Beating Broke

Personal Finance from the Broke Perspective

Should We Pay Cash for a New Car?

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Should You Pay Cash for a New Car

My husband and I have had our Toyota Sienna for 18.5 years, and it has 240,000 miles. We plan to buy a car in the next year or so, and, for the first time in our lives, we’ve saved money for the purchase. However, we can’t decide if we should pay cash for a new car or take out a loan instead with the plan to pay it off quickly.

Reasons to Pay Cash for a New Car

We have three reasons why we want to pay cash for a new car:

Stick to the Budget

Paying cash helps us stick to the budget in two ways.

Maintain Our Monthly Budget

We have a monthly budget that is working for us. If we pay cash for our vehicle, we don’t have to rearrange the budget to determine where the money will come from to pay a monthly car loan. Our finances stay as they are, and all is well.

Maintain Our Car Budget

In addition, if we pay cash for a vehicle, we have a finite amount of money available. That’s it. If we go over that amount, we either have to take some money out of our emergency fund or get a car loan.

If we consider taking out a car loan instead, overspending is easier. We’ve been to several dealerships to look at cars, and we find it easy to think, “We should upgrade our budget a bit because we can get better options and safety features if we do.” If we use a car loan, we won’t feel the pain of paying a higher price as much. Sure, we’ll feel the pain when we have to make the monthly car payment, but we won’t feel it when we sign on the dotted line because the money is not immediately coming out of our account.

No Interest

Without a loan, we won’t have to pay interest on the vehicle. The car will only cost us what it takes to drive it off the lot. Every other time we’ve bought a car, we’ve had to pay hundreds to thousands more in interest over the life of the loan.

Save for the Next Car

Pay Cash for a Car?

Currently, we are setting aside $400 a month in our budget for a new car. If we don’t have a loan, we can continue to set aside that money every month for a replacement vehicle for my husband. (His car is 10 years old and has 115,000 miles on it, so we’ll need to replace it in five to ten years.) Without a loan for my car, we can save for and hopefully pay cash for my husband’s replacement vehicle, too.

Reasons to Finance

Even though we love the thought of paying cash for our new car, there are advantages to taking out a car loan, especially if we plan to pay off the loan quickly.

Builds or Maintains Credit Score

Our credit score is excellent, and we are debt free except for our house. If we take out a car loan, we will maintain our high credit score.

While this is an important factor for some people, but less of an issue for us. Even though we’re debt free, we use credit cards regularly and pay them off before they’re due, so we maintain our credit score. So, I don’t think having a car loan or not will make much difference to our credit score.

Doesn’t Deplete Emergency Fund

We have both an emergency fund and a new car fund, so the money for the car would come from the car fund.

However, our emergency fund isn’t as large as I would like it to be. (It currently covers 1.5 months of living expenses.)

If we took out a car loan for at least part of the price of the vehicle, we could add the cash we would have used for the car to increase our emergency fund. That is a tempting idea, especially in this time of high inflation. However, if we don’t need that money as the months go on, we could use it to continue to pay extra on our car loan and pay it down more quickly.

In addition, we have one child who is attending a community college. He has one more year there before he transfers to a university, which will cost more. So, having more cash set aside to help him with his college expenses is tempting.

May Get Dealer Incentives

Long gone are the days when cash was king at car dealerships. Now, dealers make money on the financing, so they prefer customers who finance.

If we’re willing to finance, we may get dealer incentives to sweeten the deal. Without financing, those incentives are likely off the table.

Paying Cash May Increase Our Chance of Being Audited

Pay Cash for a New Car

If we pay the dealer more than $10,000 in cash, the dealer must file Form 8300. The IRS needs to know if we’re spending a large amount of cash and how frequently. Paying cash once for a new car likely won’t trigger an audit, but it does add an extra layer to our tax filing the following year.

Taking out a loan and paying more than the required monthly payment to pay the vehicle loan off quickly may be a better solution.

Our Loan Requirements

We would not consider taking out a car loan if we can’t get an interest rate below four percent. Our credit union said they could offer us a loan at 3.5 percent interest. We haven’t yet asked what the dealer can offer.

Additionally, we wouldn’t take out a car loan for a term longer than 36 months as we don’t want to extend this out for years. Even with a three-year loan, we may try to pay it off in two years.

Final Thoughts

Should we pay cash for a new car? For years that has been our dream, but now we’re wondering if some of the money wouldn’t be better served increasing our emergency fund, especially during this period of high inflation.

Read More

Our Two Large Financial Goals for 2023

Why Buying a Toyota Sienna Was One of Our Best Decisions

How We Used the Proceeds from the Sale of Our House

Picking Yourself Back Up Again

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Inevitably, you’re going to screw up.  You’re going to make a mistake and it’s gonna cost you.  If you’re lucky, it’s only going to cost you a few dollars or a bit of bruised pride.  If you’re not so lucky, it could cost you much more than that.

