Buy car with cash, or pay off student debt?

[treesrock]

Hey folks,

Longtime reader of the website and forums but first time posting.  Very thankful for all the information I've been given from the site and forums.  Hopeful to be more active on the forums moving forward.  Wondering what some of you would do in this situation.  Brief intro to myself.

Early 30's, married, dual physician household with no kids.

Annual Combined Salary: $515,000

Student Loan Debt: ~$115K refinanced with CommonBond at 3.325% (paying off as quickly as possible, started out much higher...)

Mortgage: ~300K 30 year fixed at 3.625%

Other Debt: None

I was fortunate to find this site at the end of medical school.  In the past year we've both started our attending position in academics, and are maxing out our 403b, governmental 457, and backdoor Roths.  Also have an employer match that goes into 401a.  Leftover money has been pouring into our student loans and we are on track for them to be gone in a year or two.

I've been driving a beater which finally died (in a safe way...) last week.  I've decided to buy a new Subaru Outback, which is my desired car for many reasons.  Not buying used because used Subaru Outback prices in my area are absurd.  I've been expecting my current car to die, so have a surplus in our emergency fund to buy the car with cash (OTD price $34K).

Current financing options for a 2018 Outback are 1.8% over 60 months.  Looking at what is on offer at our local banks and credit card companies is not any better.

Onto the question.  I know the math says to take out the loan and dump the emergency fund surplus into our student loans.  But I'm extremely debt averse and the idea of taking out a car loan is not appealing.  So what would you do?  Pay the car in cash, or take out the loan and put another big dent into our student loans?

[Donnie]

If the question is only whether or not to pay cash for the car or to finance it and pay down student debt, I will offer the following analysis to hopefully simplify your decision. I won't comment on the new versus used aspect.

-- Right now you have $34k of excess cash, no car loans, and $115k of student debt.

-- Your current situation is the same as having zero excess cash and $81k of student debt since you could use that cash to pay down your student debt.

-- You are buying a new car, and you can either borrow $34k at 1.9% to get the cash to buy the car, or you could borrow $34k at 3.325% on your student loans to buy the car.

I think it's an easy choice, pay the student debt and get the car loan. Cars are the most leveragable asset you will ever own. Take advantage of it and convert student debt to car debt (again looking at only whether you should pay off car debt or pay off student debt).

[beagler]

Doesn't matter? 115k student loan will be gone very soon either way. So will the car loan if you choose to pay it off faster. It's ~$500 interest savings over a year for the hassle of dealing with a car payment/loan and talking to the dealership finance guy.

The problem with car loans is people buy more car than they can afford and do so more frequently. A Subaru for your income level is perfectly reasonable.

[Dr. Mom]

Pay cash for the car.  You are in a terrific position.  So what if your student loan takes a few more months to pay off?  The interest rate arbitrage is negligible to you.  The behavior of never taking out another loan is not.

[The White Coat Investor]

Doesn't matter much. Slight advantage to behavior in some ways, slight advantage to math in other ways. Either way, you'll soon be debt free with a great income on your current trajectory.

[hightower]

Pay cash and drive off the lot with a big smile on your face.  The student loans will be gone soon no matter what.  Congrats on a job well done.  You guys are doing well.

 

BTW, I don't know if Subaru offers certified pre-owned, but you can often save a few thousand bucks that way and end up with a better warranty than factory (at least that's how it is with Honda).  Also, do you have any interest in electric cars?  I drive one now (BMW i3) and absolutely love it and never plan on going back to ICE.  The new Chevy Bolt's are nice and have great range for the price.  I'd recommend a Tesla Model 3, but they aren't really available yet due to the waiting list.  Just had to plug for electric

[Donnie]

The interest rate arb is not negligible. It's ~$1,500 over the life of a 6 year car loan. Arbitrage is free money. Who wouldn't take it. People get apoplectic over a couple bps on their fund ER, but recommend lighting $1,500 on fire because of an irrational fear of debt. Dealing with the F&I guy at a dealership is not bad at all, and certainly nothing to lose $1,500 over.

If you are going to have debt, the car debt is superior to the student loan debt.

[hightower]

Donnie wrote:

The interest rate arb is not negligible. It’s ~$1,500 over the life of a 6 year car loan. Arbitrage is free money. Who wouldn’t take it. People get apoplectic over a couple bps on their fund ER, but recommend lighting $1,500 on fire because of an irrational fear of debt. Dealing with the F&I guy at a dealership is not bad at all, and certainly nothing to lose $1,500 over.

If you are going to have debt, the car debt is superior to the student loan debt.

Click to expand...

I think the point is that he's paying off student loans so aggressively that he won't have debt for much more than another year anyway.  Besides, if he does a good job shopping he can probably negotiate a better price and save money that way.

I get  your point, but in his situation I doubt the difference in interest rates is going to amount to much more than a few hundred bucks.

[Dr. Mom]

Donnie wrote:

The interest rate arb is not negligible. It’s ~$1,500 over the life of a 6 year car loan. Arbitrage is free money. Who wouldn’t take it. People get apoplectic over a couple bps on their fund ER, but recommend lighting $1,500 on fire because of an irrational fear of debt. Dealing with the F&I guy at a dealership is not bad at all, and certainly nothing to lose $1,500 over.

If you are going to have debt, the car debt is superior to the student loan debt.

Click to expand...

