0% car loan and invest the cash?

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TTGO808
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0% car loan and invest the cash?

Post by TTGO808 »

Hello,
I’m about to purchase a new minivan. We usually pay cash and drive for 10+ years. The dealership is offering 0% for 48 months. I was thinking about taking the loan and investing the cash in 50% VFIAX and 50% VCADX.
All the rest of the house is in order. Does this sound reasonable and worth it?
Thanks!
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watchnerd
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Re: 0% car loan and invest the cash?

Post by watchnerd »

I'm not going to endorse any particular investment choice, but choosing to use working capital for an investment when you can get a 0% auto loan can be logical.

However...

That needs to be balanced against how much you're paying for the car.

If you're paying full retail at 0% vs a -10%-20% less for a car that isn't new / lease return without special financing, the math will be different.

Depreciation of new vs used should also be factored in.
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dziuniek
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Re: 0% car loan and invest the cash?

Post by dziuniek »

Sure, just make sure to look at the actual final components of your price....
A subaru dealer once tried to sneak a $1,200 financing charge past me. lol... 0% my bum!
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fyre4ce
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Re: 0% car loan and invest the cash?

Post by fyre4ce »

What you suggest sounds reasonable. A few things to consider:
  • Sometimes dealers offer cash back OR 0% financing, so make sure you're not giving up anything else in exchange for the 0% loan.
  • This plan requires financial discipline to make the payments for 4 years and not spend the cash in ways you wouldn't otherwise. Also make sure you're not buying more car than you would if you paid cash. Many people over-spend on cars, IMO.
  • Would you carry collision coverage on the car if you paid cash? If not, then there's an extra insurance cost by being required by the financing company to carry collision coverage, which could be expensive on a new vehicle.
  • If you're investing in stocks as you propose, you could very well LOSE money compared to paying cash for the car, so make sure you prepare yourself for that possibility
  • Calculate how much you expect to make on the investments over 4 years, and compare that to the time and hassle of carrying the loan for 4 years. If it's something like $1,100, it's reasonable for a high-NW individual to decide the simplicity is worth more than the money and just pay cash. Comparing the "hourly rate" to the rate you earn at your day job, or from churning credit cards or something, to what you gain from this plan, and decide how much you're willing to "work" for this amount of money.
If none of those are obstacles for you, then go ahead.
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Metsfan91
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Re: 0% car loan and invest the cash?

Post by Metsfan91 »

TTGO808 wrote: Fri Mar 12, 2021 9:59 am Hello,
I’m about to purchase a new minivan. We usually pay cash and drive for 10+ years. The dealership is offering 0% for 48 months. I was thinking about taking the loan and investing the cash in 50% VFIAX and 50% VCADX.
All the rest of the house is in order. Does this sound reasonable and worth it?
Thanks!
Do you have to withdraw monthly from the investment to make payment? Assuming you do not need to withdraw, and you can make monthly payment from your stable monthly earnings, then yes, 0% deal is a great deal. And invest in funds or bonds or CDs you are comfortable with.

Enjoy your new minivan!
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Monsterflockster
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Re: 0% car loan and invest the cash?

Post by Monsterflockster »

So in 5 years if the market tanks you cool with the decision? Only gamble with money you can afford to lose.
av111
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Re: 0% car loan and invest the cash?

Post by av111 »

OP

Even if you take a 0% loan, it is debt that will need to be paid back.

Taking on debt to invest in stocks or other business ventures is not an appropriate strategy for average worker bees who earn average paychecks and have average expenses. Primary reason? Risky investments can lose value and it will take a long time to recover the decreased capital with average savings causing sleepless nights and general discord. Imagine how this person in our example would have felt in 2009 after making this decision in 2007

This strategy would be good if this loan amount was a drop in the bucket financially and taking out cash to pay for the van from existing millions of dollars of investments would be much more complex
AV111
Adfmacro
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Re: 0% car loan and invest the cash?

Post by Adfmacro »

There are rules for 0% financing. One may be that if you miss a payment you owe interest. One may not allow prepayment. One may require gap insurance. If may be 0% for five years with the final payment two weeks after the five year mark. What happens then? Read and understand EVERYTHING fully. Free is not as free as it seems. There may be a rebate, but they will get it not you.
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Re: 0% car loan and invest the cash?

