Buying a Car: Should You Pay Cash or Get a Loan?

Buying a Car Should you pay cash or get a loan
My wife and I just recently went through our first car-buying experience and learned a lot along the way. It was bumpy at times and we definitely made some mistakes, but I think in the end we did enough right to come away with a purchase that fit pretty much everything we were hoping for when we started out.

One of the big benefits of this experience was the knowledge I gained that I can pass on to my readers. There’s a lot that goes into the car-buying process and I hope that my experience can make it easier for you when you have to go through it yourself.

With that in mind, I’ve created a car-buying series that will take you through the lessons I learned. Today is Part 2 in that series.

One of the big questions you’ll face when buying a car is how you want to pay for it. Will you pay with cash or will you finance?

I think that there are pros and cons to each option, and certain situations that favor one over the other. So today I’d like to discuss those variables and explain how we arrived at the decision for ourselves.

Pros and cons of cash vs. financing

The biggest benefit of buying a car with cash is that you don’t have to pay any interest. A car is a depreciating asset, meaning its value is constantly dropping. This is in contrast to something like investing in the stock market, where you hope that the value of the asset will grow. Paying interest for something that is losing value means that you’re losing money in two directions. In general, this is not a good thing.

Another benefit of buying with cash is that you own the car outright, which simply gives you more options. If you have a loan and you fall on hard financial times, the bank or dealer or whoever loaned you the money can take the car from you if you fail to make your payments. When you own outright, not only are you free from that threat but you also have the option to sell the car if you need some cash. With a loan, you can still sell but you have to coordinate with the lender and any proceeds first have to go to pay off the loan. You may even owe more than the car is worth, which means selling would actually require you to come up with more money in addition to the sale proceeds.

Finally, paying with cash removes the hassle of having a loan. There are no monthly payments, no dealing with a lender. You write a single check and the car is yours. Free and clear.

The big downside of paying with cash is simply that you have to have the money. Cars can cost a lot and not everyone has that much cash on hand. Of course in that case I would strongly encourage re-evaluating how much you want to spend on a car. There’s a lot of good advice out there on how to buy a well-used car on the cheap. But if there’s some reason you need a more expensive car and you don’t have the cash on hand, financing might allow you to get it, albeit with the costs above.

There’s also an opportunity cost to paying with cash. Any money you use to buy a car is then not available for other things. The cost here depends very much on what you would be using that money for otherwise, and I’ll get into some more detail about this below. When you finance, you are paying interest but the money not yet put into the car is available for other purposes.

Want more help getting your family on the right financial track? Check out my free ebook: The New Family Financial Road Map.


When might it make sense to finance?

The only circumstance in which it can make financial sense to finance is when you have the cash available to pay for the car you want, but you feel like you can find a use for that money that is worth paying the interest on the auto loan. I think it can make sense to finance if all of the following conditions are met:

  1. You have a full Stage 2 emergency fund, and
  2. You are able to secure a low interest rate on your loan (about 0-2%)

and either:

  1. The full difference in up-front cost between paying cash and borrowing will be invested for the long-term, or
  2. You want the difference in up-front cost available for another big near-term purchase (e.g. other car or home)

A full Stage 2 emergency fund, with 3-6 months of expenses in savings, will allow you to either handle the payments or even pay off the loan if you hit a difficult financial stretch. It provides some security to balance out the risk you’re taking on by borrowing.

In order for financing to make sense, you have to secure a low interest rate loan. Once you start paying more than 2% or so, it can become pretty dubious whether the cost is actually worth it.

Finally, you can’t just take the loan and be done with it. You have to do something with the money you’re saving up front by taking a loan or the cost in interest is a waste. Let’s say that the car you want would cost $20,000 but you could choose to finance it with a $5,000 down payment. The only way financing could really make sense is if you actually have the $20,000, but you take the $15,000 you save up front and do something productive with it. If you just spend it, or if you never had it in the first place, you’re basically lighting that money plus the money going towards future interest payments on fire.

