Cash or Credit?

[MarcinTexas]

With all those other purchases, there’s an argument that you should put LESS down on your Telly and use that $15k for other more useful needs. Car financing will be cheaper than credit cards and mortgage.

If you have credit card debt - don't buy a new car. Get your credit cars paid off first. I fell into that trap many years ago and swore I would never have another credit card balance. A lot of hard work, budgeting and choosing to live below my means has resulted in now almost 21 years of being credit card debt free. Best decision I ever made.

As far as mortgages - that is tax deductible - so an apples to oranges comparison. Also - a house is (generally) an appreciating asset while a vehicle is not.

For long term financial security - don't carry credit card debt, keep a rainy day fund in the bank and pay off your cars as fast as possible.

 

[WhiteSX]

If you have credit card debt - don't buy a new car. Get your credit cars paid off first. I fell into that trap many years ago and swore I would never have another credit card balance. A lot of hard work, budgeting and choosing to live below my means has resulted in now almost 21 years of being credit card debt free. Best decision I ever made.

As far as mortgages - that is tax deductible - so an apples to oranges comparison. Also - a house is (generally) an appreciating asset while a vehicle is not.

For long term financial security - don't carry credit card debt, keep a rainy day fund in the bank and pay off your cars as fast as possible.

Sound advice.

 

[mgoblue]

Certainly not advocating for credit card debt, and in fact I’m saying the opposite. Paying less in car down payment allows you to hold onto that cash, use it in more productive ways, and avoid worse kinds of debt.

Yes there’s mortgage tax implications but you’d have to have a phenomenal unrealistic mortgage for the tax advantages on 15k to outweigh the interest rate of the car loan (eg 0.9%). If you have a mortgage lender giving you a rate below 2% please let me know!

As a hypothetical, let’s drop that $15k downpayment to $5k. Assuming the 0.9% for 48 mos financing:
- monthly payment goes up $212
- total lifetime interest goes up $194

So for less than $200 over 4 years you can have the option to use that $10k however you want against other big uncertain purchases coming up. Or just put it in a savings account that earns more (or invest in the market...) and skim the extra $200 for your car payment each month.

I realize I’m not gonna to sway personal preference but with interest rates so low and no actual incentive for a large down payment, there’s mathematically no reason to do so.

 

[ebox3000]

I'd guess that most people who can pay all cash are probably looking at other brands besides Kia (Audi, BMW, etc). With that said, I agree with @MarcinTexas that it's a personal preference with how much cash you can part with for the down payment.

My Telly is $48.5K and I'm putting $15K down. Thankfully, my job is secure (knock on wood) however I need to factor in my wedding this year (if it can still happen), honeymoon (if we can still travel *anywhere*), and purchasing a house next year (in California). Lots of major question marks, but my company and industry are proving resilient through the pandemic.

If you haven't already, I recommend having an honest conversation with yourself about how much car you can afford: total monthly income, total monthly expenses, and then working in your down payment + monthly down payment. If anyone likes, happy to share the budgeting worksheet I built to determine how much car you can afford.

This is the first time I'm purchasing a car so it was quite revealing going through this exercise.

Congratulations on the soon to be marriage.

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[Kao]

If you have credit card debt - don't buy a new car. Get your credit cars paid off first. I fell into that trap many years ago and swore I would never have another credit card balance. A lot of hard work, budgeting and choosing to live below my means has resulted in now almost 21 years of being credit card debt free. Best decision I ever made.

As far as mortgages - that is tax deductible - so an apples to oranges comparison. Also - a house is (generally) an appreciating asset while a vehicle is not.

For long term financial security - don't carry credit card debt, keep a rainy day fund in the bank and pay off your cars as fast as possible.

Spoken like a Dave Ramsey disciple! I highly recommend his course if you have huge debt and are thinking of adding a new car payment to that burden... DON'T! The Telluride will be around for years, and likely some used ones at good prices will begin to appear on the horizon.

