Any reason not to take 0% financing on New Car when have Money to pay Cash Now?

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mbt863
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Any reason not to take 0% financing on New Car when have Money to pay Cash Now?

Post by mbt863 »

Hello--Buying a new car (Honda HR-V) and dealership offers 0% APR for up to 36 months....I was going to pay cash for the vehicle as that is the way we have always done so but considering this and wanted to make sure I know pros/cons of doing so. Sounds like I will need to pay maybe 10% up front and then monthly payments with zero percent APR...just want to make sure at the end of the 36 months I can just pay the remainder off in full.

We have high credit rating (no mortgage) so I guess only con is having a loan/dealing with monthly payments vs. just cutting a check upfront. Thanks.
HawkeyePierce
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Re: Any reason not to take 0% financing on New Car when have Money to pay Cash Now?

Post by HawkeyePierce »

If your car is financed you'll likely need full comprehensive insurance. You may want that for a new car anyways.

Personally I'd take the loan.
ScaledWheel
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Re: Any reason not to take 0% financing on New Car when have Money to pay Cash Now?

Post by ScaledWheel »

You'll most likely get a better price paying in cash vs. with financing, so the financing is not really 0%. That being said, I'm not sure what types of price breaks dealers are offering because car markets are not normal at the moment.

I'd personally take the loan unless its price is a very small fraction of your net worth, then I'd probably consider the loan not worth the trouble.
stoptothink
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Re: Any reason not to take 0% financing on New Car when have Money to pay Cash Now?

Post by stoptothink »

ScaledWheel wrote: Mon Nov 29, 2021 1:06 pm You'll most likely get a better price paying in cash vs. with financing, so the financing is not really 0%. That being said, I'm not sure what types of price breaks dealers are offering because car markets are not normal at the moment.

I'd personally take the loan unless its price is a very small fraction of your net worth, then I'd probably consider the loan not worth the trouble.
It was the other way around the last two times I purchased a vehicle (was prepared to pay in cash). It saved us 4-figures both times to hold the loans for a matter of weeks. We have cash sitting in HYSA to pay for our upcoming vehicle purchase (hopefully spring, we ordered a Ford Maverick hybrid in June), but wife just gave me the OK to use a big chunk of it to buy Ibonds and max our IRAs on January 1st. Especially with current inflation, will gladly take Ford's 0% for 36 months (hopefully it is still available).
ScaledWheel
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Re: Any reason not to take 0% financing on New Car when have Money to pay Cash Now?

Post by ScaledWheel »

stoptothink wrote: Mon Nov 29, 2021 1:13 pm
ScaledWheel wrote: Mon Nov 29, 2021 1:06 pm You'll most likely get a better price paying in cash vs. with financing, so the financing is not really 0%. That being said, I'm not sure what types of price breaks dealers are offering because car markets are not normal at the moment.

I'd personally take the loan unless its price is a very small fraction of your net worth, then I'd probably consider the loan not worth the trouble.
It was the other way around the last two times I purchased a vehicle (was prepared to pay in cash). It saved us 4-figures both times to hold the loans for a matter of weeks. We have cash sitting in HYSA to pay for our upcoming vehicle purchase (hopefully spring, we ordered a Ford Maverick hybrid in June), but wife just gave me the OK to use a big chunk of it to buy Ibonds and max our IRAs on January 1st. Especially with current inflation, will gladly take Ford's 0% for 36 months (hopefully it is still available).
Good to know. I'm actually considering buying a new car before year's end so am going to start looking into all the current deals. Unfortunately the car I want only has a 1.9% deal through the manufacturer.
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Re: Any reason not to take 0% financing on New Car when have Money to pay Cash Now?

Post by livesoft »

We always took the loan after insisting that we would not take the loan during negotations. Even so, we charged the maximum possible on our 2% cash back credit card to get even more savings. We just put the loan payments into our banks auto-billpay and forget about it, so no hassles whatsoever.
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SnowBog
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Re: Any reason not to take 0% financing on New Car when have Money to pay Cash Now?

Post by SnowBog »

We purchased a new car this year and took the 0% loan.

Even if I just leave the amount of car in my savings account, the interest we will earn is not insignificant, and since the loan costs us $0 seemed like a "no brainer".
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Re: Any reason not to take 0% financing on New Car when have Money to pay Cash Now?

Post by mhc »

I would only take the loan if it reduced the price of the car. For me, it is not worth the effort of having a loan if the price is not reduced.
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Re: Any reason not to take 0% financing on New Car when have Money to pay Cash Now?

