Paying for next car- cash or finance?

[LizOB]

I will be in the market for a new car likely sometime in the next year or so. My '05 Corolla runs just fine, but we are trying for baby #2 and it will be impossible to fit two carseats in the Corolla without my knees being in the steering wheel. I'm looking at a minivan (gasp) which will likely be in the ~$40k range, and I plan to drive it for at least the next 10 years. Right now we have too much cash (e-fund plus another 30k making nothing in checking), and by the time we pull the trigger on the new car should have enough cash to pay for it up front. But that means I have cash sitting around for months doing nothing. What should I do?

A: Keep cash where it is, save enough to pay for the new car in cash. Cash makes virtually nothing (but doesn't lose value) in the meantime

B: Invest cash and when it's time to buy the new car sell investments and pay cash. Risk losing money invested

C: Invest cash and when it's time to buy the new car finance it, leaving investments alone

I know WCI is not a proponent of car payments, but it feels weird to have such large sums of cash sitting in checking for months on end, especially while car loan interest rates are low. Thoughts?

[Dr. Mom]

My vote is A for simplicity.  It is what my daughter is doing currently.

[Hatton]

I think keeping cash is fine when you have something expensive to buy.

[Gamma Knives]

Given that the time frame for buying the car is indeterminate it would seem reasonable to at least invest the money in low volatility investment.

As for buying or leasing a lot of it comes down to preference. Some people will argue that if you can finance at a low enough interest rate you should do so and put the money in long term investments as they should net a higher rate of return. Other people prefer not deal with financing for the relatively small amount of return that this leverage will likely net.

Another consideration is it sounds like you are buying new (I assume a that $40k minivan is new). Personally, I prefer to buy cars that are a couple of years old to take advantage of the rapid initial depreciation that a car undergoes. Used car financing generally doesn't have the same 0% / sub 1% interest that new cars can have. However, if you are paying cash that does not matter. Obviously the are pros and cons to buying used vs news so that is up to you (there are several articles about car purchasing on this site that go into more detail than I could).

edit: Adding link to article which has links to more articles: https://www.whitecoatinvestor.com/should-you-drive-a-nice-car-a-procon/

[q-school]

wci is a fan of your buying a much older car.  

i'm a fan of c, especially if car loan rates are <1%.

if not then a.

 

[Hank]

The new Honda Odyssey and the hybrid Pacifica are a couple of solid choices.  I don't know that I'd want to keep the Pacifica past its warranty though, given Fiat Chrysler's reputation for (lack of) reliability.

That said, $40K+ seems like a lot of money for a minivan.  My wife and I bought a Nissan Quest with 15,000 miles for $19K including California sales tax, title, and registration a couple months ago.  We certainly could have afforded the $45K minivan, it just seemed like too much for a depreciating asset.  The cost of insurance was more reasonable too.

If you keep a Toyota or Honda minivan for 10 years, you'll be fine.  The total cost of ownership should be pretty reasonable if you don't swap out the van every three years.

[LizOB]

Hank wrote:

The new Honda Odyssey and the hybrid Pacifica are a couple of solid choices.  I don’t know that I’d want to keep the Pacifica past its warranty though, given Fiat Chrysler’s reputation for (lack of) reliability.

That said, $40K+ seems like a lot of money for a minivan.  My wife and I bought a Nissan Quest with 15,000 miles for $19K including California sales tax, title, and registration a couple months ago.  We certainly could have afforded the $45K minivan, it just seemed like too much for a depreciating asset.  The cost of insurance was more reasonable too.

If you keep a Toyota or Honda minivan for 10 years, you’ll be fine.  The total cost of ownership should be pretty reasonable if you don’t swap out the van every three years.

Click to expand...

I haven't gone for test drives yet, but have been looking at the Honda (new) that comes out to about 37K for the features I would want, so rounding up to 40 after taxes and such. Obviously will negotiate but 35-40ish is the number I'm using for planning purposes.

