Financing vs. Buying Outright

We have two autos with over 100,000 miles (1999 Acura Integra, 2002 Mazda Protege5). These cars are both paid off and in good condition.

However we now have a new 3-month old baby, and we’re considering upgrading to a newer SUV (07 or 08 with under 30K miles) for more cargo space, increased safety features, less maintanance, and ease of child (and dog) loading/removal.

We are also fortunate enough to have good credit and a decent amount of savings. My wife is arguing that we should pay as much up front (possibly $20K) for this car as possible, to reduce (or possibly eliminate) a monthly car payment.

I disagree with this thinking, because a car’s value depreciates over the course of ownership and it seems insane to spend a large portion of our savings on something that loses its value so quickly.

But she counters, saying that if we finance it, we’d end up paying more money over the course of 5-6 years anyway.

Who is right?

Agree that a car is a depreciating asset, and the less you spend on one the better. That’s why buying a new car makes little economic sense, no matter how you pay for it. The massive amount of depreciation and the cost of money will pay for a lot of repairs. Only if you own a business or get mileage from your employer, does a new car make sense. So, you are probably both wrong; spend the money on investments or much needed upgrades on your house; at least it APPRECIATES in value.

Your most sensible choice in this case is TO DO NOTHING! Whatever car you have in mind is not appreciably safer, and repairs and maintenance on a more expensive car will be MORE EXPENSIVE.

We raised two kids in a compact car and pulled a trailer besides. Unless your dog is a St Bernard or German Shepherd, a compact car should accommodate all of you. Think of the massive amount of money you save by following Tom & Ray’s, as well as most posters’ advice by just driving two very reliable cars to the end of their design life which is about 300,000 miles.

If you want to take a trip, rent a large car to accomodate all your gear! You will come out far ahead fiancially!

She’s right, in that you have to pay that depreciation either way. That’s why I find the lease company advertisements so misleading. They say things that lead you to believe that leasing avoids that. In fact, your lease payment is depreciation+interest+profit to leasing company, with depreciation being the majority of the payment.

As for buying vs. financing, depreciation doesn’t enter into it, because, again, you’re paying depreciation either way. While I normally like to minimize financing, you have to balance that with your need to have a reasonable cash rainy day fund. Only you can make that decision. Also, you have to decide how much you can really afford to pay on a loan. As we’ve seen, lenders will loan you more money than they should. Again, you have to be the one to judge this.

I like your thinking, and if we were making this decision based on economics alone we would certainly be more apt to do exactly what you are suggesting. But there are also factors such as comfort (my wife has to sit close to the dashboard to accommodate the baby carseat in the back), safety (Protege5 fares poorly in side impacts), and overall maintenance (stuff will need to be replaced sooner than later on an older car). These things are fairly important to us in daily driving, not necessarily on long trips.

And everyone seems to be saying that now is the best time to buy a car if you can, due to the economy. It just seems like if we wait, it could end up costing us more in the long run!

If you need more interior space, then a mid size ar would be more appropriate. Agree there is losts of choice. My bet would be a Ford Fusion, since it is highly rated, costs thousands less than an Accord or Camry, and Ford will stay in business. A very spacious and highly rated car as well is the Hyundai Elantra which has as much room as mid size car but is priced with the Civic and Corolla.

I would pay cash,and be done with it!.

Agreed…and for us it’s not necessarily a rainy day fund, but also daycare and potentially college tuition for our little one - so when we think long-term it becomes a tougher decision.

If our disposable income becomes scarce for whatever reason, it may mean trading our new fancy car for one that’s more affordable – which would be what we’re driving now anyway.

I think you need to get more specific on the car, before deciding the best way to buy it - cash or finance. Figure out the SUV you want, then see if used ones are available and how they compare to new ones. The new SUV’s come with incentive programs from the mfg’s and dealers. Used vehicles don’t have these special programs. Do the incentives on a new SUV mitigate some of the depreciation advantage of the used one.