So what could you do with that $15,000, or whatever the amount is in your case? The first option given above is to invest it for a long-term goal, such as retirement. With a balanced investment plan you should be able to expect somewhere around 6-8% in long-term returns. When compared to a 0-2% interest rate on the loan, those returns can be worth it, but only if the money is truly invested for the long-term. Short-term returns could easily be much worse than that given the risk involved with investing in the stock market.

The other option would be to keep the money available for another big near-term purchase. Let’s say that you need to buy a car now but you also want to purchase a home in the next year or two. Financing the car could leave you with more cash in savings to put towards the down payment on the house. This is not really a financially sound move, since you’re buying more things than you can afford, but if you have a solid long-term plan surrounding this decision then I could see it being a reasonable decision.

What if you don’t have enough cash for the car you want?

If you don’t have enough cash to pay for the car you want in full, meaning you couldn’t follow through with either of the options above, then you have two sound financial choices:

  1. Find a cheaper car, or
  2. Wait to buy until you save more money

Look, if you can’t afford the car you want then financing is just a bad financial decision. You’re paying interest for something you can’t afford that is losing value every single day you have it. It’s no different from buying a microwave or a cell phone on your credit card and letting the purchase accumulate interest. It’s money spent that you will never get back.

If you truly need a car (I’m talking real need here, not just a strong want), and you don’t have the cash, then find the absolute cheapest car you can that will work and finance as little of it as possible. You’ll still be paying interest on a depreciating asset, but you won’t have compounded the issue by buying more car than you need. Again, there’s lots of good advice out there for how to buy a well-used car. Get what you need with as little financial damage as possible.

Finally, do not raid your emergency fund to purchase a car unless your need is truly an emergency. As in you need a car within the next couple of days and you have no short-term alternatives. That money is there for emergencies, not for purchasing things that cost you money, like cars.

Quick note: Do you want real answers to your personal money questions? Click here to learn how to get them.

Our decision

As I mentioned in Part 1: Setting a Budget and a Timeline, we have a savings account that we’ve designated as kind of a mixed car/house down payment fund. I mentioned that our ideal spend amount for our car purchase was about half of that savings account, but that we were prepared to spend up to the full amount in that account if necessary. We would not go above that amount.

Since that money was either going to be used for our car purchase or for another big purchase in the near future, the option of financing and then investing the difference for the long-term was out of the picture. So if we did finance, it would only be out of the desire to have some of the savings available to us for purchasing a house in the near future. Though we didn’t like the prospect of using all of our savings, and were going into the process with the goal of not doing so, we decided that no matter what we would pay for the car in full with cash rather than take out a loan. The cost in interest just wasn’t worth it to us.


There are certain circumstances where it can make financial sense to finance, but those are rare. In most cases it will make the most financial sense to pay cash, even if it means buying a lesser car than you would like. Just remember that if you’re not doing something productive with the money you save up-front by financing, you are simply spending more money and putting your real goals further out of reach.

Start building a better financial future with the resource I wish I had when I was starting my family. It’s free!

78 Comments... Read them below or add one of your own
  • Alexa Mason September 9, 2013

    I financed my last car and felt like that was a big mistake. I have never hated having a payment worse than for that car. I paid it off early and will be paying cash for my next car. I think not having debt is a huge stress relief and it’s definitely worth it so save and pay cash for vehicles.

    • Matt @ momanddadmoney September 9, 2013

      I definitely think avoiding that hassle can be worth it, especially if you can’t get a premium interest rate. Sounds like you were able to handle it well though.

  • hungry hungry artist September 9, 2013

    Financing, specifically leasing is advantageous to self-employed individuals. (This may vary by tax jurisdiction though) In my locale, leasing is considered business rental. So ALL the business usage of a leased vehicle (calculated by mileage) is a tax deduction. A leased vehicle saved me $5000 or more a year in taxes which in effect reduces the total cost of ownership of the car. If I buy it outright then I’m throwing money away, both on the investment profits of the capital AND the tax savings through the leasing deductions.

