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When is it smarter to get a car loan rather than pay cash?
I've always heard that paying cash for a car is the best way to go instead of financing. But with new cars costing $40,000 or more, spending all that cash doesn't seem like a great idea. Is it better to finance or pay cash?
Eric Schad · Updated on
Reviewed by Shannon Martin, Licensed Insurance Agent.
Although the old-school thought states that you should always pay cash for a car if you can afford it, times and opinions have changed.
Modern thought is a bit more involved, but the logic is both smart and sound. So here it is: getting a
car loan
is a better choice if the interest rate you can get on the loan is less than the amount of interest or return you could make by investing the cash.For example, let’s say you find a deal to finance $40,000 to buy a car at 1.99% interest, although you also have the cash to buy it. But instead of paying cash for it, you can invest that same $40,000 in a mutual fund to make a 5% return. In this case, you’re making a net return of 3.01% on that $40,000, which not only negates the interest charges but also makes financing the more financially intelligent move.
So if you have the cash to buy the car outright, always compare the interest rates to determine what the better option might be.
To save even more cash, make sure you shop for the lowest rates possible on car insurance, which lenders will require. Try using
Jerry
, the number-one-rated car insurance app. Jerry compares personalized rates from more than 50 top providers and delivers the best deals to your phone in minutes for free. The average Jerry driver saves $879 a year on car insurance!View full answer
- Gregory R.
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