Step one; pick one or two SUV’s and/or Crossovers that you like and meet your needs. Toyota’s new crossover should be available in a 4 cyc now. The Honda CRV is nice, Ford Edge, or Escape perhaps. Use your computer for research and you’ll be able to narrow your choices.

Step two, price low mileage used vehicles of the same brand and type compared to a new one with incentives. Does the difference in final acquicision costs mitigate the mileage on the used one? When will tires, brakes, timing belts, and major maintenance figure into the equation? The used car will need all these things a few years sooner than a new car.

Step 3; do you finance or pay cash. Just the fact you have the option is good news. Decide whichever works out best when you run the numbers.

Perhaps you’ll find a perfect vehicle, get a great deal, and have a 0% financing option too. Sounds to good to be true but there are some deals out there now.

The car will depreciate whether or not you make a large downpayment. If you don’t make the large downpayment, you will owe more than the car is worth.

So what, exactly, is the benefit of paying higher interest costs?

Well, say we purchase a vehicle worth $20K. If we decide to pay for it all at once, we take the biggest depreciation hit financially.

But if we put $10K down, financed the rest at a low interest rate, and invested the other $10K into something that appreciates in value (like stocks, CD deposit, high interest savings acct, etc…), ideally we’d be recovering the money we’d be losing in a nominal interest rate and depreciation (and possibly coming out of this whole deal with a nice profit!).

(That is of course, if we avoid investing in something on the brink of collapse, like the housing market or GM stocks – which is no guarantee either…)

Ahh… hadn’t considered incentive programs… I’ll have to check that out. Thanks for the tips!

The depreciation hit will happen to the value of the vehicle whether you finance it or pay cash. Financing the purchase does [b]not[/b] mitigate depreciation cost in any way. You need to change your thinking on depreciation and understand this in order to make a sound financial decision.

Your investments would need to do quite well to outpace the APR on your loan, and that won’t happen with CDs or a savings account. So you seem to really be talking about investing in the stock market. That seems like a pretty big gamble to me. Saving on the loan interest seems to be the most surefire way to save money.

What happens if your $10,000 investment becomes worthless? Then you will have lost $10,000 and be left paying interest on the loan.

Your plan is a gamble. Your wife’s plan is a surefire way to save money on interest costs. Listen to your wife. She obviously knows what she is talking about. Then buy her flowers and apologize for questioning her extremely wise judgment.

haha… I see what you’re saying… But I can earn thousands of dollars a month from my home computer! All I have to do is call a toll-free number!

…I hate it when my wife is right!

Given what you’ve said, you’ll want to pay at least enough down so that you’re not ‘upside down’ in the car (owe more than it’s worth) down the road, so that any time you can sell the car and pay off the loan. You can be upside down even on low/zero interest loan, if it’s a long-term (60 month or more) type of loan.

I’m not really sure how long you’ve owned either vehicle, but if depreciation is a big factor in buying anything, then you should just keep what you got. If you plan on trading in in 3~5 years, then you should worry. If you plan on handing down when your kid is old enough to drive, then why should you care?
Pay cash and not worry about payments. Take the money you’d be making in payments over 60~72 months and put that into a high yield savings account or CDs each month. If your “disposable income” is lost, use the money you saved away.

Your new child is a wonderful addition congratulations, but car seats fit in both your cars, the car seat is a bigger safety factor, go for a good one and save the soccer mom van/suv until you need one.
If you feel you need used and want the facts see if your savings account pays more interest than the loan. I am sure it does not so paying cash is cheaper.

I understand Hyundai has a near zero %interest loans that has a clause that they will not reposess your car if you lose your job. This way you can hang onto some of your cash and have extremely cheap financing as well without major risk.

These are very uncertain times; you are basically looking for MORE SPACE and increased reliability in your new vehicle. I would disregard any advice concerning buying an SUV or an AWD or a vehicle with a pwerful engine. We are going back to $4 gas long before your new vehicle is even half worn. Even the posters on this site have extremely short memories about gas prices.

