If you have the funds then YES YES YES, you absolutely should. And here is why.
This weekend my Husband and I went car shopping. We are badly in need of a new car since our current model is now over fifteen years old and has started stopping in traffic when it gets too hot. The mechanic can’t find anything wrong with it and has suggested that we just buy a new motor for a few thousand dollars.
I’d rather get rid of it completely. It’s too old and I want to own a brand new SUV to drive around the city so I can be a cliché. 😉
So we went into one car dealership and we decided on one model that we liked. We told them we wanted to pay cash for it. (It’ll take a bit of scrapping some money together but we can just do it).
They looked at us like we were crazy and proposed the following financing option:
Finance the full $32,000 and put our cash of $32,000 in a savings account earning 6%. That way at the end of the five year loan we’ll have about $45,000 in our savings account (from the interest we have earned). We would have paid off the car, and on the standard finance interest rate of 13% we would have paid out $47,500. So if we still have the $45,000 in our savings account it would have really only cost us $2,500 over the loan term.
Nuh uh! Who do you think you are talking to Mister?
Ok, technically his workings out are correct, but here is the major flaw.
If I pay cash today for the car, I start with $0 in my savings account. BUT, over the next five years, let’s say I put the amount of money that I WOULD have paid off the loan into building my savings back up. In the example above that means around $750 a month or $9,000 a year.
Let’s now put that $9,000 a year into my savings account. At the end of the five year period, with interest, you now have over $50,000 in your savings account.
Now to be fair, you should take away the original cost of the car, which would be $32,000. But that means you are STILL $18,000 ahead financially.
Hmm let’s see.
Get financing, end up $2,500 poorer at the end of the five years OR pay cash up front and end up $18,000 richer.
So should you pay cash for a new car? Hell yes!
The only way it would make sense to do it the other way, is if you could get a higher interest rate on your savings account than the loan. But you and I both know, that’s nearly impossible to do.
You’d be crazy to get financing if you can have the cash.