    • Matt @ momanddadmoney September 9, 2013

      I’m not a tax expert, but I’m pretty sure that whether you buy or lease you’re able to deduct the business use of the car. In fact if you buy you’re able to depreciate the value of the car as well, which is an additional tax benefit. The IRS page on the topic is here:

      • hungry hungry artist September 9, 2013

        Leasing as far more advantageous where I live. It’s also a much more complicated accounting issue to depreciating an asset (if you bought and financed) according to a tax schedule. The lease is effectively rental which is 100% deductible. Where as the buy/loan can only be depreciated in drips and drabs.

        • Matt @ momanddadmoney September 10, 2013

          Interesting. Thanks for the info. Definitely worth talking over with an accountant before making a decision here.

        • Matt @ momanddadmoney September 10, 2013

          I just want to add that it’s important to keep in mind the long-term costs of this decision. Maybe you get a bigger immediate deduction from leasing (I’m not sure this is true, just going along with your example), but if you buy the car outright you get the full deduction over 5 years and then you own the car free and clear. If you lease you keep having to pay simply for the honor of having the car, which is an extra expense whether or not there’s a deduction. It’s not free money. You’d have to run the numbers to be sure, but it’s very likely that over an extended period you come out well ahead from buying outright over continuing to lease over and over again.

          • hungry hungry artist September 10, 2013

            I did the math on all possible permutations. I did the lease and then buyout at the contract-price. Because of the way leasing works (where I live) it saved me about $5000 off the price of a $30k car. Cost of lease + buyout – tax savings = less. Buying outright – depreciation deductions – loss of income from working capital = more costly car.

          • Matt @ momanddadmoney September 11, 2013

            Sounds like it was the right move. Hopefully most people do that kind of thorough analysis when evaluating their options. Again, thanks for the info. Not something I had considered here.

          • hungry hungry artist September 11, 2013

            Lastly though, I should point out that my take on personal finance is much more in line with a investor/trader. The loss of working capital would be a crippling blow to my monthly/weekly income. A good chunk of my income is now generated by selling many naked puts (option trading) to collect the premium. My brokerage requires that I have sufficient margin (credit) to cover the trade if ever the options would be assigned. Thus, I need every cent of available credit so I can to trade lots of contracts. My success rate is about 80% or better. (Generally collecting the premium, or closing it out early for a 50% gain in a matter of days.) So the loss of $30k of working capital would cost me about $100-200 per week.

  • Laurie @thefrugalfarmer September 9, 2013

    In our case we would probably finance if the interest rate was zero or close to it, and then invest the cash. Thanks for another thorough post, Matt!

  • Holly Johnson September 9, 2013

    I hate car payments so I plan on paying cash for any cars we buy in the future. Right now, Greg has a 2009 Toyota Prius and I have a 2008 Dodge Caravan. We own both of them free and clear. They’re still fairly new, so I hope to drive them for ten more years!

    • Matt @ momanddadmoney September 9, 2013

      You guys should definitely be able to do it. We’re hoping to get 10-15 years out of the car we just bought as well. When I was signing the papers the dealer asked me how long I planned to drive the car and I said “into the ground”. I’m not sure I’ve seen a more disappointed face than the one he gave me.

  • Grayson @ Debt Roundup September 9, 2013

    Thanks for the mention Matt. I am actually working on financing a used Jeep Wrangler to replace my project one that I am working on selling. I am doing it even though I have the cash to pay for it upfront. The reason is liquidity. I want to have the cash available to me and I am getting a 1.5% interest rate. That is almost nothing, especially for the loan amount.

    • Matt @ momanddadmoney September 9, 2013

      Interesting that you bring up the loan amount. I understand that smaller amounts of money might not feel as significant, but let’s say you saved $100 per year by not financing? Aren’t there other areas of your life where you’re happy to save just $1-2 at a time? Why is a car different?

      • Grayson @ Debt Roundup September 9, 2013

        This is really about money mentality. Having an extra $1 or $2 in my account isn’t going to give me the security that having $5,000 in my account is going to provide. I can keep that cash sitting in my savings account or I can invest it to make me more money. That $100 a year is for options. I don’t have any options when I pay cash. Sometimes it is not always about saving money, sometimes its about giving yourself options.

