is this smart? new car financing

[texaspeach]

instead of getting a 24 month car loan, we decided to get a 24 month CD for the loan amount and borrow against it. the interest on the loan and the interest on the CD are about the same, so in the end we would owe about $600. we wouldn't have a car payment every month, and if we defaulted on the loan the CD would go away not the car - I don't see that happening but in the event that it did, it would be nice not have the car repossessed. good idea? bad idea?

[velochic]

Buying a new car, in any way, shape or form is NEVER a good financial decision.

[alegna]

Originally Posted by velochic

Buying a new car, in any way, shape or form is NEVER a good financial decision.

I would have to disagree. Never say never When we needed a new car, there was no way we could have the cash on hand for it- we had to finance. We got a financing deal at 1.9%. WAY lower than we could have possibly gotten on anything used. We bought a Honda Civic. Retains value like crazy. For us, with those specific criteria, buying new was an excellent financial decision.

-Angela

[Herausgeber]

Wait. You had the cash on hand, and you borrowed the money for the car anyway? I don't understand.

Also, the interest you earn on the CD will be taxable as ordinary income. Not sure what bracket you're in, but that would be a one-third to one-half to the earnings for me.

[A&A]

Originally Posted by velochic

Buying a new car, in any way, shape or form is NEVER a good financial decision.

I disagree.


I used to think this. And we generally drive older cars...........the one I drive the most is 25 years old.

But we just got 1.9% on a Ford Escape hybrid, which gets great gas mileage and has almost zero emissions. (Plus it comes with a federal tax credit.) And my dh got a discount because of his employer. And it comes with a great warranty.

There is NO WAY we would have gotten a loan on a used car that would have come close to 1.9%. We've walked away money ahead on this deal.

And I'm sorry, I'm not understanding the original question, either. You put money in a CD instead of paying for the car with that money?

[velochic]

Originally Posted by alegna

I would have to disagree. Never say never When we needed a new car, there was no way we could have the cash on hand for it- we had to finance. We got a financing deal at 1.9%. WAY lower than we could have possibly gotten on anything used. We bought a Honda Civic. Retains value like crazy. For us, with those specific criteria, buying new was an excellent financial decision.

-Angela

Not true. Let's assume you bought a 4 door DX. If you buy a brand new one, it will cost you about $15,800. At 1.9% interest, you will pay a total of $16,700 on a 5 year loan. A Honda loses about 20% of its value the moment you drive it off the lot. That's better than most cars, which is closer to 35%.

If you bought a Honda, used 1 year, you would pay about $12,400. With a typical 8% loan, you'll end up paying only about $15,000 and it's already lost most of the upfront value it's going to lose. So, in the end you pay almost $2000 less and really retain the value of a used Honda. Buying new is never a good financial decision.

Sorry, but until you start thinking in terms of net worth instead of monthly payments, you'll never understand. When it comes to your overall net worth, it does not make ANY sense to buy a new car. You have to think about the value you are getting for your money instead of caving to the marketing schemes of these 1.9% financing. It's just a way to reel you in and think you're getting a good deal. Even 0% financing is not a good deal when you consider instant depreciation of your vehicle.

[alegna]

Originally Posted by velochic

Not true. Let's assume you bought a 4 door DX. If you buy a brand new one, it will cost you about $15,800. At 1.9% interest, you will pay a total of $16,700 on a 5 year loan. A Honda loses about 20% of its value the moment you drive it off the lot. That's better than most cars, which is closer to 35%.

If you bought a Honda, used 1 year, you would pay about $12,400. With a typical 8% loan, you'll end up paying only about $15,000 and it's already lost most of the upfront value it's going to lose. So, in the end you pay almost $2000 less and really retain the value of a used Honda. Buying new is never a good financial decision.

Sorry, but until you start thinking in terms of net worth instead of monthly payments, you'll never understand. When it comes to your overall net worth, it does not make ANY sense to buy a new car. You have to think about the value you are getting for your money instead of caving to the marketing schemes of these 1.9% financing. It's just a way to reel you in and think you're getting a good deal. Even 0% financing is not a good deal when you consider instant depreciation of your vehicle.

