When Should Cash Buyers Finance a Car?
A car is a depreciating asset, which means that from the moment you buy it the vehicle starts to lose value. There are, of course, exceptions to this rule, as in the case of the luscious 1962 Ferrari 250 GTO originally built for racing legend Stirling Moss, which recently sold for $35 million. That same Ferrari was purchased in 1996 for $3.5 million. Obviously, somebody made a pile of cash.
Your new Nissan Altima, however, starts siphoning your net worth the minute you leave the dealer’s lot, which is one reason that it’s usually wiser to buy a used car that’s just a couple of years old rather than a new car. Either way, though, you’re going to effectively lose money on the deal. The question, then, is whether you should pay cash up front or finance the car with a loan from a bank.
ALWAYS TAKE ADVANTAGE OF ZERO-PERCENT FINANCING
I’m not a math whiz, which is why I’m not sitting on a beach in Hawaii right now instead of in front of this laptop, but I’m fully capable of stating the obvious: if you are eligible for a new car loan with zero-percent financing, you should take that deal. That way, you can put your cash to work for you in myriad ways, helping to negate the impact of adding a depreciating asset to your portfolio.
If you’re not eligible for a loan with zero-percent financing, or one simply is not available, the question of whether to pay cash for a car or get a loan for a car becomes more difficult to answer. Easy to say in hindsight, but if your alternate plan to paying cash for your new car is to sink the money into, say, a social media website’s IPO, then perhaps doing the cash deal for the car isn’t a bad way to go.
THE HIGHER THE INTEREST RATE, THE MORE SENSE IT MAKES TO PAY CASH
There are, of course, safer investment instruments than Facebook. So if you’re better with numbers than I am, you’ll need to weigh your car loan interest rate and term options against your investment options and their projected rates of return.
That said, if you’re like me and never got past high-school algebra without seriously damaging your grade-point average, the following simplification may serve you well: The higher the interest rate on the loan, the more likely it is that paying cash for your new car makes more sense than financing your new car.
SPEEDY DADDY SAYS…
Thanks to the fact that the Federal Reserve has locked interest rates at record lows, the good news is that money is cheap right now. That means low-rate car loans are abundant. So, for the time being, it appears that you should finance your new car rather than pay cash for it, even if you’ve been scrimping and saving to avoid making a car payment. Invest that money in portfolios containing corporations with robust P/E ratios instead.
– Christian Wardlaw