        • Matt @ momanddadmoney September 9, 2013

          Very fair point. There’s a trade-off to everything. I mostly brought that up because I found myself thinking that a few hundred dollars here or there wasn’t a big deal when we were talking about thousands, and to some extent that’s true if you can spend a little more for something that’s important. But on the other hand I’ll buy a can of beans because it’s 10 cents cheaper than the other can. I just think it’s important not to let the magnitude of the purchase affect our judgment. It doesn’t sound like you are, but I thought it was a point worth making.

          • Grayson @ Debt Roundup September 9, 2013

            Definitely a point worth making. I have thought about this one for some time and didn’t want to jump the gun on it. I am actually writing a post about it and when opportunity arises.

          • DC @ Young Adult Money September 10, 2013

            I agree with Grayson on this one for sure. He brings up a great point. Not that your points aren’t valid, Matt.

          • Matt @ momanddadmoney September 11, 2013

            I guess to me it really comes down to what else you have for reserves. If you already have a 6-month e-fund for example, what extra security are you really paying for? I definitely don’t think someone should raid their e-fund to buy a car, but if you’ve got the money on top of that then unless you’re keeping it for a specific purpose, it really may just be overkill.

            With all of that said, this is really in the realm of making a personal decision that doesn’t have a hard and fast right answer. There are many ways to do it well.

  • Mrs PoP @ PlantingOurPennies September 9, 2013

    We financed our last car purchase, largely because we were deep in real estate purchasing mode and needed as much cash as possible available for buying those assets when they were at historical low prices as possible.

    • Matt @ momanddadmoney September 9, 2013

      That falls right into the “invest the difference” category. From what I can tell that seems to be working out pretty well for you guys.

  • Michelle September 9, 2013

    I think financing makes sense if the interest rate is 0%, or if it is very low.

    • Matt @ momanddadmoney September 9, 2013

      It definitely can, but it depends on what you do with the money. If you just spend it then you’re asking for trouble, even if the rate is 0%.

  • Andrew September 9, 2013

    I was able to pay cash for my car. I drove my last car for 10 years but now put on a lot more miles so hopefully it lasts. If I can get 0% or under 2% financing…I’d take it to free up cash for other purposes. I’ve heard PenFed has some really good low rates for car buying.

    • Matt @ momanddadmoney September 9, 2013

      There are definitely good rates out there if you want to go that route. Of course that goes hand in hand with having less advantageous places to put your money.

  • Shannon Ryan September 9, 2013

    My husband made me promise to pay cash for our vehicles when we got married, so that’s what we do. It does feel good to own the vehicles outright and we drive them for many years. Financing a car has become so commonplace that I think most adults don’t even consider paying cash. They see 0% financing as a reason to buy a fancier car. I don’t have a problem with people choosing to finance their vehicle, but they need to do it for the right reasons, which generally doesn’t include buying a car that you can’t really afford.

    • Matt @ momanddadmoney September 9, 2013

      “They see 0% financing as a reason to buy a fancier car.” That’s definitely a problem. It’s free money right? Well no, not if you spend more than you would have otherwise. Then it’s simply more money. Financing can be done in a smart way, but more often than not I think you’re right that it’s used to trick people into buying more than they can afford.

  • Jacob @ iHeartBudgets September 9, 2013

    You know my thoughts on this, and I appreciate your well-thought out approach to your car purchase. Personally, I never finance or buy anything newer than 10 years old (low miles to me is under 200k!). Not for everyone, but probably a good idea for more people to look at taking this route. The car barely depreciates at all, and you can sell it later for almost the same as you bought it for. Some higher maintenance costs, but if you’re smart about it, you’ll save thousands and thousands over the years. 🙂

    • Matt @ momanddadmoney September 9, 2013

      I do know your thoughts and I think you’re approach is really badass. Thanks for helping me think through my own decision. It’s always helpful to have someone more knowledgeable than you to bounce ideas off of.

