Cars - Pay Cash or Finance & Invest?

[Colin Smith]

My wife has finally ran her 1999 Volvo into the ground with the transmission going out and it would cost more to fix it than the car is worth at this point in time. 

Let's be clear that we are looking to buy a 3+ year old USED vehicle, looking to spend about $10,000. New vehicles are not part of this discussion as we have no interest in losing ~38% of the cars value in 3 years due to depreciation.

With auto loans being so low for used vehicles (~3%), it makes it hard to pass up, however, there is something to be said for owning your vehicles free and clear, as we do now. 

The questions is, would you pay cash and own your car free and clear, or would you finance the vehicle and invest the cash into RE?

[James Maher]

I just can't imagine paying cash for a vehicle, unless interest rates were outrageous.  Most loans are lower than inflation, and in 5 years when you're about to pay it off, you're still paying on the today's value of the vehicle, not the inflated value of the vehicle.

Look back at car prices from 5 years ago and ask yourself if you would like to lock in the 2010 new price on a 2015 car... that should answer it.

[Adam Smith]

@Colin Smith Great question! Personally, for my wife and I we pay cash for vehicles and very other thing we purchase except real estate.  For us, we feel better not having consumer debt.  I agree with the numbers @James Maher posted but there is something about having a car payment that makes us cringe.  Just the way we do it....doesn't mean it is for everyone or is even right for that matter.

On a side note, not having any debt (except mortgages) and two good paying jobs has made it easy to qualify for mortgages.  We are ready to purchase two more when we find the right deal.

You have to do  what makes you feel comfortable.

[James Wise]

Finance--Car loans are incredibly cheap. Whenever there is cheap money I think you should take advantage.

[Wilson Churchill]

How much do you like the car? Is it in otherwise good condition? I just had a transmission rebuilt for 1900 earlier this month, using quality parts.

Although you will get a low interest rate, financing a car requires full coverage insurance, increasing the cost otherwise.

[Scott Carder]

Originally posted by @James Maher:

I just can't imagine paying cash for a vehicle, unless interest rates were outrageous.  Most loans are lower than inflation, and in 5 years when you're about to pay it off, you're still paying on the today's value of the vehicle, not the inflated value of the vehicle.

Look back at car prices from 5 years ago and ask yourself if you would like to lock in the 2010 new price on a 2015 car... that should answer it.

Except for that fact that the vehicle is a depreciating asset.

[Colin Smith]

It is time to let the car go as the transmission is the kicker problem, but there are numerous other problems going on with the car that is making it more of a challenge to keep. Financially, we are at a place to buy something new (used) and for safety reason, we feel it is the best decision rather than fixing it. 

Has anyone had experience getting an auto loan to pay for a car that your buying from a private party?

[Steve Vaughan]

I see your math argument @Colin Smith. If you are investing the borrowed money at an ROI of greater than the loan rate + inflation, it makes math sense.

I'm with @Adam Smithon this, though.  Once you haven't had a car payment in years and the fact your are financing a depreciating 'asset' I don't think I could go back.  Hating your car at the beginning of every month as you make the payment?  Being normal like our broke friends still in the rat race?  Psychologically I couldn't go there, but I don't think it will be the end of the world for you.  Just come back up to us when you get 'er paid off : )

[John Thedford]

Pay cash if possible. Car loans are not deductible. I always look at minimizing my tax situation. 

[John Chapman]

I would  normally agree with the finance crowd, cheap money and all.  However, the one reason I have not ever financed is that I don't like to over-insure and carry coverage like collision.  I carry high liability and UIM, but never insure for collision and other add ons that are usually required by lenders.  My cars aren't super expensive so I could replace if necessary.  Just a personal preference/risk tolerance.

[John Powell]

I'm with Adam and Steve pay cash. It comes down to flexibility when you pay cash and live debt free except for real estate you have great flexibility when it comes to borrowing on real estate lower DTI and the ability to focus that extra monthly cash on what ever you need to.

[James DeRoest]

Finance vehicles, pay cash for houses.

Why would you buy a depreciating asset with hard earned money, but then buy a house (an appreciating asset) with borrowed money? Makes no sense.

[Will Barnard]

Originally posted by @John Thedford:

Pay cash if possible. Car loans are not deductible. I always look at minimizing my tax situation. 