Well, a lot is going to have to do with the market. I paid nowhere near that. I paid well under the MSRP. Used, I could not have found one anywhere as good of a deal on a reasonably new one (for one, the more stripped down models aren't available for years) They just aren't available here. I've looked.

-Angela

[texmati]

If you have the money to open up the CD, why not pay on the car now? Maybe I'm misunderstanding.

[alegna]

Originally Posted by velochic

Sorry, but until you start thinking in terms of net worth instead of monthly payments, you'll never understand. When it comes to your overall net worth, it does not make ANY sense to buy a new car. You have to think about the value you are getting for your money instead of caving to the marketing schemes of these 1.9% financing. It's just a way to reel you in and think you're getting a good deal. Even 0% financing is not a good deal when you consider instant depreciation of your vehicle.

I *do* understand what you're getting at, but the fact of the matter is, in THIS market (my city) I can't get as good of a deal on used on the cars I want. Just the way it is. I can actually spend LESS on a new car (and get a more stripped down model) than on the best used deal (more luxury model) on the same kind of car. Considering that we drive our cars until they fall apart (well over 10 years as a rule) The "luxury" features are no longer worth that much in resale value.

It has to do with who sells what cars and who keeps what cars *here*

-Angela

[grisandole]

I agree with Algena on this one; in certain areas, as well as for certain cars, it isn't necessarily a bad choice to buy new.

We have been buying used for years, but went new for our latest purchase, because it was only 2K more to buy a brand new car (Toyota Sienna), and the 2K extra was well worth is as the used models all had over 15K miles on them (most were over 20K). So, by spending 2K more, we got a car with 0 miles, enabling us to take full advantage of the 36K warranty.

It is true that it depreciated the moment we drove it off the lot, but not by 30%....I wish! If that were the case then we would have been able to buy a used Sienna for much less....but they simply don't deprecite drastically and quickly.

To the OP, I'm not understanding the question either, lol!

[velochic]

Originally Posted by alegna

I *do* understand what you're getting at, but the fact of the matter is, in THIS market (my city) I can't get as good of a deal on used on the cars I want. Just the way it is. I can actually spend LESS on a new car (and get a more stripped down model) than on the best used deal (more luxury model) on the same kind of car. Considering that we drive our cars until they fall apart (well over 10 years as a rule) The "luxury" features are no longer worth that much in resale value.

It has to do with who sells what cars and who keeps what cars *here*

-Angela

Yes, I agree it depends on the market. But 99% of the time it DOES make sense to buy slightly used. A car depreciates MOST in the first year. You are not building equity and it is NOT an investment. It almost ALWAYS better to buy a slightly used car. It is definitely best to not take out a loan for a car. It's probably a lot of work to find one, though. I suppose it's like telling someone in the Bay Area that they ought to buy a house because it makes best fiscal sense to be a home owner. Well, not in the Bay Area, where the housing market has pretty much hit its ceiling.

I'm just trying to be helpful here. Most people see 1.9% financing and think it's a great deal. When the actual numbers are seen on paper, you find that it's almost NEVER a good deal... simply because cars will always LOSE value. I am trying to get people to think in terms of NET WORTH, not monthly payments. This is just another example of leveraging your money to MAKE money... or in this case not wasting money.

[velochic]

Originally Posted by texaspeach

instead of getting a 24 month car loan, we decided to get a 24 month CD for the loan amount and borrow against it. the interest on the loan and the interest on the CD are about the same, so in the end we would owe about $600. we wouldn't have a car payment every month, and if we defaulted on the loan the CD would go away not the car - I don't see that happening but in the event that it did, it would be nice not have the car repossessed. good idea? bad idea?

To answer your question... what you have to look at is the annual YIELD on the CD. This is not the same as the interest you will gain. You also have to take into consideration that once the money is in the CD, it is inaccessible.

If you have the money to purchase a car outright, that is what you should do. Any finance guru would tell you that buying a car with credit should be a last resort. It is only one step above unsecured debt because by the time the loan is paid off, the collateral (the car) is worth much less than when you started.

Bottom line... PAY CASH.

[sanguine_speed]

Originally Posted by velochic

If you have the money to purchase a car outright, that is what you should do. Any finance guru would tell you that buying a car with credit should be a last resort. It is only one step above unsecured debt because by the time the loan is paid off, the collateral (the car) is worth much less than when you started.