Post by iamlucky13 »

ScaledWheel wrote: Mon Nov 29, 2021 1:06 pm You'll most likely get a better price paying in cash vs. with financing, so the financing is not really 0%. That being said, I'm not sure what types of price breaks dealers are offering because car markets are not normal at the moment.

I'd personally take the loan unless its price is a very small fraction of your net worth, then I'd probably consider the loan not worth the trouble.
I've not been able to get price breaks from dealers in exchange for not taking the loan. In fact, last time I tried to discuss pricing with Ford, they were offering a price discount only if I took their loan - If I remember right, it was 0.9% APR on the loan, and $1,000 incentive for financing with Ford. There was no incentive for paying cash.

I don't know how this works out on their end. Below market rate loans should have some form of cost to them.

Regardless of how the accounting works, it seems to have become common for dealers to very strongly incentivize financing and effectively discourage paying cash.
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Re: Any reason not to take 0% financing on New Car when have Money to pay Cash Now?

Post by lstone19 »

Check what the cost of getting them off the title is in your state after you pay off the loan. In Illinois where I live, the cost of having an updated title issued is equal to the initial cost of having the title issued ($151 now I believe). For the last car I financed (incentive financing like the OP's question), I never did have the title reissued and it did not seem to cause any issues over the remaining time we owned it or when it was traded in.
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Re: Any reason not to take 0% financing on New Car when have Money to pay Cash Now?

Post by JonFund »

For many dealers, the 0% financing is the best price they will offer, because of the financing rebates they receive. On my last new car purchase, I paid cash but did not receive any lower price than had I financed. I'm hearing the same thing from others that have bought new cars in recent years.
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Re: Any reason not to take 0% financing on New Car when have Money to pay Cash Now?

Post by KlangFool »

mbt863 wrote: Mon Nov 29, 2021 12:59 pm
Hello--Buying a new car (Honda HR-V) and dealership offers 0% APR for up to 36 months...
mbt863,

I wanted to be paid in order to take a car loan. So, this deal would not be good enough for me. The dealer has to pay me above and beyond the loan interest for me to take a loan.

In my case, I receive $500 rebate for taking a 7.5K, 1.9% 36 months loan that I can pay off immediately. I only paid $14.95 in interest and received $500 ( minus $14.95) for my effort.

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Re: Any reason not to take 0% financing on New Car when have Money to pay Cash Now?

Post by SpaghettiMonster »

I was in the same situation twice this year. Both times, there was no difference between the cash price and the financing OTD price. I decided to take the financing and invest what I otherwise would have paid upfront in cash. Keep in mind too that a dollar you’re paying in cash today will likely be worth more than the dollar you’d be paying on month 36.
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Re: Any reason not to take 0% financing on New Car when have Money to pay Cash Now?

Post by adamthesmythe »

Sometimes you can get a better price for cash. Sometimes not. Ask.
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Re: Any reason not to take 0% financing on New Car when have Money to pay Cash Now?

Post by KlangFool »

JonFund wrote: Mon Nov 29, 2021 3:09 pm
For many dealers, the 0% financing is the best price they will offer, because of the financing rebates they receive.
JonFund,

I disagreed.

In many cases, you could take a 1.9% car loan with no early pay off penalty and get a rebate. For someone with cash, that is the best deal. The person could pay off the car loan immediately after one month and keep the rebate.

If the dealer does not offer you some of the financing rebate, why would you take the loan? You would pay cash instead.

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Re: Any reason not to take 0% financing on New Car when have Money to pay Cash Now?

Post by aristotelian »

I would only take 0% financing if you had a good interest rate arbitrage opportunity. Back when interest rates were 2% you could offset a decent amount of the price of the car earning interest on the balance and paying off the loan with devalued dollars. The latter is still true but not so much the former. Up to you if it is worth the hassle. The bigger question to consider is if financing the car subconsciously allows you to buy more car than you need.
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mbt863
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Re: Any reason not to take 0% financing on New Car when have Money to pay Cash Now?

Post by mbt863 »

Thanks to all for the responses--helpful perspectives and just what I was looking for. :sharebeer
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fizxman
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Re: Any reason not to take 0% financing on New Car when have Money to pay Cash Now?