Post by markjk »

TTGO808 wrote: Fri Mar 12, 2021 9:59 am Hello,
I’m about to purchase a new minivan. We usually pay cash and drive for 10+ years. The dealership is offering 0% for 48 months. I was thinking about taking the loan and investing the cash in 50% VFIAX and 50% VCADX.
All the rest of the house is in order. Does this sound reasonable and worth it?
Thanks!
I've done this very thing so speaking from experience, I think it sounds reasonable. The only caveat is to make sure you aren't overpaying for the car under the guise of 0%. You still want to pay a fair overall price for the vehicle, including financing costs.

In general, I'm a proponent of using the low interest rate environment to our advantage right now. I'm not a fan of debt but cheap debt when used properly gives you the most options. It can be a slippery slope taking on debt so you have to be careful. It's a tool that can help you get ahead if used correctly.
Admiral
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Re: 0% car loan and invest the cash?

Post by Admiral »

Auto loans are tricky. This is one case where 0% is not 0%. Or, more accurately, you may pay no interest but the car ends up costing more. How much more is the issue.

In my recent experience, to get the dealer's low financing, the out the door price of the car was higher than when I brought my own financing.

Dealers aren't in the business of giving away free money. Get some quotes as if you are a) paying cash and b)bringing your own financing. My guess is the out the door price will not be the same.

I chose to pay cash for 1/3 of the car and finance the rest, even though I could have paid for the entire thing in cash. I'm an optimist and assumed I could make more than 2.14% on $20,000 over 36 months. Thus far: good decision.
HotWheels22
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Re: 0% car loan and invest the cash?

Post by HotWheels22 »

Admiral wrote: Sat Mar 13, 2021 5:36 am Auto loans are tricky. This is one case where 0% is not 0%. Or, more accurately, you may pay no interest but the car ends up costing more. How much more is the issue.

In my recent experience, to get the dealer's low financing, the out the door price of the car was higher than when I brought my own financing.

Dealers aren't in the business of giving away free money. Get some quotes as if you are a) paying cash and b)bringing your own financing. My guess is the out the door price will not be the same.

I chose to pay cash for 1/3 of the car and finance the rest, even though I could have paid for the entire thing in cash. I'm an optimist and assumed I could make more than 2.14% on $20,000 over 36 months. Thus far: good decision.
My understanding in purchasing two different brand new vehicles in the past two years agrees with this first statement. You can get huge cash discounts ($5-7K off MSRP for vehicles in the $30-40K range) OR you can get 0% financing. So, what that means is that 0% financing just means you are paying the interest without knowing it. People all across the country are being fooled by this and thinking they are getting one over on these dealers.
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Re: 0% car loan and invest the cash?

Post by JoeRetire »

TTGO808 wrote: Fri Mar 12, 2021 9:59 am I’m about to purchase a new minivan. We usually pay cash and drive for 10+ years. The dealership is offering 0% for 48 months. I was thinking about taking the loan and investing the cash in 50% VFIAX and 50% VCADX.
All the rest of the house is in order. Does this sound reasonable and worth it?
Sure.
If someone wants to lend me free money for 4 years, I'll always accept it.

As far as the specific investments, (shrug). Is this where all your other investable assets are?
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Admiral
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Re: 0% car loan and invest the cash?

Post by Admiral »

JoeRetire wrote: Sat Mar 13, 2021 6:11 am
TTGO808 wrote: Fri Mar 12, 2021 9:59 am I’m about to purchase a new minivan. We usually pay cash and drive for 10+ years. The dealership is offering 0% for 48 months. I was thinking about taking the loan and investing the cash in 50% VFIAX and 50% VCADX.
All the rest of the house is in order. Does this sound reasonable and worth it?
Sure.
If someone wants to lend me free money for 4 years, I'll always accept it.

As far as the specific investments, (shrug). Is this where all your other investable assets are?
It's not "free money," as explained.

There's generally a tradeoff between interest rate and cost. (How you invest any money you are not paying is a separate issue.)

When you get a mortgage, you can buy down the rate by paying points. It's the same principle here. The dealer will make their margin one way or another.

That's not to say there might not be occasional instances where dealers have internal incentives to move particular cars/model, sales targets that they need to meet to get OEM discounts, and so on.
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JoeRetire
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Re: 0% car loan and invest the cash?

Post by JoeRetire »

Admiral wrote: Sat Mar 13, 2021 6:25 am There's generally a tradeoff between interest rate and cost.
When you get a mortgage, you can buy down the rate by paying points. It's the same principle here. The dealer will make their margin one way or another.
You are assuming facts not in evidence. I just answered the question as stated.
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johnny
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Re: 0% car loan and invest the cash?