 

[vinylhaircut]

Excellent points about really figuring out what you can afford, but this sentence I disagree with. I think plenty of folks pay cash for the cars they can afford. My dad always paid cash and that meant his cars didn't have bells and whistles since he bought cars when the wheels fell off and bought what was in his budget. I know others that pay cash and their cars aren't BMW or MB but Fords or Chevys.

Yup, that's exactly me too. I am fortunate to be able to pay cash in full when mine arrives in October (hopefully). I could instead buy something more expensive and finance the difference, but I've always found that it's much better to live a little less than one's means. Doing so over decades is exactly why I can pay all cash now. But to each his or her own!

 

[mgoblue]

Yup, that's exactly me too. I am fortunate to be able to pay cash in full when mine arrives in October (hopefully). I could instead buy something more expensive and finance the difference, but I've always found that it's much better to live a little less than one's means. Doing so over decades is exactly why I can pay all cash now. But to each his or her own!

Genuine curiosity - why not finance this purchase and use the cash as an investment? Assuming you have good credit and can get 0.9%, you can make more than that by investing the rest.

 

[vinylhaircut]

Genuine curiosity - why not finance this purchase and use the cash as an investment? Assuming you have good credit and can get 0.9%, you can make more than that by investing the rest.

That's a very reasonable question. IMO, to do that you need a safe investment, like a CD, and that would net a very tiny profit amount - not worth even the administration. To get a higher marginal rate, you'd need to take more risk with the investment (e.g. stocks or bonds). That risk is not a problem over a decade, at least historically, but over the shorter lifespan of a car loan it could net nothing or even go upside down.

There's also a more subtle aspect. There's nothing wrong with debt - for just the right opportunity. So by avoiding debt now, it keeps options open in the future for a better way to use that potential debt for a much better opportunity. Additionally, if you know you're going to finance anyway, some people might be tempted to move to a higher trim, add on options, and so forth. In other words, they might spend more than they would if paying cash - a generally bad idea IMO. Lastly, having no debt removes a potential temptation in the future - skip a payment or two and buy something else - which can obviously lead to issues. By avoiding debt altogether, even when the rate looks good, it reinforces a positive trend in one's entire financial life.

Now, having blathered on so much, let me say that this is just what has worked for me. Everyone's situation, personality, risk tolerance, and financial discipline are different.

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[mgoblue]

Makes sense.

So by avoiding debt now, it keeps options open in the future for a better way to use that potential debt for a much better opportunity

Note - you could replace “debt” with “cash” in that statement above. For example, I personally *could* pay all cash now, but I am not going to because that 50k is more useful to me toward a down payment on a house, or quitting my job for a bit, or a handful of other random things I might want to do in the next four years.

But I agree that these are all personal choices. Thanks for your thoughts!

 

[NDBlackEX]

I just wanna throw in my two cents. This probably drifts a bit from the OP's query but I think it generally fits in with the cash or credit theme for which this thread is titled.
Sorry, this post turned into a novel...

I just think it's important to have a plan that you're comfortable with. Take your time and think through all the variables.

Paying cash is a great option if you can but I also see the value in financing and investing or saving your big chunk of money.

We sacrificed other things in our lives and took on 2 overlapping car payments on brand new cars a couple years apart. But, we didn't just jump in. We figured that by the time our cars were paid off, we'd have a couple vehicles with well under 100k miles that we'd cared for and maintained. We also had extended warranty on both so we knew everything would be tip top coming out of the payment era. The payments are gone and now we have options. We have a 3rd car, a 2002 civic we bought new. We like the flexibility of having the 3rd vehicle and each one serves a purpose.

Our plan after paying off the two newer cars (A CRV and F150) was to be flexible with our 3rd car. We could always keep the 17 year old Civic and have no payments, buy an older late model fun car like a Mustang or something for under 10k or buy something else new. Whatever tickled our fancy... We have the 2 reliable, relatively new vehicles that will serve us well into the future. Conservative buys that fit our needs.

