If you don't want a monthly car payment, start your “monthly car payment” into a savings account now. You'll end up paying less for your next car if you can maximise the up-front payment.
They've been low for a while now too. As annoying as it is to have a $670 car payment each month, you really can't beat 0% interest on a $40k loan. Especially in a market where the average monthly return on $40k in stocks has been pretty substantial.
That's really neither here nor there. The discussion was more about transforming, "save up and pay cash" to "save up and get a loan anyway because interest is so cheap."
I picked $40k because that's roughly the median price of a new car. Whether your going for a $25k car, or a $125k car, the advice is the same: get a low-interest loan.
You lose all of that and more on depreciation in the first two years.
I buy older than most people; currently my newest car is a 2009. I do maintenance and routine repairs myself, and I lose almost nothing on depreciation. But you can still come out ahead by buying 4-6 years old and letting the original buyers take the bulk of the depreciation losses.
For me the sweet spot has been 5 years old and < 60K miles, usually cars with that description haven't been run into the ground. Currently driving a mustang with 200K miles on it and it still runs like a sewing machine. It's harder now though, pandemic has really driven up used car prices, makes more sense to buy new currently, especially if you're getting something like a honda or toyota that holds value.
This is a really common misconception that buyers have.
Just stop and think for a second - put yourself in the dealer's shoes - why do you think the dealer would want cash? No reason. They don't want your cash. A cash buyer is a pain. They want to sell you a loan.
The last time I bought a car I offered cash, and they countered with a four-figure discount (on total cost of ownership) if I took part of it as a loan. I now have that part of the price invested, creating money, while I gradually pay the loan.
And my credit score went up as I had a new, responsible loan!
Cash buyers are fools, unless you're really at the point of valuing not having a loan for moral reasons (maybe a German?) at four-figures.
And if you had walked out the door they would have run after you to take the cash deal AND given you the discount. You think they prefer to deal with the time and uncertainty of putting you through a loan application, when they could pocket the same sale in cash? Nobody is coming out with less money on a loan purchase vs. cash, except the buyer.
I think you're mistaken about how dealerships and car sales are structured, at least in places like the UK and the US. Maybe it's different where you are?
They get a proportion of the sale price, and they get paid a referral fee for you opening a loan, and then on top of that they can offer extras that you probably don't need like fabric protection products.
> Nobody is coming out with less money on a loan purchase vs. cash, except the buyer.
The dealer is paid to get you to get a loan. If they don't get the loan, they get less money. My understanding is that their referral fee is somewhat weak about how much the loan actually has to be, so they just care that you take it.
It's worth it to them to discount the price by less than their loan referral fee, in order to get the loan referral fee.
> And if you had walked out the door they would have run after you to take the cash deal AND given you the discount.
No they'd just have sold to someone willing to pay their price.
There's a car supply shortage... that's the whole point of the article... did you miss that? If you want to buy a new car at the moment and you go in haggling them on a mid to high end spec car they'll just tell you to fuck off and you won't get the car you want.
> they get paid a referral fee for you opening a loan
Which is added in to the finance charges or amount borrowed. Ever wonder why the salesmen always want to negotiate a "payment" amount instead of a purchase price?
> No they'd just have sold to someone willing to pay their price.
And I'd have just gone to another dealer willing to work with me on my terms.
> There's a car supply shortage
True, and that causes higher prices overall. But negotiation strategies for getting the best deal haven't changed.
> Ever wonder why the salesmen always want to negotiate a "payment" amount instead of a purchase price?
Well that's the point - say you want agree a purchase price for the car before you talk about how you'll pay. Do that and get an actual number from them. Then...
Offer to pay the agreed price cash and ask for a discount based on this - you won't get one because there's no benefit to the dealer in taking cash it's just an inconvenience to them.
or...
Offer to take at least a small a loan and ask for a discount based on this - you might get one because the way they are established means there are strong incentives for them to make loans.
In either case you can of course threaten to walk away if the price isn't right, but paying cash isn't going to increase your bargaining power it's going to diminish it - 'not only is this person wanting to pay less but they also want to fuck up my loan referral rate and fee and make me unpopular with my manager'. And at some point I presume you need a car so you can't walk away forever.
The idea that you're an attractive customer if you'll pay cash is a 90s thing.