Post by johnny »

HotWheels22 wrote: Sat Mar 13, 2021 6:01 am
Admiral wrote: Sat Mar 13, 2021 5:36 am Auto loans are tricky. This is one case where 0% is not 0%. Or, more accurately, you may pay no interest but the car ends up costing more. How much more is the issue.

In my recent experience, to get the dealer's low financing, the out the door price of the car was higher than when I brought my own financing.

Dealers aren't in the business of giving away free money. Get some quotes as if you are a) paying cash and b)bringing your own financing. My guess is the out the door price will not be the same.

I chose to pay cash for 1/3 of the car and finance the rest, even though I could have paid for the entire thing in cash. I'm an optimist and assumed I could make more than 2.14% on $20,000 over 36 months. Thus far: good decision.
My understanding in purchasing two different brand new vehicles in the past two years agrees with this first statement. You can get huge cash discounts ($5-7K off MSRP for vehicles in the $30-40K range) OR you can get 0% financing. So, what that means is that 0% financing just means you are paying the interest without knowing it. People all across the country are being fooled by this and thinking they are getting one over on these dealers.
I agree. There is clearly a formula that auto dealers use. "I can only meet *this* price if you choose financing at *this* rate". In fact, it is probable that you can't get the lowest purchase price without financing.

OP, I suggest you discuss various rates and purchase prices with the dealer. Then pick the lowest purchase price, regardless of rate. Then use your boglehead super power to immediately pay off the loan. 😁

Really though - having no car payment... It's a wonderful thing
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Re: 0% car loan and invest the cash?

Post by Carguy85 »

Tell them you must get a better deal because you don’t want to insult your intelligence by taking “ 0% “. Anyone with any sense knows nothing in this world is free. I’d walk otherwise...their job is to make you feel like you are doing something smart...let them make you feel smart for knowing better than 0% antics
Admiral
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Re: 0% car loan and invest the cash?

Post by Admiral »

JoeRetire wrote: Sat Mar 13, 2021 6:30 am
Admiral wrote: Sat Mar 13, 2021 6:25 am There's generally a tradeoff between interest rate and cost.
When you get a mortgage, you can buy down the rate by paying points. It's the same principle here. The dealer will make their margin one way or another.
You are assuming facts not in evidence. I just answered the question as stated.
I assumed nothing. You, however, have framed the question incorrectly: "Yes, I would take free money."

My goal is to help the OP understand that their offer of 0% financing has a cost. It is not free.

The OP did not ask what you would do. They asked what they should do, using (IMO) an incorrect assumption.
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Re: 0% car loan and invest the cash?

Post by watchnerd »

av111 wrote: Sat Mar 13, 2021 2:12 am

This strategy would be good if this loan amount was a drop in the bucket financially and taking out cash to pay for the van from existing millions of dollars of investments would be much more complex
If a car isn't a drop in the bucket financially it's too much car, regardless.
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Re: 0% car loan and invest the cash?

Post by HMSVictory »

So you are going to borrow on your car to invest?

No never do this. Never. Ask yourself "would Jack Bogle borrow on anything to invest"?

This isn't going to make you rich. Paying cash for your cars, staying away from debt and investing in index funds over decades will make you very, very rich.
Stay the course!
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Re: 0% car loan and invest the cash?

Post by guitarguy »

watchnerd wrote: Sat Mar 13, 2021 7:50 am
av111 wrote: Sat Mar 13, 2021 2:12 am

This strategy would be good if this loan amount was a drop in the bucket financially and taking out cash to pay for the van from existing millions of dollars of investments would be much more complex
If a car isn't a drop in the bucket financially it's too much car, regardless.
Eh...I agree with people generally overspending on cars but this is a pretty high standard. What’s a drop in the bucket?

We have a nice size portfolio, but is $30k - even though we can pay it cash - a drop in the bucket? I dunno. Maybe more like a 3 fingers pour.

OP: I’d pay cash for the car.
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Re: 0% car loan and invest the cash?

Post by Admiral »

HMSVictory wrote: Sat Mar 13, 2021 7:55 am So you are going to borrow on your car to invest?

No never do this. Never. Ask yourself "would Jack Bogle borrow on anything to invest"?