The point is not having debt, so who cares which is superior?  OP is debt averse.  The loans will be paid off much quicker than 6 years.  At a certain income level (perhaps like $500K which OP has) the interest rate arbitrage is negligible.  Remember you are on a forum of high income and HNW people.

[Zaphod]

Dr. Mom wrote:

Donnie wrote:

The interest rate arb is not negligible. It’s ~$1,500 over the life of a 6 year car loan. Arbitrage is free money. Who wouldn’t take it. People get apoplectic over a couple bps on their fund ER, but recommend lighting $1,500 on fire because of an irrational fear of debt. Dealing with the F&I guy at a dealership is not bad at all, and certainly nothing to lose $1,500 over.

If you are going to have debt, the car debt is superior to the student loan debt.

Click to expand…

The point is not having debt, so who cares which is superior?  OP is debt averse.  The loans will be paid off much quicker than 6 years.  At a certain income level (perhaps like $500K which OP has) the interest rate arbitrage is negligible.  Remember you are on a forum of high income and HNW people.

Click to expand...

Who routinely worry about switching funds for an expense ratio difference of 2-4 bps, and routinely struggle with putting money in a 0.9% vs. a 1.1% savings account for their emergency fund.

If your retort is true here, its true in all those other things and more as well (not saying it isnt, theres basically zero difference in those), but the point was to align it with something that people understand better, since its basically the same thing yet viewed entirely different.

[treesrock]

Thanks all for the replies.  Agreed that the math for a 6-year car loan would certainly work out better than my student loans, but as many have pointed out I have no plans to keep the loan that long.  Being debt averse I plan on paying down all my debts (aside from mortgage) before investing in anything outside my tax-deferred accounts, so considering all loans (car and student loans) will be gone in a couple years max, looks like consensus is its reasonable to just pay cash for the car.  That was my intuition but sometimes you just want like-minded people to agree with you, hence my love for this site.  Thanks guys.

To hightower, my Subaru dealer does offered pre-owned, but the prices on lot were absurd.  A 2017 Outback with identical trim/options was listed for $300 less than my negotiated price for the new 2018.  Plus the new 2018s have Apple Carplay which is an option I desire.  As for the electric cars, I would love one, but currently don't have a garage and not excited about the prospect of charging my Model 3 on the driveway exposed to the elements...

 

 

[Dr. Mom]

Zaphod wrote:

Dr. Mom wrote:

Donnie wrote:

The interest rate arb is not negligible. It’s ~$1,500 over the life of a 6 year car loan. Arbitrage is free money. Who wouldn’t take it. People get apoplectic over a couple bps on their fund ER, but recommend lighting $1,500 on fire because of an irrational fear of debt. Dealing with the F&I guy at a dealership is not bad at all, and certainly nothing to lose $1,500 over.

If you are going to have debt, the car debt is superior to the student loan debt.

Click to expand…

The point is not having debt, so who cares which is superior?  OP is debt averse.  The loans will be paid off much quicker than 6 years.  At a certain income level (perhaps like $500K which OP has) the interest rate arbitrage is negligible.  Remember you are on a forum of high income and HNW people.

Click to expand…

Who routinely worry about switching funds for an expense ratio difference of 2-4 bps, and routinely struggle with putting money in a 0.9% vs. a 1.1% savings account for their emergency fund.

If your retort is true here, its true in all those other things and more as well (not saying it isnt, theres basically zero difference in those), but the point was to align it with something that people understand better, since its basically the same thing yet viewed entirely different.

Click to expand...

Totally agree with you that it applies to those situations as well.

[Zaphod]

treesrock wrote:

Thanks all for the replies.  Agreed that the math for a 6-year car loan would certainly work out better than my student loans, but as many have pointed out I have no plans to keep the loan that long.  Being debt averse I plan on paying down all my debts (aside from mortgage) before investing in anything outside my tax-deferred accounts, so considering all loans (car and student loans) will be gone in a couple years max, looks like consensus is its reasonable to just pay cash for the car.  That was my intuition but sometimes you just want like-minded people to agree with you, hence my love for this site.  Thanks guys.

To hightower, my Subaru dealer does offered pre-owned, but the prices on lot were absurd.  A 2017 Outback with identical trim/options was listed for $300 less than my negotiated price for the new 2018.  Plus the new 2018s have Apple Carplay which is an option I desire.  As for the electric cars, I would love one, but currently don’t have a garage and not excited about the prospect of charging my Model 3 on the driveway exposed to the elements…

 

 

Click to expand...

So just looking for confirmation bias then?

No matter what your plan is, in none of them is paying cash for the car superior. Student loan debt is the worst form of debt that an ordinary person can own. Not only that, its at a higher rate. The superior option is obvious, money is fungible, etc...

Even if you turn around and all these debts are gone in 9 months, doesnt change anything. The real downside to financing things is buying too much or more than you would otherwise.

You will literally have the exact same amount of debt after paying cash, it will just be in student loan form at a higher rate. The scenario is exactly and most succinctly laid out by Donnie.

[treesrock]

Agreed with Zaphod's point.  However I personally tend not to worry about small differences in expense ratios or savings accounts interest rates, but instead try to keep things as simple as possible, so I think thats another point towards just simplifying my life and paying for the car in cash.

[CordMcNally]

I'm in the "doesn't matter" camp. Which one would make you the happiest? Do that one. Your happiness is worth much more than the miniscule savings in interest you might achieve.