Post by fizxman »

When I bought my truck three years ago, I had three choices:
  1. Pay cash and receive a few rebates.
    1. Lowest monthly cost at $0.
    2. Second for the overall price of the truck.
  2. Finance @ 0% and receive no rebates.
    1. Second for the monthly cost.
    2. The highest overall price.
  3. Finance at a high rate (~9%) but get all of the rebates for which I was eligible.
    1. Highest for the monthly cost.
    2. Lowest overall price.
I chose #3 and then paid off the truck immediately.
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Re: Any reason not to take 0% financing on New Car when have Money to pay Cash Now?

Post by Stinky »

adamthesmythe wrote: Mon Nov 29, 2021 3:24 pm Sometimes you can get a better price for cash. Sometimes not. Ask.
This is my experience too.
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Re: Any reason not to take 0% financing on New Car when have Money to pay Cash Now?

Post by harikaried »

mbt863 wrote: Mon Nov 29, 2021 12:59 pmI was going to pay cash for the vehicle
Do you actually have the cash (emergency fund?) or is it in taxable investments that might have gains that would have an additional tax cost?
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Re: Any reason not to take 0% financing on New Car when have Money to pay Cash Now?

Post by H-Town »

HawkeyePierce wrote: Mon Nov 29, 2021 1:01 pm If your car is financed you'll likely need full comprehensive insurance. You may want that for a new car anyways.

Personally I'd take the loan.
Full comprehensive insurance can be costly. Not my favorite thing. Back when I bought my used car, I switched to liability-only policy as soon as I paid off the loan in 3 months. I can self-insure the value of the car so...
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Re: Any reason not to take 0% financing on New Car when have Money to pay Cash Now?

Post by euler »

Last time I bought a car (2008), standard advice was to pretend you were going to get financing (or at least appear open to it), negotiate the price, get it in writing, then pull out your checkbook and decline financing only after they were unlikely to back out of the settled deal.

Have things changed? Probably. Makes me dread my next car purchase...
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Re: Any reason not to take 0% financing on New Car when have Money to pay Cash Now?

Post by SmileyFace »

Make the largest downpayment allowed by cash-back or points-based credit card (last time for it was $4000) and then take the 0% loan. Last time I said no and was offered more money off to take the loan so you could see if this works for you as well (dealerships get incentives sometimes to get people on loans - even the 0% ones).
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Re: Any reason not to take 0% financing on New Car when have Money to pay Cash Now?

Post by bertilak »

stoptothink wrote: Mon Nov 29, 2021 1:13 pm
ScaledWheel wrote: Mon Nov 29, 2021 1:06 pm You'll most likely get a better price paying in cash vs. with financing, so the financing is not really 0%. That being said, I'm not sure what types of price breaks dealers are offering because car markets are not normal at the moment.

I'd personally take the loan unless its price is a very small fraction of your net worth, then I'd probably consider the loan not worth the trouble.
It was the other way around the last two times I purchased a vehicle (was prepared to pay in cash).
I have done that, used the financing to get a price break then paid off immediately. As I remember there was no "lock-in" period. Perhaps that is a matter of state laws/regulations.
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Re: Any reason not to take 0% financing on New Car when have Money to pay Cash Now?

Post by riverant »

At todays inflation rates, I would take 36-no 0% financing on my groceries if available…

People celebrate ibonds like crazy. Is Financing a new car at 0% that much different than buying ibonds at the annual max?
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Re: Any reason not to take 0% financing on New Car when have Money to pay Cash Now?

Post by Golf maniac »

I would definitely take the 0% loan. I have always negotiated the price, then when they ask about financing I ask and get an additional $300 to $500 off for taking the 0%. As stated above the dealer gets a kickback from the manufacturer for getting you to take their financing.
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Re: Any reason not to take 0% financing on New Car when have Money to pay Cash Now?

Post by feh »

We took a 0% 36 month loan 5 years ago for a car we could have bought with cash. Mathematically it makes sense.
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Re: Any reason not to take 0% financing on New Car when have Money to pay Cash Now?

Post by pennywise »

ScaledWheel wrote: Mon Nov 29, 2021 1:06 pm You'll most likely get a better price paying in cash vs. with financing, so the financing is not really 0%. That being said, I'm not sure what types of price breaks dealers are offering because car markets are not normal at the moment.

I'd personally take the loan unless its price is a very small fraction of your net worth, then I'd probably consider the loan not worth the trouble.
Exactly-right now the market is so out of balance there’s no deal to be had by paying cash.