A Hyundai Elantra, also available as a spacious hatchback, will do everything you want it to do and will be very economical to operate.

“I understand Hyundai has a near zero %interest loans that has a clause that they will not repossess your car if you lose your job. This way you can hang onto some of your cash and have extremely cheap financing as well without major risk.”

GM has similar financing deals and better loan default protection. You can buy a new Pontiac Vibe for under $20,000. GM will almost certainly survive in some form. Even if they went completely out of business, the Vibe is sufficiently similar to the Toyota Matrix that you will find almost all parts in the future. It’s really just slightly different body fascia, and you could use Toyota parts if you had to for those as well. The best guess seems to be that Pontiac will cease to exist shortly, but I think that two cars will remain with GM: the Vibe and G8. They will be rebadged as Chevy’s, I think. Of course, you could just buy the Matrix, too.

One more thing: Pay cash.

Thanks for the info everyone…it really is helpful. We bought both of our current cars back in 03, and to be honest we would be fine with keeping both indefinitely if we didn’t think we’d need the upgrades (more space, safety features, lower maintenance costs and time, etc…) in the near future. Plus the state of the economy leads me to believe dealers are under more pressure to make more sales (or at least that’s what they want me to think!)

One thing I did realize… we bought our current cars (99 Integra & 02 Protege5) back in 2003 for approximately $10K more than what they’re estimated worth is now. So that’s a depreciation of 10K over 6-7 years. This leads me to believe that if we were to purchase a $20K car today, that chances are in another 6-7 years we’ll be able to sell/trade it for approximately $10K. So the net loss is pretty much the same, right?

I’ve also noticed in searches I’ve done on, there’s a somewhat consistent depreciation across the board in that generally cars 6-7 years old are roughly $10K cheaper than brand new cars of the same make & model. Is there any science to this?

If you get financing for the same percentage rate or lower than your savings interest rate, it’s a wash so go ahead and finance. If the rate is higher than what you can get for savings, then put a large deposit on it. Remember that if you owe very little on a newer vehicle, the insurance company will try to lowball their offer if you get in an accident. They don’t usually try to screw a bank. You are both right.

You appear very concerned with depreciation. It is a fact of life in the car business. No science, the rate of depreciation is two main factors. The age of the vehicle, and the make and model of the vehicle. Cars that are 5 years old depreciate at approximately the same rate, with variations base on make and model. Hondas and Toyotas are perceived to hold up better and depreciate less than average. Some makes are perceived to wear out faster such as Dodge Stratus and depreciate more than average. A ten year old car that sold for 40K new will sell for about 10K used if it is a Toyota, and less the 5K for a faster depreciating car. A car 4 to 5 years old generally sells for about 1/2 the original MSRP. Cars depreciate much less per year after they are 5 years old. The biggest hit for depreciation is in the 1st 4 years of ownership.

If you want to reduce your hit for depreciation look at cars about 4 to 6 years old. If you plan to keep a car for 10 years yourself then you are better off buying new and then you have control of the maintenance of the car from day 1. The issue with used cars is the repair/maintenance history is unknown. Getting a good used car depends on your inspection ability, how complete the records are on the cars service history, and an inspection by a professional mechanic. With any used car you have to expect more repair, maintenance, and reconditioning costs into your budget. On the other side you don’t have to make a monthly payment, or a much lesser monthly payment.

In your situation how much many miles per year will the “family” car be driven? If it is not your main high mileage car (another car takes the long daily commute) then perhaps you can get a used car for the family and keep one or both of your current cars for the daily commutes. If you have space to park them keep both cars you have and buy a used station wagon, mini van, or SUV and leave the car seats set up in it. Just use the kid mobile when you take the kids and the other cars the rest of the time. 3 cars 5 years old or more is your best option to reduce the depreciation hit. You’ve already taken the hit on your two current cars, the best way to get your money’s worth is to keep them and run them until they drop.