If you are a real estate investor, then you likely have your own business and as such, the car IS tax deductible as is the fuel, maintenance, insurance, etc.

The arguments for paying cash mostly touch on the "good feeling of not having a car payment". In my humble opinion, my feelings don't matter here, it us all about the math and nothing more. If I pay $10k cash for a car that I could have financed at 3% and invested that $10k into real estate making 10% or better, I look at it as me losing $700+ annually. 

I personally have not seen a legitimate mathematical argument against financing the car here.

[Maxwell Anyimah-mensah]

A year and a half ago, I walked into a dealership with $10,000 to purchase a car. however , when I discovered that I could get said car for 2.49% interest rate per annum, it was a no brainier to finance the car and leverage the said $10,000 into a purchasing real estate investment...
I always take the finance if I can and leverage the money in hand on another deal.
My 2cents, finance the car and leverage the cash!

Thanks for reading!

[Taylor Marvin]

I completely agree w/ Will's point, and the other poster's regarding the opportunity cost argument. However, one point to mention, specifically reg James post is the effects of leverage. Your ROI is magnified when using debt - regardless if it is autos, houses, or stocks.

Given no alternative investment options, tax implications, etc, you should always choose to lever appreciating assets and pay cash for depreciating assets.

[Roger Pokorny]

I agree with @Will Barnard use the cheap financing of 3% and invest the $10,000 in a real estate deal that makes 10%+.  You will not get any better financing rates than this.  The key is to have discipline to not take the money and spend it on another liability.  If you do that, the advantage of the cheap financing goes out the window.

[David Tipton]

Cash is king. I would finance the car, but only if I could put that cash to use some other way. If it's going to sit in your savings account earning less than 1% then it doesn't make sense to finance.

[John Thedford]

I agree and disagree:) @Will Barnard

I don't think you can take the cost of the car and maintenance, gas, etc unless the car is 100% business owned. I don't own any car in my business. I take the .57 per mile reimbursement. If I could take every dollar to my name and put it into RE then financing the car might make sense.

Anyways...I am not the CPA or tax expert..just a landlord trying to get by:)

[Will Barnard]

Originally posted by @John Thedford:

I agree and disagree:) @Will Barnard

I don't think you can take the cost of the car and maintenance, gas, etc unless the car is 100% business owned. I don't own any car in my business. I take the .57 per mile reimbursement. If I could take every dollar to my name and put it into RE then financing the car might make sense.

Anyways...I am not the CPA or tax expert..just a landlord trying to get by:)

 I am not a CPA either, however, ownership (title) does not have to be in the entity name for you to get a tax deduction, you do however have to show it s used for business purposes. In my case, I lease cars as 100% of the lease payment is deductible, I do lease in my biz name, and I do have another car which I can show as my personal vehicle. If I did not, I would have to show the IRS the % of time the vehicle is used for business and fir personal use. This is something everybody should consult their CPA on. As to not get off topic here, let's get back to finance or pay cash . . . I still don't see any legit argument against financing UNLESS you have no option to invest that money into something greater than the interest rate you pay for the loan.

[Scott Carder]

Leasing a car is similar to leasing a house, it makes someone else money.

[Colin Smith]

I am very glad to see so many jump in on this conversation! Having read through all the posts, I see two groups of people, ignoring the few that are going against the masses. 

1 - Pay Cash - Reason: Because it "feels good" to not have the payment.

2 - Finance - Reason: Your net at the end of the payment period will be greater if you finance and invest in RE. Do the math, it's all about the numbers.

My opinion from what I've read: REI should be treated like a business, and a good business should have very little emotion involved. Therefore, I shall finance the vehicle!

[Brandon Hall]

@Scott Carder Unfortunately, statements like this are not as cut and dry as you may think. @Will Barnard is a business owner which provides him with the ability to deduct 100% of the car's lease payment as a business expense. Assuming Will operates out of an S-Corp (he's a smart guy so I'm positive he's doing this) and nets $350k, by deducting his lease payment he avoids 15.3% self-employment tax, a 1.5% CA franchise tax on net income, a blended CA income tax rate of 7.98% and a blended federal rate of 26.1% for a total of 50.88%.

