Finance vs. cash

I’m considering purchasing a 2012 Sonata. I’m not sure if I should finance or pay for it cash. I have the option of putting 10K as a down payment and financing the rest. I also have the option of paying it off. The sticker price is approximately 21K; 23K with taxes, fees, etc. Should I finance? Pay it off? If I consider purchasing, how much should I offer? Realistically speaking, how much will the dealer negotiate if I pay cash? How much should I offer? I would like to offer between 20K-21,500.

What do you mean “refinance” it?

The dealer makes money on financing, so the fact that you are paying cash is not very appealing to them. Whether you should pay cash or finance depends on your finances. Do you have 8 months of emergency cash sitting around after you pay for your car? What are you going to do with the extra $10-12K if you finance. If you will make 6% guaranteed and you finance with a rate of 2%, then maybe it is better to finance.

I always find it a safer bet to pay cash and not to pay interest.

Check on Edmunds and and see how much people are paying for a similar car. $200 above or bellow should do it depending on where you live.

What will you do with the money if you don’t finance it? Look at how much you can make if you want to save it. If the savings are minimal, you might want to pay all cash. Other considerations include having a cushion in case you need money immediately. Consider dealer financing as well as band and credit union financing. Settle on a price before you look at dealer financing. You have the cash and would not lie if you told them that you want to pay cash at first. Then ask about financing. If you look at bank or credit union financing, get qualified for the loan you want first.

  1. Don’t discuss your payment options with the salesman until you have settled on a price. If pressed tell the salesman you will shop around for the best option after the price is set.

  2. Calculate total cost of the car if you decide to finance. To be really thorough calculate the value of the money you keep in savings as if it were invested in say a 5yr CD.

  3. If you decide to pay cash resolve to replace the money from savings by the amount of the monthly payment as if you decided to finance.

Most of the time cash is best.

I have used the same method the managers of fleets use. Make them bid against each other. There are lots of dealers around.

I make a list of dealers. I don’t worry about going out of town, the warranty is from the manufacturer not the dealer. Then I go to each one. I tell them what car I want (you don’t want to settle for a car you really don’t like as well anyway do you?) and tell them you want their best offer. Tell them you are going to go to other area dealers (area may be your city or maybe state wide). The dealer with the best price will get your business. Dealers don’t need to have the car in stock, they can get what you want if they don’t have it. Make it clear that you will be making the exact same offer to other dealers. Give them a time limit and do what you say.

Funny thing about that.  The last time I did it, the winner dealer did me one better and sold it for something like $500 below the agreed price when all was said and done.

Note if you have a  trade you can do the same thing, just don't mix it up with the new car.

Do not mention or even discuss financing with the dealer while negotiating the price. Before going to the dealership, check with your bank, S&L or credit union to see what they have for auto loan deals. Then compare the cost to finance to the value of the money in savings/CDs or other investments.

If you decide to finance, get a pre-approved for a loan from your bank, S&L or credit union. Then if the dealer has a better deal, you can always go that route. But beware of dealer loans. dealers have been known to pad the price they send to their financier with options lie an added warantee or a wax job but it wont appear in your paperwork. They hide it in finance charges etc.

What you need is either an interest calculator or a schedule from your financial institution on the cost per $1000 financed for the interest rate and duration you have been pre-approved for. That way if the bank comes up with say $15/$1000 for a 5 year loan, so you figure $300mo on $20k, but the dealer offers a lower interest rate and the payment comes in at $320, the dealer is cheating.

Car loans from credit unions and manufacturers are 2-3%. If all you are going to do is keep it in the mattress for 1% then pay cash, but it doesn’t take much to make more than 3% on your money. Contrary to what that radio host Dave Ramsey jabbers on about, why would you pay off a 3% loan any faster than you have to. And dealers don’t want you to pay cash, hoping you will finance through them.

I’ve gotta say I’ve never seen a time like this. In 1981, the bank loan on my new Olds was 18% and that was good. A few years later it was down to 7%. My first house was 8%, now 3%. Even my school loans were 6% now kids get them for 2%. It’s not going to last so I’d save your cash and load up a little.

Given the Fed’s announced plans for the discount rate it should last for the next couple of years.

I always pay cash (and then start saving immediately for my next car). Except for a mortgage, I prefer not to owe anybody anything.

Banks or other “institutions” with capital rarely lend out money at a rate below what one can get “guaranteed”. Why loan you money when they could simply invest it in a vehicle that guarantees them a better return? They have to take the money people invested with them, lend it out and pay a portion of the proceeds to their investors. This naturally makes borrowing money more expensive than investing in guaranteed rate of return vehicles. I often hear people proposing such options and wonder where this wonderful investment vehicle is, I have several hundred thousand I’d like to squirrel away.

Cash is ALWAYS best if you can afford it. As stated, the dealership has to make their money someplace. If you pay cash, the price will be slightly higher than if you finance. If you balk at stating a payment option, you can bet they will default to the cash price to mitigate risk. Of course, if you do finance through them, it’s all gravy. My advice is to be up front and know what you’re willing to pay. If you’re serious, that often gets noticed and the games tend to vaporize…

If you find a 0% loan, then they won’t negotiate, as there’s usually a stipulation in that offer that says you have to pay full price for it to get the 0%.

" The sticker price is approximately " When you are looking for a car why do you even care what the sticker price is? Really? There is no magic to that number. People buy cars at, above and below sticker.

Before you go in, give this some thought. Do you really care what the sticker price is or do you care what you are going to pay. Sticker price is magic. It is nothing more than a number the manufacturer decided would help increase their profit. No government rules how it is determined or what is done with it.

Sticker price is a sales tool and nothing more.

We bought a new Toyota 4Runner back in 2003. We negotiated a price and decided to buy the 4Runner. The dealer offered Toyota’s financing for 0% interest for 3 years. The financing was on the price we had negotiated. I had never financed a vehicle before, but decided that rather than paying cash, we would earn the interest on our money. The monthly payments were quite high, but we came out ahead on the deal. This was the only time I ever financed a vehicle, but I would do it again if I was offered 0% interest on a price that I negotiated.

The only thing I’d want to be sure of on a 0% deal is what might trigger penalties or conversion to an interest-bearing loan, with back interest due. I haven’t heard of this on car loans, but thing like this happen with other “0%” and “no payments for a year” kind of come-ons, one wrong step and major penalties occur.

@texases–I was really skeptical of the deal. In so many cases, a dealer offers either a rebate or 0% financing, which of course, then isn’t 0% financing. Had I been offered a rebate, I would have paid cash. In our case, all that was offered was 0% financing on the price we had negotiated and the financing was through Toyota. In our case, it worked to our advantage. The next vehicle I bought I did pay cash.

And if you get that 0% financing you better make sure you pay on time, every time. In most cases one late payment jacks you back up to the default rate for the life of the loan besides the late fee you will pay. In some cases even if your late on other loans or credit cards, or your credit rating falls they will ding you for it!

That is an excellent point DfromSD. When we financed a tractor at 0% after negotiation too, we had automatic withdrawal from the account we held the money in. The account pays us interest while the auto withdrawal offers us a measure of security. In this case, even at 0%, we have dedicated funds to pay for the car in cash. This was a way to make a little extra money but you need to save ahead still. I would set up an automatic payment plan regardless of the interest rate on all loans to protect your credit.