Let me tell you a little secret.  We’ve all been there.  In all likelihood, we’ll all be there again.  But, some of us will get back up, dust ourselves off, and get back to doing what it was we were doing in the first place.  The rest will sit on the ground where they landed, beaten and broken, and never get back up.  They’ve given up.  The world got the best of them, and they have lost the will to try again.

Getting back up isn’t the hard part.  Gathering the will to get back up is.

None of us who have fallen and gotten back up have any greater aptitude for it than anyone else.  Sure, we may be better at some things than other people, but when we fail, we are all the same.  Here’s a little bit more of a secret.  Some of us are better prepared for the fall.   We’ve done what we can to soften the blow, not because it’s inevitable, but because it could happen.  Think of it this way; you don’t buy health insurance because your sick, (well most don’t) you buy it in case you get sick.  You don’t wear a helmet while bicycling because you know you’re going to fall, you wear it in case you do fall.  Sometimes situations are out of our control.  We certainly don’t choose to get sick.  And we don’t choose to fall off of our bikes on to the hard concrete below.  But, sometimes it happens.  And the better prepared you are for it, the easier it is to get back up and get going.

An example.

Many years ago (something like 7), I drove a old pickup (older than I am).  One particularly cold day, then engine refused to start.  It refused to start the next day despite having a charger on it and attempts to pull start it.  I couldn’t go without a car, so what was I to do?  I had no savings, and no means of coming up with any extra money.  I had fallen.  In order to get myself up and out of the hole I had dug, I was forced to take on a massive (for me at the time) car loan on a used car.  The bank wouldn’t finance much without a down payment, so I took what I could get.  It was a terribly low spot for me, financially.  I went from having no car payment at all, to having a car payment of a little under $200 a month.  I could afford it, but just barely.  If anything had happened to my income or if an emergency of some sort had arisen, I would have fallen that much farther (and harder).  To be honest, I didn’t learn all that much from that particular episode.  But, I did get back up and back on the road.

A week or so ago, my car sprung an oil leak.  The repair wasn’t horribly expensive (only about $150), but enough that it could have been very damaging if I had been in the same situation as I was before.  But, I’m not.  I’m prepared.  I have a small emergency fund that can easily cover an expense of that magnitude.  The fall wasn’t nearly as bad.  It wasn’t as bad of a situation as it was before, either.  But, because I had prepared, the fall was very short and I was able to recover quickly.  In fact, it was less of a fall than it was just a little bump.

Preparing for an emergency isn’t a bad thing.  It doesn’t mean that you are expecting to have an emergency any more than having health insurance means you’re expecting to get sick, or wearing a bike helmet means you’re expecting to fall.  But it cushions you against the fall.  Getting sick is less stressful if you have insurance that you know will pick up part of the bill.  You’ll have less road rash if you’re wearing a helmet.  And, if you have an emergency fund, more falls will become bumps.

Do yourself the favor.  Prepare now, so that when you do fall, you’ve got some cushioning to land on.

Cash Back Rebate or 0% Financing?

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Let me begin by saying that I don’t see any real value in buying a car new.  You’d be better off waiting a year or two and buying the same model after the initial devaluation happens.  If you insist, however, and you have to choose between a cash back rebate and 0% financing, here’s how it breaks down.

I’m taking liberties here and using a few assumptions.  The first, and most important, assumption is that you’ll use the cash back rebate as an addition to your down payment.  I’m also assuming a 5 year loan because that’s pretty standard for a new car loan.  I’m assuming that you’re going to use the cash back rebate as an addition to your down payment, because you’d be an idiot not to.  No really.  Why would you buy a $20,000-$50,000 car that will lose at least 10% of it’s value the second you sign the dotted line and then also take the $2500 (Or however much) in cash?  Also, if you do take it in cash, will you drop me a line?  I’ve got some ocean front property in Oklahoma to sell you.

Assumptions aside, the deciding factor here is the interest rate.  The lower the interest rate if you take the cash back, the better that side looks.  Somewhere around 5.8% they are about even over the life of the loan.  Of course, if you make extra payments that will change things as well.  If you can get a rate of 4% or so, the difference is pretty good and you should use the cash back and run with it.  At something like 8%, however, you’d be pretty silly to not take the 0% financing.

In the end, there are several variables that need to be taken into account such as trade in and sales tax.  And this is far from a scientific study I did here, nor is it meant to detail exactly how to buy a car.  What I would suggest is using a loan amortization calculator and punching in the numbers.  For this little experiment, I used a calculator built for just such a calculation at interest.com.