The lowest total cost you can pay for most new cars* is to put in a sizable down payment, chose a loan with a low-but-non-zero interest rate, then pay the whole thing off as soon as the loan paperwork shows up. This will always get you the highest dealer incentives (i.e. lowest number on the invoice) which get made up by the bank paying for the profitable loan. After that is buying cash, and last place is 0-interest loans (I guess technically last place is interest-bearing loans paid off in installments, but if you can pay cash that's not really a consideration).
There are always offers which are available to cash buyers/real loan buyers, but not 0% financing buyers. The reason for this is simple; 0% financing is a hack to get people to buy more expensive cars, and you'll discover that on the lower margin cars that option mysteriously vanishes.
I just went through this myself and helped two friends out, it's true for Ford, Honda, VW, Audi, and Chevy at least in the US.
* If you happen to be one of the few people who actually wants to buy a high-margin car (usually Halo cars like Corvettes) then sure, get the 0% financing. Just realize that you're being fleeced, although if you're buying a Vette you probably already knew that and value isn't top-of-mind
You simply don't understand how modern franchise dealers operate. Cash discounts are no longer a thing. Due to incentives they prefer to finance through the manufacturer's captive lender. The F&I guy is already sitting there in his office with nothing else to do and as long as you have a decent credit score the approval process takes literally a few minutes.
Sure the dealer will take cash if that's how you want to pay but you're not getting any extra discount.
I always separate trade-in and financing from the price. Deal on the price first then the trade, then the financing.
Trade ins are good for negotiation too. Wanted the factory extended warranty. Dealers in other states will discount the extended warranty but can’t sell in my state. Dealer wouldn’t discount the warranty to the price of the out-of-state so I had them keep it that price and up the trade in value to match it. They can show they didn’t discount the warranty. I get the discount.
They did that if I would get finance thru them, matching my prearranged banks rate. Deal made.
Went in the next Monday to the local bank and refinanced the car loan.
Also made them give me so thing for signing the arbitration agreement. Everything is negotiable. I did have to walk away but they called me back on the drive home.
Exactly - agree a sale price. Then discuss payment. And at that point cash has no benefit to the dealer, but a loan does. So the loan can get you a discount but the cash cannot.
Yes, if you're going to cash buy, you can frequently get a better deal off the sticker price by agreeing to finance and then simply paying the loan off. How you structure things really depends on priorities though. Normally I buy the car (through financing) but right now I prioritized low monthly payments during financial uncertainty, so I leased. If things are different in three years, we'll either buy a new car or buyout the lease-- I made sure the lease buyout price was something we would be comfortable with: the TCO came out to only a little more than if we financed a purchase w/ higher immediate monthly payments, and I judged that a slightly higher TCO is worth the current ability to keep monthly expenses to a minimum.
Assuming you can. Some deals are set up so that you have to pay most of the interest even if you pay the loan off early, or other prepayment penalties.
Yes, prepayment penalties are a thing. But every time this comes up, we see reports of too-good-to-be -true deals that don't have them. See, for example, this thread:
I also had a friend do exactly what I described, and there was another thread where they only had to make two payments and then could pay off the rest without penalty (and even that was an unspoken gentlemen's agreement with the dealer) -- will find if I get a chance.
The point is, it's simply not warranted to assume as a bedrock of truth that no dealer every makes a confused deal in this respect, as chrisseaton was insisting.
Dealers don't care whether you pay cash or finance. Just call around dealers within a certain mile radius you are willing to drive and find the best deal. This has been, and will always be, the best way to get a deal.
One offer I was looking at recently was 0% OR $4k cash back off the MSRP. The interest rate on taking the cash back offer ended up working out to near exactly $4k. Though if you have good credit and went through a credit union you could probably get a much better rate.
It's actually the opposite. Most franchise dealers get incentives for financing through the manufacturer's captive lender, so you can often negotiate a slightly better deal by taking a loan.
Don’t dealerships make a good percentage of their profits from finance charges? The last time I bought a car, it took an hour of cajoling to get the cash price of a three year lease
Absolutely. To take Ford as an example, It’s not that huge an exaggeration to suggest Ford manufactured cars with virtually no profit margin to help sell profitable loans via its Ford Credit arm at various times in its recent history, rather than providing loans to help sell the cars at profit. Ford Credit is a huge part of Ford’ overall business.