This means for every dollar of his lease payment, he gets a 50.88% discount and his true cost is only $0.4912 per dollar. True, leasing does make someone else rich, but it can also make you rich given the right circumstances.

@Taylor Marvin I'd love to see your numbers that led you to draw the conclusion that you should always pay cash for depreciating assets (i.e. a car). Perhaps in a high interest rate environment, but I'm not sure that statement can be justified in today's environment (perhaps you will prove me wrong!).

Let's assume the car costs $10k and @Colin Smith puts 10% down leaving him with a loan of $9,000 at a 2.85% interest rate for 60 months meaning his monthly payment will be $314.82. Let's assume the car depreciates another 40% during the five years he owns it. At the end of five years, Colin will have paid $9,889.07 in interest and his car is now worth only $6,000. The true cost of the car to Colin is $13,889.07 (interest plus loss in equity).

Because Colin took a loan in the amount of $9,000, he was able to invest that money at a conservative rate of 8%. At the end of five years, his $9,000 has grown to $13,224. The net difference between the cost of the car to Colin and his $9,000 investment is only $665.12. But that cost is in future value terms so we need to discount it back to today. At a 3% rate (inflation), $655.12 in five years is really $573.74 today. So the cost of the car loan to Colin, assuming he can reinvest $9,000 at 8% (in real estate we often get 12%+) is only $573.74 in today's terms.

On the other hand, let's assume Colin pays $10,000 cash for the car. He doesn't have a car payment, but he also doesn't have $9,000 to invest. At the end of five years, Collin's $10,000 has lost 40% of it's value (depreciation) and is now only worth $6,000 (car's equity). So the car cost Colin $4,000. Again, that's the future value so we need to discount it back to today. Assuming a 3% rate (inflation), that $4,000 cost in five years is really $3,450.44.

In reality, paying cash for the car will cost Colin $2,876.70 ($3,450.44 - $573.74) in today's terms. And this is just a high level example which leaves out the real technical NPV and IRR analysis.

Put the numbers into Excel prior to making any financial decision. It takes the emotion out of it and will often expose you to the truth behind what popular bloggers may otherwise advocate.

[Colin Smith]

@Brandon HallThanks for doing the math! Now it's mathematical proof clearly laid out and no longer theory. 

[Jay Hinrichs]

@Colin Smith  I am one of the one's the car companies love.. I buy brand new cars every 2 to 3 years.. right before I have to buy tires I trade them in... but I buy the one's with zero % financing.. I drive to many miles to do the lease thing.. and the last thing I want to do is waste my time taking a car to the shop.. or be stranded or Pay one nickel other than oil change.  New cars now a days only require oil changes..

But that's me..  I did pay cash for a Porsche once.. but I ended up disliking that car.. clutch went out and it was 6k to fix it... WTF  6k for a clutch and friends of mine with Ferrari's pay 5k for tune ups.. but they sound cool for sure.

I can go either way.. but I tend to use most of my capital in my business so it does not make sense to tie up 100 to 150k in cash into vehicles when I can basically get zero % financing.

[Will Barnard]

Originally posted by @Scott Carder:

Leasing a car is similar to leasing a house, it makes someone else money.

 Scott, @Brandon Hall said it best and I must agree with him, especially about the part that I am a smart guy, ha ha.

Brandon is 100% correct that I see an S Coro and for a number of financial reasons. His lease numbers are one of many. 

While I would agree with you that messing typically makes others rich, the financially savvy know how to get on that side if the fence. My auto leases are financially sound for my business purposes and tax planning. 

[Scott Carder]

Originally posted by @Will Barnard:

Originally posted by @Scott Carder:

Leasing a car is similar to leasing a house, it makes someone else money.

 Scott, @Brandon Hall said it best and I must agree with him, especially about the part that I am a smart guy, ha ha.

Brandon is 100% correct that I see an S Coro and for a number of financial reasons. His lease numbers are one of many. 

While I would agree with you that messing typically makes others rich, the financially savvy know how to get on that side if the fence. My auto leases are financially sound for my business purposes and tax planning. 

I understand every situation is different. I thought to OP was taking about a personal, not business purchase. I operate a S-corp as well for my day job.  I run a fleet of 10 trucks, and since they are all over the IRS gvw weight limit I can depreciate them up front. Maybe the lease is best in your situation, I just cant see it in my application.  Good Luck