  • Katie Collins September 9, 2013

    Another benefit of paying cash: You can have less insurance on the car. At least in the state of Tennessee, you’re required to have full coverage on a financed vehicle. If you own the car outright, you can drop your coverage to liability, which saves a pretty penny in insurance costs.

    • Matt @ momanddadmoney September 9, 2013

      Interesting. I didn’t know that but it makes sense. We actually just added back collision and comprehensive with our new purchase because the cost-benefit analysis seems to be more in our favor with a more valuable car. But we don’t have it on my wife’s car and didn’t have it on my old one. Having those kinds of options is definitely a benefit.

  • John S @ Frugal Rules September 9, 2013

    Good post Matt! I think either can be fine, depending on the specific situation. With our last car we financed, because we got something like 1.9% APR and were fine taking that on. It was a five year loan, but we ended up paying it off in a little over three years. I hate having a car payment, but if you can take advantage of a really lower interest rate then I have no problem taking the loan if you’re wise overall with your finances.

    • Matt @ momanddadmoney September 9, 2013

      Completely agree. As with anything else, there’s no inherently good or bad. It’s all in how you do it.

  • Tonya September 9, 2013

    My guess will be I’ll buy a new (slightly used) car that is more affordable, where I’ll put as much down as I can, but will probably have a short term loan with low interest. I have good credit so at least the last part will probably be possible. As far as having enough saved? Well that’s going to take some time. 🙁

    • Matt @ momanddadmoney September 9, 2013

      Yeah, having the money saved is tough. We wanted to go the slightly used route too and the problem we ran into is that for the reliable kinds of cars we were looking at, there wasn’t much of a price break until you got to really used. There’s always a trade-off involved.

  • Edward - Entry Level Dilemma September 9, 2013

    Buy a car over 20 years old. As long as you keep it in good condition, its value will actually INCREASE, according to KBB. Maybe just a dollar or two per month, but I’ve seen this same result on several different cars.

    That said, we financed our car because we were just coming out of a bankruptcy and had pretty much no cash savings built up yet. But the property management company didn’t want to rent to us any more and the nearest place we could find in our price range, and was okay with the recent bankruptcy, was across town with no bus routes to get my wife to work.

    • Matt @ momanddadmoney September 9, 2013

      Your approach to car-buying sounds a lot like Jacob. It’s pretty badass, but we were honestly nervous to go that route. We just didn’t want to deal with the possibility of getting a total lemon and were willing to pay a premium because of it. But if you can pull that off, I think it’s pretty awesome.

      Your personal story is a great example of life getting in the way of the perfect decision. Sometimes we just have to make the best of the situation we’re given.

  • Money Matters September 10, 2013

    We’ve paid cash for our last few cars, and it’s amazing how much better those cars drive when they’re paid for – with no monthly car payment. We just followed the Dave Ramsey plan for buying cars – where you save up enough money to buy a “good enough” car that will last you a couple years, and then you continue paying yourself car payments until you have enough to upgrade or buy your next car. Each next car you get should last you a bit longer, and give you longer to save for your next one. Keep working your way up!

    • Matt @ momanddadmoney September 10, 2013

      I like that approach. You don’t need the ideal car right away. Giving yourself time to get into a strong financial position while fulfilling your needs along the way is a great way to go.

  • Done by Forty September 10, 2013

    That’s a thorough run down, and one that’s particularly fair to the option of financing. In general I think cash is the way to go but for someone who can borrow at 2% or less and has the discipline to put the delta in investments, you’ll likely make some money.

    Another advantage of buying outright is the ability to insure at the levels you’d like to. My car’s value doesn’t justify comprehensive coverage but if I financed it, I’d have to insure it at that level until it was paid off.

    • Matt @ momanddadmoney September 10, 2013

      You’re the second person who’s mentioned that point on insurance, which is a good one that I had overlooked. Always nice to have that added flexibility.

  • Pretired Nick September 10, 2013

    There are very few good reasons to finance a car. It’s worth mentioning that in most cases to get a car loan for 0-2%, you’re pretty much only looking at new cars — which is insane. If someone “needs” a car, you can get something reliable for $3,000. If you don’t have that money and the car is for getting to work (although you should probably just move closer to work), then a small loan could get you buy. When I was very poor and my car was stolen, I put a car like that on a credit card so I could get it quickly and just paid it off in a couple months.