FWIW my mom drove a Chrysler Town and Country for >200k miles without major problems, though I know that's anecdotal. Consumer Reports has great things to say about the Odyssey, Sienna, and Pacifica so plan on looking at those. I don't want more than one minivan- I want this one to get me all the way through the little kids phase of my life!

[Matas]

Here's the minivan. A very nice Honda Odyssey!

 

[LizOB]

Matas wrote:

Here’s the minivan. A very nice Honda Odyssey!

 

Click to expand...

Haha awesome. Where can I buy that one?? I would ROCK the daycare pickup!

[Matas]

And child seats are quite similar to miniature racing seats - harness and all. You'd be the badass of the carpool lane!

I believe Honda sponsors this car in club racing events - I saw this (or similar) at Road Atlanta a couple years ago. Sure changed my impression of a minivan.

[ajm184]

I bet there is a enough room in back to throw in a Nitro kit  :lol:

[Zaphod]

If you have "too much" cash, simply move some to your taxable account in your preferred asset allocation. You cant really invest money you plan to be using in any short period like a year, since anything could happen and you may end up only being able to get a much older vehicle than you were planning due to volatility.

There is nothing inherently wrong with financing a car in theory, however, as with all things financed it will undoubtedly push you to purchase something larger than you otherwise would have with cash. When you use cash it really, really hurts to over spend. So thats why many people propose cash for things like cars, and that issue is very real.

[The White Coat Investor]

LizOB wrote:

I will be in the market for a new car likely sometime in the next year or so. My ’05 Corolla runs just fine, but we are trying for baby #2 and it will be impossible to fit two carseats in the Corolla without my knees being in the steering wheel. I’m looking at a minivan (gasp) which will likely be in the ~$40k range, and I plan to drive it for at least the next 10 years. Right now we have too much cash (e-fund plus another 30k making nothing in checking), and by the time we pull the trigger on the new car should have enough cash to pay for it up front. But that means I have cash sitting around for months doing nothing. What should I do?

A: Keep cash where it is, save enough to pay for the new car in cash. Cash makes virtually nothing (but doesn’t lose value) in the meantime

B: Invest cash and when it’s time to buy the new car sell investments and pay cash. Risk losing money invested

C: Invest cash and when it’s time to buy the new car finance it, leaving investments alone

I know WCI is not a proponent of car payments, but it feels weird to have such large sums of cash sitting in checking for months on end, especially while car loan interest rates are low. Thoughts?

Click to expand...

You lost me. You have $30K. You want a minivan. You have the money for it or soon will. But you're thinking of financing it because you're worried you'll miss out on the difference between what the market gives you and what you can finance a car for over a 9 month period on $30K? Maybe if you quantify it then you'll find the decision easier.

Let's say you make 5% in the market over 9 months but would only get 1% in the savings account. 4% of $30K = $1200. Not exactly life changing money.

If $30-40K is such a huge chunk of your net worth that having it earn a low return is a big deal and such a large percentage of your income that it would take many months to save it up, maybe you need to rethink about whether you should be spending that much on a car, especially when a reliable minivan can be purchased so much cheaper. For example, a 5 year old Sienna in nice condition runs $12-13K. So you could invest $25K of your $30K now, leaving $5K in a car fund, add $1K a month to it over the next 9 months, and buy a used, but still very reliable Sienna.

But it's beyond me why a doc would want to make car payments. Most docs should be putting enough money toward building wealth that they could buy a $5K car every month without having to eat Ramen. Want a $10K car? Okay, save for two months. $15K? Three months. etc. Just stop your 401(k) contributions and additional student loan payments while saving up for a few months. Voila- you can now pay cash. Too painful to stop the 401(k) contributions? Then you're probably buying too expensive of a car relative to your financial situation.

Just some random late night thoughts. It's your money and your life, do what you want. But I think my commitment to never have a car payment has paid rich dividends in my life.

 

[EJ at Dads Dollars and Debts]

Only recent I would say A and cash is that you can have less insurance on the car. You don't need total collision, etc. that you would when leasing. This may save you some cash later on.

[Zaphod]

Its an annoying fixed bill thats unnecessary. And it will definitely be larger than if you paid cash.