Financing a Car

[crushonmickey]

Does it make sense to finance a car when we have the cash sitting in the bank to pay it off?

The cash is our emergency fund, and we would use about 50% of it to pay off the car loan. But then I could take the "car payment" and pay myself back into the emergency fund and save the $80 a month in interest.

Is this a bad idea? It just doesn't make sense to me to keep paying that car payment with interest when we have the money, but I hate to wipe out half the emergency fund???

 

[TiggerTails57]

I'd pay it off and save the interest.

 

[brergnat]

Are you earning more in interest (percentage wise) on the money in the bank than you are paying (percentage wise) on the car loan? If so, keep the money in the bank. If not, pay off the car.

Remember too, if you need to use your emergency fund, and you have the car paid off, that's one less payment you have to worry about, which actually shrinks your emergency fund "need" significantly.

We came into some money earlier this year due to my FIL's passing. We had ZERO in the bank for emergency funds. We used ALL the money to pay off our two car loans and cc debt. We are now able to sock away a couple thousand dollars per month into a savings account. We will be up to the amount we "need" in emergency savings by next June! We don't really "need" an emergency fund because DH's job/pay is secure even in the event of something happening to him, but we would need some money for child care if something happened to ME (since I'm a SAHM), so we are putting money away for that.

 

[Kate and Pete]

Buy it with cash. You'll often get a better deal with cash - and you won't go into debt to buy a new car! Your savings can be built back up.


No new debt!

 

[4HppyCamprs]

If the money is earning more money in the back than what you are paying in interest charges leave it in the back. Paying 0 interest on a car versus earning 3.5 interest in the bank (for example). Negotiate the best price you can on the car regardless of financing or cash pay.

 

[ExPirateShopGirl]

How quickly can you replace the savings?

 

[SandrA9810]

If you can get 0% interest, even if it's for the first three years. Make the payments for 3 years, then pay it off completely. That way you're not taking 1/2 your emergency fund. After 3 years you'll only be taking a 1/4 of your emergency fund.

But try both tactics with the sales people, financing and paying cash upfront.

 

[justbishop]

If it's at all avoidable, don't go into debt to buy a car (and don't buy new, either way). I'd take the cash and buy something late model and used, and start a "new" car fund while building the savings back up (so that next time, you won't have to finance OR dip into your EF )

 

[pipervali]

If you're paying $80 a month just in interest on a car payment, I'd suggest paying it off, because your rate sounds absolutely insane.

When I purchased my car, I didn't get a car loan. I didn't love the idea of the credit union holding my title until the loan was paid off. Instead I got something called a share pledge loan. I had the total amount of what the loan would be, sitting in a savings account. I 'borrowed' against my cash that was already in the account. I ended up with like a 3% interest rate. And as I paid the monthly payment, less and less of my money was tied up in the share pledge. So every couple of months, I would ask the loan specialist to remove the hold on however much I had paid towards the loan. That way I wasn't paying a ridiculous amount towards interest, but I also wasn't out all that money right away. And I could also access more and more of my savings if I needed it.

 

[Disneywedding2010]

I got a better deal on a car (just bought a 2011 Nissan Juke on Saturday) when I told them I was paying cash for it. Its one less bill I have to worry about paying each month.

 

[MrsPete]

This is too hypothetical to comment upon. Questions:

How much do you have in the emergency fund? If you have only $3000, you shouldn't deplete it by half -- it'd take you too low. On the other hand, if you have $30,000, removing half would still give you a good cushion.

How fast could you replenish the emergency fund? Are you the person who will actually do that, or would you plan to do it and never get around to it?

Do you have any reason to suspect that you'd need that emergency fund in the near future? Job insecure? Going to need to replace your furnace or roof? Of course, we never know when we're going to have an emergency, but sometimes we know that expensive things are coming up in the future. IF you see any of these things on the horizon, it might be a time to hold onto cash. (For example, I know that this time next year I"m going to start paying for braces -- I know I'm going to dip into my short-term savings.)

And though it's been asked before, how are you paying $80/month in interest on a car? Do you have something super-expensive, or is your rate uber-high? Can you afford this car? I'm suspicious that I couldn't.

I got a better deal on a car (just bought a 2011 Nissan Juke on Saturday) when I told them I was paying cash for it. Its one less bill I have to worry about paying each month.

I bought my car three years ago, but my experience was just the opposite; They were rather disappointed when I paid cash. It meant that they weren't going to make interest money from me month after month after month.

For the record, when we bought my car three years ago, we faced just this question! We could pay cash by essentially depleting our short-term savings and checking account . . . or we could finance a portion of the car. We didn't have to touch our emergency savings, but we bought the car weeks before a relatively expensive vacation and two months before Christmas . . . but my old car was DEAD, and we had to make the purchase THEN. We did choose to empty out our short-term savings and checking. We had a couple lean months, but we went into it knowing that we'd made that choice. We bought the car in late October, and by February we were "ourselves" again. A couple paychecks, eating out of the pantry instead of grocery shopping, and our checking account looked good again. Given the same circumstances, I'd make the same choice again. We both agreed that avoiding financing was worth those couple lean months, and we were both very motivated to build our balances up again.

 

[scrapquitler]

I can only see two scenarios where it makes sense to keep the payment while you have the cash in the bank:

1. if the money in the bank is gaining a lot more interest than what you are paying as interest on the payment (if the car loan is at like 3% and you have some whiz bang bank account paying 10%, then keep the money in the bank).

3. If you have a low credit rating and you are trying to boost your credit score by showing good payment history, then it is worth keeping the payment.

Other than that, I'd pay that loan ASAP.