    • Matt @ momanddadmoney September 10, 2013

      You make a good point about the best interest rates typically being for new cars. I don’t think that’s 100% true, but it’s definitely the norm. I don’t think there are any hard and fast rules, which is why I would keep an open mind to both, though I agree that paying cash is the better option in the large majority of cases.

      • Pauline @ MakeMoneyYourWay September 11, 2013

        Some retailers have second hand cars with guarantee and a 36 months free finance. I would take the 0-2% rate because I believe in my ability to repay, and make good use of the cash in the meanwhile. If you let the 0% deal lapse and it reverts to 9.99% you aren’t getting a deal anymore.

        • Matt @ momanddadmoney September 11, 2013

          If you can make good use of the cash in the meantime, it’s definitely a route worth considering.

    • Brett April 14, 2015

      I looked on bankrate, and there are 2% loans for used cars too. Of course these are for people with awesome credit. But it’s the same as a new car (I was also under the impression that new car loans had better deals).

  • Mike September 10, 2013

    This is a very good article! One advantage I’ve discovered to paying cash for things is purely psychological: it just feels good to own things and not be in debt! Plus, it has been a pretty important attitude shift for us overall!

    • Matt @ momanddadmoney September 10, 2013

      I think you make a good point about the psychological side of things. With that said, I think there’s a role for balance though and understanding how to use certain things, such as debt, to your advantage. Not for everyone or for all situations, but worth keeping an open mind about.

  • Kim@Eyesonthedollar September 10, 2013

    It’s been a few years since I bought a car, but it seems the really low rates are on new cars. Spending $30K on a car just because it has zero percent interest is not really a smart choice in my opinion. If you could find a decent car a few years old for a really low rate, I can see where that might be appealing, but I hope to never take any sort of car loan again.

    • Matt @ momanddadmoney September 11, 2013

      I 100% agree that you shouldn’t pay more simply because you can get a lower interest rate. That’s incredibly counter-productive. But you the cost of the car is the same then the low interest rate is worth at least considering.

  • Paul Sarwana September 10, 2013

    “In most cases it will make the most financial sense to pay cash.” I agree with that statement. A car is a depreciating asset with increasing fuel and maintenance expenses during its economic life. If you really have to buy a car make sure you to pay cash and use it for productive activities.

    • Matt @ momanddadmoney September 11, 2013

      I think that there are circumstances where it can make sense to finance. It isn’t all or nothing, but yes in most cases I think cash will make the most sense.

  • MoneySmartGuides September 11, 2013

    For me it all comes down to the interest rate of the loan. If I can get a loan for under 2%, then I take the loan because I can invest the money I would otherwise use to pay for the car. I make sure though that the investment is a short-term, safe investment.

  • catbug November 20, 2014

    I do it the same as buying it with cash but slightly different. I have aa credit card that gives 2 points for every $1 spent. I saved up till i had enough in my bank. Twice the amount of thr car. $2500 x 2. And i got to increase the credit limit of my card anyway while i waited for my savings to grow. Then i paid for it full with my card, and paid my card off completely the month after. So i got 50000 worth of points which is equivalent to $500. So technically i paid $24500 for the car. Sounds impossible but it is when you have no children and no life (like me). No life but at least i have a car that won’t break down and has extended warranty.

    • Matt Becker November 20, 2014

      Nice! I actually wanted to do that myself but couldn’t get the credit card company to increase my limit enough. I’m glad you were able to make it work!

  • Joe November 22, 2014

    Great discussion. All of the other internet research ignores the opportunity cost, which is important to me. While I have the cash on hand to purchase my choice of a car, i’m thinking that leasing makes sense. My logic being that I can put the purchase price of the car, lets say 45k, into a stock mutual fund, and make lease payments ($500 per month for 39 months) from it. At the end of the lease, I have the balance of my 45k (25k?) plus whatever investment risk/reward that money provided.