This isn't going to make you rich. Paying cash for your cars, staying away from debt and investing in index funds over decades will make you very, very rich.
This is a little simplistic, no? Taking a mortgage is also using debt to invest, if indirectly.

We don't know what the OP's finances are. Nothing wrong with some low-cost leverage. Positive cash flow and liquidity often trump the cost of some minuscule interest rate. I'm paying $624 in interest over 3 years in order to use $20,000 for my kid's tuition. Would you say that's a poor choice?
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Re: 0% car loan and invest the cash?

Post by watchnerd »

guitarguy wrote: Sat Mar 13, 2021 8:00 am What’s a drop in the bucket?
<5%

A common figure that people feel comfortable allocating to "play money".
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Re: 0% car loan and invest the cash?

Post by HMSVictory »

Admiral wrote: Sat Mar 13, 2021 8:02 am
HMSVictory wrote: Sat Mar 13, 2021 7:55 am So you are going to borrow on your car to invest?

No never do this. Never. Ask yourself "would Jack Bogle borrow on anything to invest"?

This isn't going to make you rich. Paying cash for your cars, staying away from debt and investing in index funds over decades will make you very, very rich.
This is a little simplistic, no? Taking a mortgage is also using debt to invest, if indirectly.

We don't know what the OP's finances are. Nothing wrong with some low-cost leverage. Positive cash flow and liquidity often trump the cost of some minuscule interest rate. I'm paying $624 in interest over 3 years in order to use $20,000 for my kid's tuition. Would you say that's a poor choice?
Yes it is simple. See Occums Razor for a better explanation of why simple is better. I don't have a mortgage either. YMMV
Last edited by HMSVictory on Sat Mar 13, 2021 8:09 am, edited 1 time in total.
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Re: 0% car loan and invest the cash?

Post by Carguy85 »

watchnerd wrote: Sat Mar 13, 2021 8:07 am
guitarguy wrote: Sat Mar 13, 2021 8:00 am What’s a drop in the bucket?
<5%

A common figure that people feel comfortable allocating to "play money".
Maybe what an account fluctuates on a given day as bare minimum?
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Re: 0% car loan and invest the cash?

Post by watchnerd »

Carguy85 wrote: Sat Mar 13, 2021 8:09 am
watchnerd wrote: Sat Mar 13, 2021 8:07 am
guitarguy wrote: Sat Mar 13, 2021 8:00 am What’s a drop in the bucket?
<5%

A common figure that people feel comfortable allocating to "play money".
Maybe what an account fluctuates on a given day as bare minimum?
That also sounds appropriately small.
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Re: 0% car loan and invest the cash?

Post by guitarguy »

watchnerd wrote: Sat Mar 13, 2021 8:07 am
guitarguy wrote: Sat Mar 13, 2021 8:00 am What’s a drop in the bucket?
<5%

A common figure that people feel comfortable allocating to "play money".
That’s fair.

The $30k max spend for a car we have in mind would be 6% for us...so maybe a slightly larger than average drop.

I don’t consider that target limit overspending. And I also don’t consider it small enough to be “play money.”

So to each their own! :beer
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Re: 0% car loan and invest the cash?

Post by tvubpwcisla »

I think I would do the opposite. Eliminate all debt, and then invest into 100% equities.

:moneybag
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Re: 0% car loan and invest the cash?

Post by Watty »

You can call dealerships and car salespeople lots of derogatory things things but stupid is not one of them. When there is something like 0% financing you are not getting that for free.

The last new car that I bought was a Toyota that had a 0% financing option. There was no formal rebate that I was giving up to get the 0% financing but I was negotiating a deal on the internet where I contacted around a dozen dealerships to get a good price. Several dealers said the same thing, that I would need to pay an extra $1,500 for the car if I took the 0% financing because the dealership had to pay corporate Toyota that in a dealer participation fee whenever someone bought that car with the 0% financing.

If the dealership you are talking is not that upfront about how that works then you might contact several dealerships and tell some of them you are paying cash and tell the others that you will be using the 0% financing to see the differences in prices

It was a few years ago but here is a post that I did about my experience with buying a car over the internet.

viewtopic.php?f=11&t=239526&p=3746230

I have also found that when I have to write out a large check to buy a car I tend to buy a bit less expensive car.
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Re: 0% car loan and invest the cash?

