Paying cash for a car - or maybe I shouldn't


Out of respect and consideration for JT and Mike, I’m not biting.


I’ve read that some mortgages don’t allow pre-payment or have pre-payment penalties. Has that happened to car loans too?


It can, daughter deal, 4.5% no prepayment on loan from dealer, got her CU loan 2.5% no prepayment penalty through dealer after wife cavetched, go figure. Was not involved, just wife and daughter.


That’s why before you sign any loan papers you need to read them to make sure there is no pre-payment penalties. Most legitimate firms don’t do that anymore but doesn’t hurt to check. Most don’t calculate interest on the rule of 78ths either where they get most of their interest in the first few years, but doesn’t hurt to check that either.


@Rod_Knox, out of consideration to @bing, let’s stay away from politics.


Tell me, how did your portfolio do in 2008?


You need to be careful about paying off a loan early. A common thing to do is to add the total interest onto the loan, then divide that by the number of months to get the monthly payment. If the payoff is simply the number of months left times the monthly payment, you will have paid all the interest, just paid it very early. They’ll tell you there is “no prepayment penalty” but they won’t tell you that you are still paying all the interest. You need to make sure that the pay off is significantly less that the monthly payment times the number of months left. I recently learned about this, and I think I fell for it some years ago.

Having said this, some people have pointed out that some dealers offer 0% loans on some car models these days. I think those are often subsidized by the manufacturer, so you might bet a better deal using one of those. Then, of course, you wouldn’t lose anything by paying it off early.

The sales people giveth, the fine print taketh away.


It dropped by a bit more than 50%, about how it did in the drop of 2000-2; it also dropped a lot 1987 October 19. I had capital losses to carry forward for years. (wasn’t in the market in 1929) It’s quintupled since 2008. Ever hear ‘Buy low, sell high’ - after a crash, you’re already there, you don’t have to buy.


Yes that was my comment on the rule of 78ths which is not as common now as it used to be. You want a simple interest calculation on the balance instead.


That was ten years ago but it was a big loss like most everyone else. That’s history and I don’t keep records back that far, plus the computer program on the investments doesn’t go back that far. At any rate, that’s why you take the overall average rather than focus on a short period of time. If you panicked and sold, you lost. In the performance figures I provided for a couple funds, the term “since inception” gives the overall average of performance over the years since the fund was started.

Everybody has to choose their own level of risk but I’ve talked to so many risk averse former employees that have pretty much blown through their money on safe interest bearing investments. Pretty sad to see people over 65 and all they have is meager investments paying 1-2% returns.


That’s true for investing, but it’s not true for this decision, where one is comparing the certain return of paying cash for a car to the very uncertain return over then next 3 or so years in the stock market.


If you’re dealing with a bank institution that has a No Prepayment Penalty, then find a new bank. Better yet - join a Credit Union.


By “no prepayment penalty” I meant that there is not a prepayment penalty. The bottom line here is that the cost to pay the loan off early should be less than the number of payments left times the monthly payment.

And, yes, probably the best bet is to join a credit union.


Yes - I know what you meant. Most banks have abandoned that practice. Credit Unions never had it.


Mike sorry but that’s a little confusing with the double negatives. If the bank has a “prepayment penalty” then find another bank. If it has “no” prepayment penalty, all is fine.


I suppose there are 3 things that don’t come with instructions - spouses, children and money. Do your homework and good luck to you.


Dear Moo: Sure these guys want to make maximum money but I think you can actually get a better deal paying cash. There are a few things to watch out for though; first, get YOUR own mechanic to check it out mechanically BEFORE signing anything or paying a dime. Secondly, if you do wind up buying, get a decent warranty. How long will this car run, a conservative estimate (ask the salesman first then make an offer if it’s decent). If nothing else ask for 120 days (surely it should last that long you might suggest).
If all lines up, now is the time for a little horse trading. Make a lowish offer but not too ridiculous; perhaps refer to Edmunds or the KBB cheap value for private sales.
Finally (this should be the first time you mention paying cash), the sales person gives you his final (too high) price. You can ask what type of discount they can offer if you pay cash, right now. (For this to work, you must actually have the cash with you, possibly taking it out to show him)


You realized the OP is talking about a new car, right?

You get the manufacturers warranty. Unless you buy an extended.

Really? Ask the salesman? It’s a new car what do you think he’ll say?

I repeat it’s a new car.

I don’t think a whole lot of people are comfortable carrying around enough cash for a new car, much less flashing it on a sales floor.


This reads like a post by someone who has never bought a new car .


You might be surprised at just how many people can and do carry enough cash to buy a late model car when they go shopping. And you would likely be very surprised at the deals they can make. But certainly those who are able to do that are intelligent enough to not display or even mention the cash on the sales floor.

When you make a reasonable offer and lay the cash on the sales manager’s desk in neat $1,000 bundles and are ready to walk away at any counter offer a great deal of bickering is eliminated and you either get the deal you want or move on quickly.