Might as well finance and and leave money invested when you will be paying MSRP or higher either way.
Fedaykin
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Re: Any reason not to take 0% financing on New Car when have Money to pay Cash Now?

Post by Fedaykin »

It's very clearly the right answer to take the loan UNLESS:

* You don't want comprehensive insurance coverage which most lenders will require (note: some insurers even require crazy $500 deductibles but some allow sane deductibles in the ~$2,000 range which really helps)
* Somehow you get a discount for cash purchase, which is unlikely because dealers get incentives to sell loans.

In the above two cases, you have to run the math to figure out what is the best scenario.

Anytime you can buy something with someone else's money and it doesn't cost you anything? It's the right call for responsible borrowers.
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Re: Any reason not to take 0% financing on New Car when have Money to pay Cash Now?

Post by Bogle7 »

Crazy as it sounds, taking the loan will likely raise your credit scores.
Paying cash won’t.
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Re: Any reason not to take 0% financing on New Car when have Money to pay Cash Now?

Post by bertilak »

Bogle7 wrote: Mon Nov 29, 2021 9:30 pm Crazy as it sounds, taking the loan will likely raise your credit scores.
Paying cash won’t.
Yup.

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Re: Any reason not to take 0% financing on New Car when have Money to pay Cash Now?

Post by mesaverde »

iamlucky13 wrote: Mon Nov 29, 2021 2:24 pm
ScaledWheel wrote: Mon Nov 29, 2021 1:06 pm You'll most likely get a better price paying in cash vs. with financing, so the financing is not really 0%. That being said, I'm not sure what types of price breaks dealers are offering because car markets are not normal at the moment.

I'd personally take the loan unless its price is a very small fraction of your net worth, then I'd probably consider the loan not worth the trouble.
I've not been able to get price breaks from dealers in exchange for not taking the loan. In fact, last time I tried to discuss pricing with Ford, they were offering a price discount only if I took their loan - If I remember right, it was 0.9% APR on the loan, and $1,000 incentive for financing with Ford. There was no incentive for paying cash.

I don't know how this works out on their end. Below market rate loans should have some form of cost to them.

Regardless of how the accounting works, it seems to have become common for dealers to very strongly incentivize financing and effectively discourage paying cash.
It may seem strange to most Bogleheads, but most Americans are unable to buy a new car (and often a used car) with cash.
The reason dealerships offer 0% loans is because they know that consumers are ___ times more likely to buy a car (that they often cannot afford because they don't have the actual cash to pay for it instead). Therefore dealerships are ___ times more likely to make a profit.
Last edited by mesaverde on Tue Nov 30, 2021 6:29 am, edited 1 time in total.
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Re: Any reason not to take 0% financing on New Car when have Money to pay Cash Now?

Post by mesaverde »

Before the pandemic I bought a Honda with a 0% loan (but had cash to pay for it in full).
After making automatic payments for a little less than a year, I decided I wanted to increase my cashflow and decrease the number of payments in my life to simplify things. So I paid the loan off all at once.
As others have said, in today's inflationary environment it may be wise to take the loan. In that way you retain two options (keep loan or pay it off) and can pay the loan off at the time of your choosing.
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Re: Any reason not to take 0% financing on New Car when have Money to pay Cash Now?

Post by mr_brightside »

take the loan if you're comfortable with it

---------------------------------
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Re: Any reason not to take 0% financing on New Car when have Money to pay Cash Now?

Post by PatrickA5 »

I've taken out loans in order to get a better deal, but always paid them off after a month.

If there is no incentive (other than 0%), I'd probably just pay cash. Sure, you could stick in a HY savings account and make maybe $8 per month after taxes, but it's just not worth it to me to mess with it. And, as someone above pointed out, I'd have to go to the tag agency and get the lien off my title which would, in my state, cost $50.

I play the bank bonus / CC game quite a bit, so it's not like I'm adverse to saving a few bucks, but it would have to be more $$ to interest me.
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Re: Any reason not to take 0% financing on New Car when have Money to pay Cash Now?

Post by psteinx »

Primary potential downsides to a 0% car loan:

1) Need C&C insurance. If you wouldn't otherwise have this, factor this at maybe 30% of the cost of the extra coverage, as that seems to be the loss ratio. i.e. If your insurance company charges you $200 extra for this, they're likely to payout about $140 of that in claims, and so you're losing, on an expected basis, ~$60. There may be a slight additional loss to you, in that making a small claim may increase your insurance cost in the future, for at least a while.

2) Hassle of making ~36 payments instead of 1.