Bottom line... PAY CASH.

I do believe there is an important exception--if you are able to purchase a car with financing (even used) that is less than the amount of interest you would be guaranteed by investing that income in a secure investment. Better to put that money now into the investment than buy the car upfront.

[alegna]

Originally Posted by velochic

It almost ALWAYS better to buy a slightly used car. It is definitely best to not take out a loan for a car. It's probably a lot of work to find one, though.

I would agree with almost always

Part of the equation for us though is that we buy cars that will last- toyotas and hondas as a rule. And in our market it would end up costing us MORE to buy used (to get something only a couple of years old with low mileage costs MORE than new- at least more than the deals I can talk them into on new )

In general cars are not a good investment. So when we have to spend the money- we make sure we won't have to spend any money on it again for a LONG time.

-Angela

[texaspeach]

we have the money to buy the car out right in cash, but would like to take out a loan to build credit. It seemed like taking a loan against a cd instead of a traditional car loan was a smarter way to go. I should have explained that in my original post, sorry!

[velochic]

Originally Posted by sanguine_speed

I do believe there is an important exception--if you are able to purchase a car with financing (even used) that is less than the amount of interest you would be guaranteed by investing that income in a secure investment. Better to put that money now into the investment than buy the car upfront.

You can NEVER get ahead financially by taking a loan out on a car... no matter what the rate is... because a car is A DEPRECIATING ASSET!!!

When you drive a car off the lot, you lose an average of 20% of the car's value (worse if it's domestic) instantly. Then a car loses value an average of 7% - 12% per year. Add a conservative 3% inflation... and you get a loss of 70% - 85% in 5 years. That would mean that if you got a loan for 0% financing, you would have to have an annualized return on investment of 12% AFTER TAXES... that means at least a 16% annualized return. The Dow average for the last 120 years is only 10.6%. You would have to beat the market for 5 years by nearly 6% to even break even on a 0% financing deal.

NO, NO, NO... getting a loan for a car is NEVER a good idea. Getting a loan for a new car vs. a used car may be the lesser of two evils in very specific situations, but ultimately, getting a loan for a car is always an evil. It's just not a good fiscal decision.

[Herausgeber]

Originally Posted by texaspeach

we have the money to buy the car out right in cash, but would like to take out a loan to build credit. It seemed like taking a loan against a cd instead of a traditional car loan was a smarter way to go. I should have explained that in my original post, sorry!

Oh, I see! Well, which loan is cheaper?

[sanguine_speed]

Originally Posted by velochic

You can NEVER get ahead financially by taking a loan out on a car... no matter what the rate is... because a car is A DEPRECIATING ASSET!!!

When you drive a car off the lot, you lose an average of 20% of the car's value (worse if it's domestic) instantly. Then a car loses value an average of 7% - 12% per year. Add a conservative 3% inflation... and you get a loss of 70% - 85% in 5 years. That would mean that if you got a loan for 0% financing, you would have to have an annualized return on investment of 12% AFTER TAXES... that means at least a 16% annualized return. The Dow average for the last 120 years is only 10.6%. You would have to beat the market for 5 years by nearly 6% to even break even on a 0% financing deal.

NO, NO, NO... getting a loan for a car is NEVER a good idea. Getting a loan for a new car vs. a used car may be the lesser of two evils in very specific situations, but ultimately, getting a loan for a car is always an evil. It's just not a good fiscal decision.

That depreciation occurs whether or not you finance or purchase outright. And, please don't shout at me.

[McFeelings]

If your goal is to build a credit history, I'd recommend getting a credit card, charging a small item ($200 or so) and paying it off over a few months even if you can pay it in full at the first billing. Boom! Good credit.

Between the extra taxes on the CD, loan fees, and the depreciation factor, I just don't see why you'd want to jump through all these hoops. I'd pay cash for the car and be done with it.

Also, are you trying to improve your credit for a home loan down the line? The credit card method would allow you to establish credit AND not have a monthly debt payment (debt to income ratio) by the time you apply for a loan. Both would work in your favor more so than just a good credit ration.

[velochic]

Originally Posted by sanguine_speed

That depreciation occurs whether or not you finance or purchase outright. And, please don't shout at me.

The depreciation is why it's foolish to finance it and invest your money elsewhere.