My wife and I are into cars and love the latest and greatest but never really got into the trade every few years game. There's seemingly always something new and cool coming out and we want to drive all of them which isn't feasable. Plus, we grow attached and have trouble trading things we like. Looking to go out of our comfort zone, we looked at wranglers and other off road buggies (we're into that), plotting our next vehicle purchase but taking our time, watching and waiting for the next cool car to come out. Well, enter the baby, (planned) and now, here we are getting pushed back towards practicality again. When we travel with this kid, it's like going on tour. Sure would be nice to have some extra space and seating but not blend in with the rest of our fellow suv and van owners. The Telluride fits the bill perfectly. It's new and stylish, cutting edge but still practical for us while we go through the stroller, playpen, rear facing car seat, pack up your whole world when you travel phase.

We're not in a position to pay cash. We're going to put some money down, not a ton, just enough to get us through that first big depreciation hit, get a longer term loan, likely overpay each month like we usually do and we'll see how long we keep it. I like keeping some money free, having the option to overpay each month and if money gets tight, make the regular payments. (We paid each of the last 2 cars off a year early) We also have the option to just sell and get out of our payment with two good cars to fall back on. That would be my plan even if I could pay cash.

But, that's just me. Different strokes for different folks. As long as you're comfortable.

Put some thought into it though. I had a friend who joined the military right out of high school and bought a new compact sedan shortly after enlisting. Well, this guy kept on letting the salesman talk him into a new car every 3rd or 4th time he went in for an oil change and two upgrades later, he gets orders for overseas and now he's 10 grand underwater and needs to sell his car fast. Just be smarter than that and you'll be ok. He was a payment shopper and that was his downfall. The dealer always found a way to keep the payment close for him when he upgraded.

Now, we'll see if I can bring myself to sell the Civic when the Telluride comes. That little thing is part of the family, it's tough to imagine selling it to some stranger. Hopefully there's someone in the market for a two decade old compact sedan who has 3-5 good references and could pass a comprehensive background check .

 

[vinylhaircut]

@NDBlackEX - very good thoughts. The idea of making sure you plan through everything is really important. I've always felt that there were really only three things that are worth borrowing money for: a house, a car (especially if it enables a job), and education. With all three, it's critical not to overbuy or underbuy. It's also tempting to look only at what keeps your current cash flow the lowest, but that often isn't the best overall option. While it might seem like financing a larger amount (and holding more cash) will give one more flexibility in the future, that might not be the case at all. After all, that amount of cash is *committed* either way, whether spent now or financed. Paying more now and financing less can actually give more flexibility in many ways. Certainly it is not unreasonable to finance a car, though, and might be a good plan if it prevents one from having to later take a larger mortgage at a higher interest rate (or even worse, run up credit card debt). So as you say, thinking through the whole financial plan is important.

 

[Frankie Knuckles]

Genuine curiosity - why not finance this purchase and use the cash as an investment? Assuming you have good credit and can get 0.9%, you can make more than that by investing the rest.

I was about to chime in and while the paying cash theory and being debt free is the ultimate goal, your advice makes the most sense and here’s why: what you are advocating is not for everyone, only those that are disciplined enough to invest the difference or for those who have the means to invest the difference in the first place. That said, those that can do this option absolutely should. It’s called leveraging your money. Give me a loan for 0.9 percent and I will take it all day long, knowing I will make on average 7-9 percent in the market ( assuming good sound mutual funds/stocks are purchased). It’s a no brainer. Leverage the money by using their funds allowing you to keep your cash invested. Just make the payments on time and let your and their money work for you.

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[PassingTime]

If you can get 0.9%/48 mos, why pay cash? That's pretty close to free money. Now if there was an incentive to pay cash by the dealership (there's not), it would be different.

Wondering where you are getting the .9% or finding a .9% for 48 months finance offer in today's economy? From what I have seen most of the interest rates are headed up significantly. No one wants to lend cheap money during the pandemic when everyone is losing jobs or at least that is what I am seeing. I can go either way and will look for the best option when my car arrives. My wife's car is paid off first week of this October on a 5 year 0% offer that we went with on her Toyota so timing is good. I could pay cash (thank you Dave Ramsey) but will wait and see what is offered just like we did with the Toyota. It only made sense to go with the best offer and at that time we got a great sale price, an above average trade in on her old car when I would normally sell myself and the 0% so we saved the cash and financed.