    Better money in the bank than money in the car, just like you said. Is my logic flawed?

    • Matt Becker November 24, 2014

      I definitely agree with you that looking at the opportunity cost makes a lot of sense. If you can get a loan for 0-2%, you may be able to earn more on that money elsewhere. With the big caveat being that if you invest the money in the stock market, you face the risk of that money not being there when you need it, like at the end of those 39 months when you need to pony up more money for another car. Of course, you could instead use that $20,000 to purchase a great used car and let the $25k you invested ride for even longer, AND have an extra $500 per month once that initial 39 months is up.

  • Daniel Vance Plaisted February 12, 2015

    I can only get cash from my investments (from TSP): which means as much as 20% going to the IRS. So say I pay close to 6 thousand interest on a 30 thousand withdrawal: is paying cash still a better way to go?

    • Matt Becker February 13, 2015

      You definitely don’t want to take money out of your TSP to pay for a car. Leave it there. Now, whether you should take some time to save up the cash elsewhere first is still a good question, but withdrawing from your TSP to buy a car is definitely not worth it.

  • Brett April 14, 2015

    There aren’t many articles like this around. Most people have lots of wants and not much cash. Luckily I have saved enough cash for the car I really want. Usually I’m fairly practical saving a few cents on the beans as you’ve mentioned, but for cars or things I enjoy, I really like to get what I want rather than what will just do the job (cars are definitely an emotional decision at least for me). After that, I typically love the car to death, and treat it like new until everyone but me notices how beat up it is.
    Getting back on point, I’m planning on financing since I can easily get 2% or better on a loan. That’s cheap money to invest. I could easily get that in returns from the S&P 500. In addition, I would be building my credit that is till this point loan free. My only qualm with doing this is that while financially advantageous, this strategy goes against human emotion since I’ll likely want to double spend the money that I no longer have… I guess I’ll have to focus on my net savings vs gross then.

    • Matt Becker April 15, 2015

      Thanks Brett! It’s nice to have the money in savings that you can then spend on something you enjoy. If that’s a car for you, then go for it!

      As for your strategy, you’re definitely right that it will take some discipline to actually invest the money instead of spending it. I hope you’ll keep us updated and let us know how it’s going. Good luck!

  • ChipMonk June 17, 2015

    Nice article. For my situation I’m in the middle of he fence tossing up between paying cash or going fiance on my new car which I need to get in a couple of weeks. A lot of my friends have told me to pay cash for the car and get it over and done with, less hassle etc. But my accountant is advising me to purchase the car through fiance and has explained that in long term by leaving my cash in my offset account which is offsetting my home loan I will be better off. The negative side of this is that I will be paying more for the car but whats a couple thousand extra spent compared to tens of thousands saved … ofcourse that’s over say a 20 year period. The approach I’m swaying to is pay 1/4 of the car with cash and fiance the rest, that way I decrease the loan amount and still come up better in long term.

    • Matt Becker June 17, 2015

      Hey ChipMonk. I’ll be honest that I don’t completely understand how this strategy would save you tens of thousands of dollars. Are you saying that you would invest the money for a higher return?

      • ChipMonk June 17, 2015

        G’day Matt. The example my accountant gave me was:

        · On a $40,000 car say the interest rate is 6% per annum and we take the loan from a bank 5 years to pay the total interest charged will be $6,398 at the end of 5 years.

        · If the same amount of car $40,000 will be taken from your equity/offset (25 years loan to pay) the total interest will be $23,339 on a 4% interest rate.

        Do you agree with that logic? I’m sure I will still have my home loan debt in the next 10 years unless I win the lotto!

        • Matt Becker June 18, 2015

          Okay, gotcha. I had to look up what an equity offset account was, as it’s not something I had heard of. Not sure if we have those here in the US.

          So I can certainly see why this may be a good idea if these are the only two options you are considering. Though, if funds are limited, I would consider looking at a less expensive car that you could at least mostly fund with cash you had outside of your offset account. Here are two posts that may help you find the right car for your needs:

          Good luck!

