Finance or pay cash for car right out of college?

Question

I just graduated and will be starting a job in a week at a salary of $65,000. After accounting for retirement savings and taxes, I should bring home about $3,500 per month.

Unfortunately, my 8 year old car with 177k miles on it has a transmission related issue, and the several dealerships and automotive garages I've checked with can't even find the available part needed to order. At this point I am considering just purchasing a reliable used car that I can drive for at least 5 - 7 years.

I have $90k in savings, and will be living with my parents. I know that just starting a new job I don't have any real job security, but buying a car is the only option that makes sense to me. My initial budget was no more than $10k for my next car, and with a 3% APR 60-month loan would be about 5% of my net income.

I had originally planned to just pay cash, but I've had people tell me to just take the loan and pay the interest. I have a credit score of 750, with a 3-year credit history.

I've already checked out: Buying my first car out of college

Should I take out the loan vs. paying cash? What is the advantage of the loan?

Answer 1

You are in great shape. Very few people have 90k in savings at any age, let alone coming right out of college.

The question you checked out, really does not apply to you. You are making a conservative choice with the car, so there is no problem there. A 10K car will be a small portion of your net worth and will not depreciate as rapidly as a new car or by as much. Your salary and likely investments will easily eclipse any depreciation suffered.

Given your credit score, I can see no logical reason to take a loan. Some people would advocate taking a loan to improve your credit score, but I find that pretty darn silly. Even they would admit, that a 10K auto loan would not likely increase your score beyond 750. Also much beyond 720 or so, it is just vanity, any such person qualifies for the best loan rates provided sufficient, stable income.

Buy the car and pay cash. Also I would move out of your parents home.

You have achieved a level of greatness with such a salary and such a savings account at such a young age!

Oh, don't listen to broke people when taking financial advice, such as your friends that are telling you to get a loan.

Answer 2

What is the advantage of the loan?

Keeping yourself liquid.

Find an auto loan calculator (like https://www.onlineloancalculator.org/), punch in the numbers, and decide whether or paying that amount of money to someone else is worth your liquidity.

In my opinion, though, with that much money, even a $14K car (really $15K with sales tax) isn't a big enough hit on your savings to worry about liquidity. Thus, I'd pay cash.

Answer 3

If you can afford to pay cash for the car, as you can, you should separate the purchase decision from the loan decision. First, find the car you want and imagine you pay cash for it. That is a realistic option. Now you have to decide whether to take out the loan. You are just borrowing some money on certain terms. These are probably better terms than you could borrow that money if it wasn't secured by the car. What will you do with the money? Maybe the interest rate is low enough that you think you can make more investing it. In that case, take the loan. Maybe you are worried that you will have a demand for cash in the future that exceeds the reserve you have left after buying the car. What is the chance of that? How much worse will the interest be if you have to borrow in the future? The interest will likely be much higher if you take it on credit cards, but in your place the chance is rather low. Based on the ads I see, a 750 credit score is good enough for anything you want to do, so improving it is not a priority. If the interest rate is silly low, I would take the loan. Otherwise, I would pay cash and replenish the cash from income. You are just paying yourself the interest that the loan would consume.

Answer 4

One additional thing to keep in mind: with OP's savings, it almost surely makes sense to purchase liability-only insurance rather than full coverage. Buying a car on a loan precludes that, which means OP would be paying significantly more for insurance on top of the money spent on interest.

Aside from that, I would go so far as to say that getting a loan to buy a car never makes sense. If you have money to pay cash, you're just wasting money, and if you don't have money to pay cash, you should simply select a cheaper car. Look for something so cheap that even if it's impractical to fix you can just buy another one like it for less than the payments you'd be making on a nice car.

Answer 5

Advantage of car loans

1. (as @RonJohn mentioned) Liquidity.
2. They can be very cheap. My local credit union offer loan at rates lower than the rate of their high yield checking account, even after tax.
3. YMMV, but some loan can have great add-ons such as gap insurance with deductible reimbursement. Use your own judgement though.
4. Improve credit history.

I don't know why a lot of people on this site hate credit/loan products but I'd suggest you at least take a look at the options you have. If your bank offers you say a 1.5% loan, it's not that hard to put the money you "saved" to work and get back more.

And let's not forget, 1 dollar today is worth more than 1 dollar tomorrow.

Answer 6

A reliable car is a good investment. My preference is to avoid debt for a number of reasons, and if you can buy a car for cash, that frees you up to save a lot more per month and earn the interest on that as well as giving you a good cushion, of course. If you have other ways to continue building your credit history, I'd pay the cash. However, another thing to consider is that, if you can pay that much cash, really do your research and find the right car that will last you more than 5-7 years. Don't buy it brand new, but buy a low-mileage, like-new car that will be able to grow with you for a long time. You don't have large expenses on the horizon to speak of, so I'd say, spend the money now and plan to build your savings back up. And if you need to, you can use the money you're willing to spend now as a large down payment on a more expensive car (maybe $15-20k, depending) and get a short-term loan with low monthly payments and low interest.

Tl;dr: if you don't pinch pennies now, you can have at least one car you can depend on in 10 or even 15 years when you do have more expenses and debt.

Answer 7

With that kind good credit and prospect of a good paying job, I would suggest you put your money in stokes and buy a car on loan since you have good security and you won't be worried about defaulting and repo, meanwhile your money will be growing interest while in stokes,try to diversify your income as much as possible, with the bounty of opportunities available these days and given your net worth, only one's imagination is the limiting factor.

Answer 8

Never owe money on a car that's out of warranty.

Because if you do... and you have a mechanical problem... you get hit with a cash-flow double whammy: you must buy another car (or pay a huge repair expense), and also must pay off the note on this car.

The car is the loan's collateral. A broken car is bad collateral. The lender could have a big problem with that - check your contract but they may be able to call the note. This is not a mortgage: If your car is upside-down, you owe that difference to the finance company!

Collision insurance covers traffic accidents, but it does not cover mechanical problems. There is mechanical "insurance" in the form of extended warranties, but many of them are scams, or nearly so in practice.

Answer 9

A car is never in investment, it is a source of a fixed expense you are buying.

The golden rule is never buying a car if you cannot dispose at least of the amount you are paying for it and never, ever, buying it on credit.

Reaching the value of plus 10k, at around that value or a little more you can already buy new cars. I would evaluate running a 2nd hand car, or buying a more simple and less luxurious new car, pristine new and know history. (A friend of mine when he bought a 2nd hand a car from "an old man", bought a car with hidden structural damage that almost killed him) A new car will also burn less gas.

Buying a new car also means money, you know you wont need repairs and new hardware/tires for at least a good 4 years, and adding that to the 10k, it means that it makes more sense buying a new car for 15k than buying an used car for 10k. [it does not mean you will spend 5k with an old car...there are other tangibles and intangibles with a new car]

Take in account the deals of new year 2018, and try to negotiate giving back on your old car, and you can get very interesting deals that will save you some money. This year, in the beginning of January, I bought a new brand card at the same price I would have bought an used car in December 2016 in much similar conditions.

Word of advice, cars depreciate starting on January. You should always avoid buying a car with a plate of December.

Beware also of legalities. From ownership, fines liability from the former owner, and even mortgages/insurance, it is much more simpler buying a new car than a 2nd hand one.