 

[My Car is a 2001]

Wondering where you are getting the .9% or finding a .9% for 48 months finance offer in today's economy? From what I have seen most of the interest rates are headed up significantly. No one wants to lend cheap money during the pandemic when everyone is losing jobs or at least that is what I am seeing. I can go either way and will look for the best option when my car arrives. My wife's car is paid off first week of this October on a 5 year 0% offer that we went with on her Toyota so timing is good. I could pay cash (thank you Dave Ramsey) but will wait and see what is offered just like we did with the Toyota. It only made sense to go with the best offer and at that time we got a great sale price, an above average trade in on her old car when I would normally sell myself and the 0% so we saved the cash and financed.

Kia’s offer for qualified buyers, 720+ credit score.

0.9% for 48 months
1.9% for 60
2.9% for 66
3.9% for 72

 

[Taketime]

Yesterday I completed the paperwork for my Telluride coming next week. I was preapproved by my Credit Union for 1.79 for 36 mos but Kia offered me 1.75 for 36 mos with a $500 and $400 military rebate. I took the Kia offer.

 

[vinylhaircut]

"I will take it all day long, knowing I will make on average 7-9 percent in the market"

Careful. While 7-9 percent is a perfectly reasonable return over a ten year average... that's the tricky part. It's easy to focus on averages and forget the volatility along the way. If one is planning to use the funds to make payments, you'll need the money far sooner than that. The market can swing pretty dramatically, and it would be easy to be under water in the duration of an average car loan. IMO it's by no means a no brainer.

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[Mysteg]

Kia’s offer for qualified buyers, 720+ credit score.

0.9% for 48 months
1.9% for 60
2.9% for 66
3.9% for 72

Ok I’m confused and on the verge of freaking out...
I purchased my Telluride on Thursday and without running my credit which all 3 scores are over 720 and was offered a 5% on anything over 48 months! Did they bamboozle me? I went with my credit union at 3% but I didn’t see any of those options at all!

 

[PassingTime]

Kia’s offer for qualified buyers, 720+ credit score.

0.9% for 48 months
1.9% for 60
2.9% for 66
3.9% for 72

Thanks, I hope that is in place when my car arrives (maybe November?). I would definitely go for that 48 month rate and the rebates and keep the cash or at least a good part of that! I have been trying to find decent rates and missed that one somehow. Maybe its regional because I am not seeing it around here? JUST checked the KIA sight and you are so right. Just went into effect on 8/4 and good through 9/8 on 2021! I think that I checked a day or two earlier. How things change. Might not be there when my car gets here but I can hope it goes on a little longer.

 

[Frankie Knuckles]

"I will take it all day long, knowing I will make on average 7-9 percent in the market"

Careful. While 7-9 percent is a perfectly reasonable return over a ten year average... that's the tricky part. It's easy to focus on averages and forget the volatility along the way. If one is planning to use the funds to make payments, you'll need the money far sooner than that. The market can swing pretty dramatically, and it would be easy to be under water in the duration of an average car loan. IMO it's by no means a no brainer.

You are correct with market volatility. I tried to qualify my statement and reread it and can see that it was poorly crafted or just oversimplified.
I understand there are no guarantees My point was that for those that can afford to make payments at that rate while using the cash to invest, they be ahead in the long run. If they were relying on the cash (investment in the market) to pay down the loan, then you’re right, it’s too risky. Bottom line is that there are too many assumptions and too many different scenarios for this option to be a “no brainer.” But I truly get his point. I would leverage all day long for that loan rate, because I am in a position to do so. It’s not for everyone, that’s for sure.

 

[My Car is a 2001]

Ok I’m confused and on the verge of freaking out...
I purchased my Telluride on Thursday and without running my credit which all 3 scores are over 720 and was offered a 5% on anything over 48 months! Did they bamboozle me? I went with my credit union at 3% but I didn’t see any of those options at all!

Just took this screen shot. Kia’s website this is for 2020s, but I imagine it also covers 21s. Sounds like they tried to pull a fast one on you. Here’s the link: Special Offers & Savings on APR, Leasing, & New Models - Results | Kia