Paying Cash vs. Financing…What’s my best option?
Confessions of a Top Gun: Tips & Tricks to Help You Purchase Your Next Vehicle…
Vol. 1: Paying Cash vs. Financing
***Disclaimer*** Every person’s situation is different so this advice doesn’t apply to everyone. Generally speaking, though, the information below will apply to most people looking to buy a new or pre-owned vehicle.
First, we need a buyer. Let’s call him Steve. Steve is looking to buy a new car and has fair/good credit. Step one is to find the right vehicle and with hundreds of different models spread across dozens of different brands, that can be a difficult undertaking. I can write an entire post on this topic (coming soon!) but obviously Steve needs to find the right vehicle that suits his needs. Once that is complete, a big decision needs to be made…
Pay cash or finance through the dealership?
Here, I should mention there are a couple of different ways Steve can pay “cash” for a vehicle. The first is obvious… Having $20,000-$40,000 available in liquid cash sitting in a chequing account, an investment or elsewhere. If this is the case for you, great job, that’s IMPRESSIVE! I will touch on this scenario below but for now I will focus on most folks who don’t have that cash but are considering getting a loan through a bank (either through their line of credit or a general bank loan).
Back to Steve. In this example, he’s decided to go with a 2020 Elantra selling for $24,000 plus tax ($26,880 all-in). He can finance it at 0% for up-to 7 years or get a $2,000 cash discount.
He can borrow that $27,000 from the bank, save $2,000 and walk away with a sweet deal, right? Not so fast. Don’t forget, Steve will be paying interest on that loan from the bank (anywhere from 3%-8%). Unless he’s able to pay that loan off quickly, he’s not saving $2,000 at all. In fact, he’d end up paying more for the Elantra, assuming he took 5-7 years to pay it off, which is the industry average.
It’s pretty clear that using the banks money at 0% is the better option.
But wait… How is the dealership able to offer 0% financing if the loan is still held through a bank? That’s a great question and it’s one I hear a lot on the showroom floor. No bank would offer a consumer a 0% loan, right? What’s in it for them?
That’s where the manufacturer comes in. They pay the bank a lump sum up front once the deal is approved. This is a win for the bank because they get their money right away instead of collecting tiny interest payments over time. The manufacturer and dealership win because they move another unit off the lot. And the consumer wins because they’re getting a 0% interest loan.
Sound too good to be true? It’s not. This is the day and age we live in, where credit is everything. The old days of “cash is king” no longer apply.
And what about the other example I talked about? What if Steve just wanted to pay for the Elantra with his funds sitting in his bank account? He saves the $2,000, walks away with no car payment and no interest to be paid to the bank. That’s the ultimate deal, isn’t it? Maybe for some but stay with me a moment longer.
What if I told you about an investment opportunity? Your initial contribution is $27,000.
You’d lose 30% on day one. Then, slowly over time, that investment will shrink to $0 unless you sell it before that happens, maybe cutting some of your losses. Would you invest in my fund? I don’t think so. Nobody would.
Do you see where I’m going with this? The ugly truth about cars is they are depreciating assets. They just don’t appreciate in value, ever… Other than a few collectibles out there. So why would you liquidate yourself of $27,000 just to save $2,000 when you can take that same $27,000 and invest it elsewhere?
I’m no financial advisor but simple math tells me that if you invested that money into something conservative like a GIC or RRSP, a modest 2% return would leave you with a balance of $31,000 after 7 years. Meanwhile, your vehicle is now paid off.
At the end of the day, it’s your money so do what you want with it. But coming from an industry expert with years of experience, my recommendation is to always finance with the banks money (ideally at a nice low rate, sometimes as low as 0%) and invest your hard-earned money into something that’s going to make it grow. Don’t sink it into something that’s only going to depreciate, even for the perceived “savings” when buying it brand new.
See you next week!
Written by: Jesse Pelletier | Sales Team Leader @ Focus Hyundai | Hyundai ‘TOP GUN’ 2018, 2019