Post by MotoTrojan »

Another lower risk option (still keeps the cash in a bank) is to move it around and collect bank bonusses.

https://www.doctorofcredit.com/best-ban ... t-bonuses/
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Re: 0% car loan and invest the cash?

Post by SteveJones »

Also remember they only offer 0% loans on new cars, so the 10% loss in value the first 6 months is interest IMO.
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Re: 0% car loan and invest the cash?

Post by We're wolves »

Admiral wrote: Sat Mar 13, 2021 5:36 am
Dealers aren't in the business of giving away free money. Get some quotes as if you are a) paying cash and b)bringing your own financing. My guess is the out the door price will not be the same.

For new cars, dealers generally have nothing to do with the financing. Financing is generally through a national brand motor financing entity. And while discounts/0% financing are sometimes an either/or proposition, that's not a general rule, and no indication of it in this particular case according to the OP's post.
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TTGO808
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Re: 0% car loan and invest the cash?

Post by TTGO808 »

Yeah, it’s a Honda and the negotiation was an all cash buy. I think I’m getting a fair deal. Total cost of the car is 2.5% of my invested assets, so I think I’ll do this “experiment” and see if it works out. I suppose if the car loan gets cumbersome I’ll just pay it off. Thanks for the insights!
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Re: 0% car loan and invest the cash?

Post by Minty »

TTGO808 wrote: Sat Mar 13, 2021 12:34 pm Yeah, it’s a Honda and the negotiation was an all cash buy. I think I’m getting a fair deal. Total cost of the car is 2.5% of my invested assets, so I think I’ll do this “experiment” and see if it works out. I suppose if the car loan gets cumbersome I’ll just pay it off. Thanks for the insights!
I support this. Various places will tell you if an offer is a manufacturer incentive, such as here. The Honda 0% financing seems to be. If the dealer doesn't have to pay for it (and therefore has no reason to reduce the price if you decline 0%), then free money is free money. Push out an ACH payment, and the car loan will not be cumbersome. I did two low interest rate loans with Honda Financial Services, and at least then (1995-99; 2014-18) they were fine, no problems or tricks.
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Re: 0% car loan and invest the cash?

Post by HotWheels22 »

johnny wrote: Sat Mar 13, 2021 6:41 am
HotWheels22 wrote: Sat Mar 13, 2021 6:01 am
Admiral wrote: Sat Mar 13, 2021 5:36 am Auto loans are tricky. This is one case where 0% is not 0%. Or, more accurately, you may pay no interest but the car ends up costing more. How much more is the issue.

In my recent experience, to get the dealer's low financing, the out the door price of the car was higher than when I brought my own financing.

Dealers aren't in the business of giving away free money. Get some quotes as if you are a) paying cash and b)bringing your own financing. My guess is the out the door price will not be the same.

I chose to pay cash for 1/3 of the car and finance the rest, even though I could have paid for the entire thing in cash. I'm an optimist and assumed I could make more than 2.14% on $20,000 over 36 months. Thus far: good decision.
My understanding in purchasing two different brand new vehicles in the past two years agrees with this first statement. You can get huge cash discounts ($5-7K off MSRP for vehicles in the $30-40K range) OR you can get 0% financing. So, what that means is that 0% financing just means you are paying the interest without knowing it. People all across the country are being fooled by this and thinking they are getting one over on these dealers.
I agree. There is clearly a formula that auto dealers use. "I can only meet *this* price if you choose financing at *this* rate". In fact, it is probable that you can't get the lowest purchase price without financing.

OP, I suggest you discuss various rates and purchase prices with the dealer. Then pick the lowest purchase price, regardless of rate. Then use your boglehead super power to immediately pay off the loan. 😁

Really though - having no car payment... It's a wonderful thing
Exactly, let them give you as high of an interest rate as their heart desires so that they think they will make all their money off of interest on you and lower the purchase price to below cost. Then pay it off a month later. Although, I've learned they will only let you pay in $10K increments.
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Re: 0% car loan and invest the cash?

Post by firebirdparts »

It doesn’t matter much. The effects will be minor compared to the effect of buying the car in the first place.
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Re: 0% car loan and invest the cash?

Post by grabiner »

Another potential cost is insurance. If you have to have a $500 deductible on your collision and comprehensive insurance to get the loan, but you would prefer a higher deductible, the loan will cause you to pay extra for insurance. (The savings are not the full insurance difference, but there is a real savings; a lower deductible is more expensive for the insurance company to handle because it means more claims will be processed.)
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