3) Small chance you mess something up or something otherwise goes awry, and you get hit with some penalty super-high rate. My memory is not perfect on this, but I *think* some of these are really harsh - miss a payment and the super-high rate is charge in arrears or something like that.

4) Psychological factors, good or bad, that you can hopefully assess on yourself.

5) Impacts on credit score (maybe good or bad), if that matters to you.

6) Maybe hassles (and, per another poster, non-trivial costs) in handling the title and potential future re-titling/release, with a lien-holder. May make a sale (especially private party sale) a little more complicated, if you sell it while the lien is still there, and some private parties may not want to deal with that.

7) Impacts on rebates/discounts. This is an obvious one, ofc. Could be good or bad (lose or gain rebates/discounts by financing).
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Re: Any reason not to take 0% financing on New Car when have Money to pay Cash Now?

Post by Carguy85 »

What do you plan on doing with the cash? Buy stocks?... do you really want to take out a loan to buy more stock? Buy bonds?...how much after tax interest in 3 years time do you plan on making with this option and is it worth the added complexity to you? Neither of the above sounds like an excellent idea. I suppose you would have more cash on hand “just in case”. If that makes you feel better then maybe your “emergency” fund wasn’t sufficient enough to begin with? Anyhow, this is not really a financial product for bogleheads... it’s really more for making it easy for those who can’t really afford a new car (vast majority of society) to buy a new car. My vote is to not play silly games. Cut a check and keep life as simple as possible.
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Re: Any reason not to take 0% financing on New Car when have Money to pay Cash Now?

Post by fishandgolf »

We just purchased a new 2021 Chevy Blazer. There was no cash incentive so we paid 1/2 with cash, maxed out the credit card for the 2% rebate, then took out a loan for the balance and got a $500.00 rebate.

Finding the vehicle that we wanted was a PITA. Local dealers had nothing.... absolutely nothing. We were ready to order a new 2022 when this one popped up. Had to drive an hour to get but it had everything we wanted. :sharebeer
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Re: Any reason not to take 0% financing on New Car when have Money to pay Cash Now?

Post by hairybeast »

For our recent car purchase, we were prepared to pay cash but financed for the $1,000 rebate. There was no prepayment penalty and I planned on paying it off within a couple of months. After all of the negotiations where we indicated we were paying cash, we got to the rebates portion. They mentioned the rebate for financing and I confirmed there was no prepayment penalty. We could pay it off the next day the sales guy proudly announced.

Sales guy had to "work" with finance to get us a "great" rate of 4%. My credit scores are over/close to 800 and only have mortgage so debt-to-income is low. I just took the loan and paid it off as soon as it was discoverable online. I would have held it for a few months to let them make a little off of me, but when they came back with that rate I got a little peeved so I just paid it off. I paid $20 or so interest and have a couple of credit pulls for $1,000 so it was a good deal in the end.

We put the max downpayment ($3,000 I believe) on our 2.5% cashback credit card.
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Re: Any reason not to take 0% financing on New Car when have Money to pay Cash Now?

Post by chuckwalla »

So, car loans don't have early payoff penalties? Asking because I've never done it before.
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Re: Any reason not to take 0% financing on New Car when have Money to pay Cash Now?

Post by stoptothink »

PatrickA5 wrote: Tue Nov 30, 2021 11:17 am I've taken out loans in order to get a better deal, but always paid them off after a month.

If there is no incentive (other than 0%), I'd probably just pay cash. Sure, you could stick in a HY savings account and make maybe $8 per month after taxes, but it's just not worth it to me to mess with it. And, as someone above pointed out, I'd have to go to the tag agency and get the lien off my title which would, in my state, cost $50.

I play the bank bonus / CC game quite a bit, so it's not like I'm adverse to saving a few bucks, but it would have to be more $$ to interest me.
With inflation where it's at and I-bonds at 7.12%, it's a very intriguing time to go through the hassle. If it weren't for saving us $1500 on the total price of the vehicle for taking financing, I would have just cut a check last time. This time, IMO it's a no brainer unless they offer a significant discount for cash.
stoptothink
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Re: Any reason not to take 0% financing on New Car when have Money to pay Cash Now?

Post by stoptothink »

chuckwalla wrote: Tue Nov 30, 2021 3:48 pm So, car loans don't have early payoff penalties? Asking because I've never done it before.
I think it depends. Salesman tried to tell me it did with my last purchase, but he was lying.
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