Borrowing also means you have to carry collision insurance, the surplus value (over the expected payout) of which should also be considered a finance charge if you’d otherwise not carry it.
If you were to buy a car in cash for $40k+, would you really not bother to carry comprehensive insurance on it? Are there really that many people out there where a $40k+ oops just isn't a big deal, just go buy another?
I don't carry comprehensive insurance on my car. I drive a 2000 Honda Accord though, so the KBB value (and what they quoted me for) was only about $1000. I wouldn't carry comprehensive on that. But you bet if I've got $40k+ rolling down the road and in the elements it's going to have some insurance on it.
I've usually dropped collision coverage on cars when they get under around $15K. (All but one of my cars was purchased for less than this, often much less.)
If I had a 0% loan on it for some reason at that point, that meant paying off the loan to let me do that. (If you assume an 8% nominal return on investments, that means when paying off the loan would cost me under $100/mo.)
I think you should insure against risks that would be a substantial impact to your life and (generally) not insure against risks that wouldn't.
Yeah, but a savings account? Interest rates for savings are abysmal, and auto-loans are themselves frequently near (or at) zero these days, so it's losing advice as-given.
Better advice: put the money in the market or other higher-yielding investment, then take a low or no interest loan on the vehicle when the time comes so those investments can continue to grow at the much higher clip. Money's just too cheap to give away your own cash. Obviously, if the interest rate environment changes, this should be re-evaluated.
What percentage are you talking about as being abysmal. 0.1% offered at some shitty brick and mortar bank is terrible but nearly all the online first banks offer (or offered before covid) what I thought was a decent 1-3%
I'm not seeing anything like that. Here's the latest roundup of "the best rates" over at Bankrate [0], which includes some online-only banks. Highest I see there is 0.57%, with most at 0.4% and 0.5%.
You might be able to scrounge up a few basis points somewhere if you're really determined and/or willing to meet some requirements. Still, even with our low-inflation these days [1], you're actually losing money in these savings accounts.
Main point though is that it's more of a relative game vs your ROI elsewhere. Even indexes and ETFs that are reasonably "low-risk" are routinely returning much more these days, and of course over the long haul equity markets still beat this handily, even when smoothed for downturns.
TMobile Money is 4% for the first $3000 and 1% after that for customers and 1% flat for everyone else. Ally used to be pretty good but I've moved all my savings over for now
Yeah, obviously not scalable, but cool for a risk-averse T-Mobile wireless customer who wants a guaranteed 4% on $3K.
It is funny though that they give the example that at $5,000 saved your effective APY is around 2.79%. I mean, the bottom line is that as soon as you get above $3K, any additional savings drops to a lowly 1%, which doesn't keep pace with inflation (i.e. you're losing money). But they're presenting it like 2.79% is some kind of average that matters, thus implying it's a good idea to keep pouring money in.
The reality is that the offer is not an average, but two discrete terms of 4% and 1%. And, on the latter, you're trading whatever other returns you could've made elsewhere for that miserly 1%. Much better to put it elsewhere, even for those who bite on the initial $3K for 4%.
Isn't the benefit of the car loan that you can have emergency funds? I mean, if you save up $5k and get a car loan for $25k you for years you effectively have a 2 year emergency buffer.
If you pay off the car up front you may run into liquidity issues until you have restored your emergency fund.
No one should consider using their emergency fund for anything other than emergency's, so I am not sure what your point it
The comment I was responding too talked specifically about saving money in a savings account for the purposes of buying expensive things like a car. It should go with out saying one should not use their emergency fund for these purchases (unless they are an emergency)
Once you have the 6mos to 1 year of expenses in your emergency fund you should divert any other cash to other accounts such as Debt Repayment (providing the debt is more than 5-7% interest or current inflation) and/or investments such as tax advantaged retirement accounts
Or save up enough that you can pay cash. I would think for the HN crowd it should be feasible. I think when you're spending money that's already in your account you make better decisions. Like you'll be less inclined to pay thousands more for an upgraded model with a bunch of superficial nonsense added
It would be better to take the car payment and invest that money. You can get a car loan for less that 3% interest, and you can easily make double that with low risk ETFs. Hell, you could invest your savings into a dividend fund and use that to pay your car payment directly.
Depends on the interest rate of the loan, inflation rate of money between now and the time the loan is paid off, and any gains/losses you could make now investing that money.