  • Nelson July 13, 2015

    Hi Matt, thinking of buying a fairly used car in the next 3 months. I have about $40k saved up for this and on the fence about what to do. My credit is fair and so i wont get the best interest rates if i finance. I am also very leary about investments since i am not good at it so i rather buy a car cash than have the money sit in my savings like it has for a while now. Thoughts?

    • Matt Becker July 14, 2015

      It definitely sounds like paying with cash will be a good option for you. Though I would consider only using a fraction of that $40k on a car so the rest of it is available for other purchases. You can check out this post, this one, and this one for some ideas on how to find a great car at a lower price.

  • Ero August 17, 2015

    it doesnot make financial sense to pay interest on a depreciating asset.i have seen so many people take loans to buy cars and i really wonder who taught the financial education if any.if its a business car then its okay (you might get tax beaks for its depreciation) but for a personal car. nahh!

    • Matt Becker August 18, 2015

      I definitely agree that in most cases it doesn’t make any sense. But if you can get a low enough interest rate AND you will actually be putting that money to good use somewhere else, it COULD be worthwhile. But the default option should definitely be to only buy what you can afford to pay for with cash.

  • Angie Mac June 7, 2017

    I am 21 years old, and not having a car is deeply affecting me. I share a car with my mom, because we both work at the same place. Because she works, it makes taking the car to school or maybe a 2nd job difficult because she too needs it. Financing seems to be my only option because i need a car asap, and my interest rate would be 3.24%…should i try to wait it out, or finance a car(im thinking used, im not picky)? I do not have to pay bills other than my phone, so i have some leniency to pay for the car payments

    • Matt Becker June 7, 2017

      Thanks for sharing your story Angie. I definitely can’t say anything for sure, but if not having a car is preventing you from moving forward, and if you can finance an inexpensive used car without putting yourself in a tough financial situation otherwise, which it sounds like you can, then I don’t think it’s a bad idea.

  • Sarahjferg April 17, 2018

    I see that this is an older post, but perhaps you can still offer advice. I’m buying a brand new car with trade in difference that puts it at $30000. If I can get 0.5% financing over 24months and I can pull my payments from a bank account that earns me 2%….it makes sense for me to finance, right? Or am I missing something? Seems too good to be true. The other options are 1% over 36 months and 1.5% over 48 months.

    • Matt Becker April 19, 2018

      It certainly could make sense but I would keep two things in mind.

      First, pay attention to other fees that come with the financing. The interest rate may be low, but other fees could offset the savings.

      Second, this only works if you have the money available now and can keep it in a savings account earning 2% for the entire 24 months as you make your payments. If you don’t have the money now, or if for some reason you have to use the money for some other purpose, then you’ll come out behind.

  • Lornalee April 17, 2018

    Wow!! This is so helpful! I am in need of a car, a d have been
    saving but was offered a loan by my bank. At 59 I dont need no drama with lol
    So I will defiantly try and get something with my savings. YOU WERE SUCH A BIG HELP, THANKS

  • Carib King September 30, 2020

    Hi, I wanted to know if I made a good financial decision. I always wanted a car and I was saving for it in a credit union. I had some money on shares but I took a loan to do a masters. When I was almost finished paying for the masters degree I got a lumpsom of cash. The amount was enough to pay for a car cash but what I did was took a small sum of the lumpsom money and payed off the loan and took the rest and increased my share value in the credit union. I then took a loan and bought the car. Did I make the right decision or would I have been easier paying for the car cash instead?

  • Baba January 8, 2021

    Reading this in 2021 but I have to admit that the wisdom shared here is ageless.
    I had been considering getting my car financed by the bank but now I’m having second thoughts.
    I was evaluating the decision based on the fact that all three of us will be commuting daily, my wife and I to work and my little girl to school. The loan payments are almost equal to the amount we will spend on public transport,plus or minus $20.
    I know I have not factored in the fuel and maintenance cost,but I feel that this might be a good decision considering that public transportation is not that efficient in my country.
    Am I making the right move?

Leave a Comment