Consumers always ask, which is better, to purchase a vehicle cash or to finance? While every situation is unique and varies, the consensus by financial Gurus such as Dave Ramsey is to purchase cash. While I am no financial genius, I am against purchasing a vehicle cash in most situations.There are a few occasions where I feel a cash purchase is the best option, but there are many factors to consider.
First, you have to decide how much vehicle you're trying to buy and what purpose will it serve. I once bought a Saturn Vue cash for ,y daughter's first car. I think we paid $3500. The Vue had over 100,000 miles and over 10 years old. It wasn't meant to be a car to last a lifetime or be driven to the ground. It was just her first car to last her a few years. In this day and age, $5,000 doesn't buy a whole lot of car. So you have to tread lightly on a purchase in which the vehicle may not be in the best condition. So, decide how much do I want to spend? What do I want to get out of my purchase?
Now, for larger purchases in the $20,000, $30,000 or $40,000 range why buy cash? Financial experts say you don't want to pay interest over time and that will save you thousands. True. But how much money will you lose by pulling such a large amount from your account? Most individuals who have that much money available in the bank or through investments have two things in common, excellent credit and financial independence to a point. Meaning this, if you have a large amount of money in the bank earning interest making you money for nothing, why would you stop it from doing so? $20,000 earning 10% compound interest will earn you approximately $10,000 over 60 months. If you finance $20,000 over 60 months at a modest 3.9% you will pay approximately $4,400 in interest charges. That means keeping your money in the bank will actually make you about $5,500! This is one factor to consider in deciding whether to finance or pay cash.
Another factor, for me, is even more important. Why invest in a depreciating asset? The two brands with the best resale value in America are Subaru and Toyota. And both of those brands will be worth between 52 and 65% after three years. All vehicles, new and pre-owned, lose value immediately. So why put either all or a lot of your cash into something that will be worth less in the immediate future? It's like telling someone here's $200 pay me back $100 when you can. It goes contradictory to common sense.
Lastly, the train of thought in buying cash is that you avoid payments and you own your assets. In case of income loss you don't have to worry about losing anything. That is excellent thinking. Except that I revert back to the common factors of people who consider buying cash: excellent credit and financial independence. People who have 20, 30, 40 or more thousands in the bank do not come by that in by accident. They are financially bright individuals. So that if they have $20,000 in the bank today, they will not spend or lose that money just because they didn't make a cash purchase. They will keep that money in the bank and the option to payoff any loan is always there because the financial means is always there. If they lose their job, they have money in the bank to payoff any loans and still manage.
To finance or purchase cash is ultimately a personal decision. You have to weigh all your personal factors and choose to your needs. Would I buy a home cash? Absolutely. Over time property values can only go up. Would I purchase a fairly new vehicle cash? No. For my personal preference, it is not a financially sound decision.
My customers always ask me, "how do I get the most for my trade in?" The obvious answer don't ever drive it, maintain it and hope it never gets damaged. The reality is there is no foolproof way to maximize your car's value and no one, not even Kelly Blue Book can predict a vehicle's value. But there are some simple steps to improve your chances and car's worth the day you decide to either trade it in or retail it to an individual.
- Before bringing your car to a lot or putting it up for sale, wash it. It sounds simple and unnecessary but a shiny car is always worth more. Vacuum the inside also. Make your car look like the way you want the one you're buying to look. Not only will your car look good, it will remove the "we have to pay to get it cleaned up" objection from the dealer.
- Bring your maintenance records. Not just oil changes but also any 15k and/or 30k services you may have performed. Not only does this emphasize the running condition of your vehicle but also many times dealers will devalue your vehicle by stating all the maintenance they will have to perform to be able to retail the vehicle. With your records, the dealer can no longer use this tactic to lower the value of your vehicle.
- Before selling or trading in your vehicle, assure your state inspection sticker is up-to-date. This follows the thinking in #2. A dealer or buyer can point to things that may be needed to get your vehicle to state specifications, i.e. tire wear, muffler, tail lights, etc. If your inspection is renewed then your vehicle will need almost no recon from the dealer to get it to retail standards.
- I do advise you get an idea of your vehicle's worth before selling or trading. Most consumers use Kelly Blue Book but dealers and banks use N.A.D.A. It's fairly simple to go to their website and get an idea by inputting some of the vehicle's information. But also keep an open mind. The true value of anything is what someone is willing to pay for it at that time. Neither NADA or KBB are writing a check for your vehicle. But come to the table armed with information so you can get the most available to you.
- Lastly, it is not necessary for a dealer to know how much you owe on your vehicle for them to put a value on it. If you are financing your next purchase, yes absolutely they need to know in order to get you accurate financing options. But to just tell you what your vehicle is worth? No. The reason to withhold this information is that typically a dealership assumes all the consumer wants is payoff. If you have equity (if your vehicle's value is $10,000 and you only owe $5,000 for instance) then the salesperson will try to convince you they only have to pay you at or near your payoff for your vehicle. Your vehicle's value has no relevance to your payoff. Good or bad. The value of your vehicle needs to stand aside from the other factors in your purchase.
