputation of not breaking down and doesn't consume a lot of fuel.
Just imagine instead if you had that $1k per month for yourself, invested it and perhaps was lending it to a clueless person to buy their own car. This is wealth :-)
As you can see, buying a new car is a bad idea. Sometimes it is even better to get a loan to buy a used car. A lot of used cars are sold very cheapily after 2 years and most of its value is lost. A used car has actually a better resale value than a new car, supposing when you bought it it was used.
So even if you end up buying some crooked car with real issues despite being only 2 years old(uncommon), you can always resell and buy another 2 years old used car.
If you really like cars and driving... and want to drive expensive cars, it is likely cheaper to rent them, drive it for a while and return it. You even get to experience different cars.
Brand new cars is for emotional buys, people who don't really grasp economics or are just too rich to care about it. Are you any of those options?
the optics of large cash transactions are still dicey.
even if you are doing nothing wrong, make sure your not going to be hassled
Huh? Am I weird to assume that "buy with cash" is a metaphor and of course anyone buying a car from a dealer would write a check or whip out their phone and do online transaction?
Do people actually show up with a briefcase of $100 bills like in movies?
Do people actually show up with a briefcase of $100 bills like in movies?
I did mean "cash" in the abstract sense, in case anybody was in fact confused by that
Like by the govt? Hadn't thought about that, good thing to think about
a number of cash payments would look quite normal, if you arranged a payment plan on paper but actually exchanged xthousand dollars for a vehicle all at once, it could be stimulating for IRS, or maybe DEA depending on exact situation
How does the IRS even find out you buy a car? There’s no federal sales tax. You just pay your state taxes.
If it’s a “nothing fancy” car, maybe a 30k accord or less, and he has a good income, it’s not going to raise any flags with either state or fed.
Bottom line - pay your taxes and you’ll be fine.
I can’t emphasize enough how good a feeling it is to have the title to your own car.
If it’s a “nothing fancy” car, maybe a 30k accord or less, and he has a good income, it’s not going to raise any flags with either state or fed.
Bottom line - pay your taxes and you’ll be fine.
I can’t emphasize enough how good a feeling it is to have the title to your own car.
the IRS would find out when the seller reports the sales income, unless the seller is truly crooked and cooks thier books up in some way, such as fees to a consultant who died in a house fire thus all his records are burned and gone.
Is there a federal sales tax on cars?
im sure there is a federal tax on annual revenue, regerdless of what your business sells
I believe that any movement of $10,000 or more is automatically reported to the Feds. A systematic movement of say $9,000 multiple times to avoid that would be viewed as structuring and you might draw their attention as well.
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Obviously the exact answer depends on a lot of specific numbers that I'm not laying out, but broadly speaking, is this a sensible thing that people sometimes do or is it likely a bad idea?