Automotive

When is it better to simply buy outright a new car, rather than finance it with a loan?

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  • Aug 6th, 2021 11:16 am
[OP]
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Jun 5, 2010
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When is it better to simply buy outright a new car, rather than finance it with a loan?

I recently moved, and in doing so increased my mortgage. With this, I currently have mortgage funds available to use to finance a small new vehicle. My car is on it's last legs, and the cost to repair far exceeds it's current value.

I prefer to buy new, and plan to keep the car long term.

I assume the thought process is that this is money I could either use to pay off a car, or put it back to pay off some of my mortgage. Is the math as simple as thinking the money should pay off whichever is at a higher interest rate? Like if I found a vehicle at 0% financing, would I be better to put the money back into my mortgage? Or if I found one at like 3%, would it be better to put it all towards the car?
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Aug 30, 2020
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YEG/YYZ
No such thing as 0% financing because you'll lose out on a cash bonus, usually at least $500 or sometimes up to $2k or more.
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Sep 1, 2004
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CanadianConsumerYEG wrote: No such thing as 0% financing because you'll lose out on a cash bonus, usually at least $500 or sometimes up to $2k or more.
Not cut and dry. Subaru is giving 1% 36 months or $1000 off on Forester. In OP's case, I would take the car loan and drop $40K into the mortgage (assuming the mortgage is new and early in amortization period).

Assuming OP is on $500K mortgage and 25 year. At $10K/year extra lump sum will save around $4K in interest during the 1st 5 year term.

Or if OP will put $40K and reduce mortgage to $460K. He will save $8K during the 1st 5 year term.

So why would I pay cash for a $40K car to save $1K when putting it into mortgage could save $3-$7K (after paying $1k interest on car)?

* mortgage interest saving will reduce if a) smaller mortgage (duh) and b) toward tail end of the amortization period. If OP is in his final 10 years of the mortgage, then it's really a flip of a coin.
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Xtrema wrote: Not cut and dry. Subaru is giving 1% 36 months or $1000 off on Forester. In OP's case, I would take the car loan and drop $40K into the mortgage (assuming the mortgage is new and early in amortization period).

Assuming OP is on $500K mortgage and 25 year. At $10K/year extra lump sum will save around $4K in interest during the 1st 5 year term.

Or if OP will put $40K and reduce mortgage to $460K. He will save $8K during the 1st 5 year term.

So why would I pay cash for a $40K car to save $1K when putting it into mortgage could save $3-$7K (after paying $1k interest on car)?

* mortgage interest saving will reduce if a) smaller mortgage (duh) and b) toward tail end of the amortization period. If OP is in his final 10 years of the mortgage, then it's really a flip of a coin.
True. Will definitely need to crunch numbers to see what is better. My post was just simply stating that "0% financing" is just a more palatable way for consumers to accept a car loan.

If we want to really go in depth (and we're just talking about a car loan only), we can even argue that losing out on a $500 cash bonus is worth it, and to stretch that 0% financing as long as possible, if that means keeping the rest of your money in an index fund giving 6-7% over that financing period, which will probably net more money than the $500 initial savings.
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Feb 8, 2010
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Skilas wrote: I recently moved, and in doing so increased my mortgage. With this, I currently have mortgage funds available to use to finance a small new vehicle.
It is generally better to get mortgage to buy car with cash. Mortgages has lower interest (A-lender).
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billy_z wrote: It is generally better to get mortgage to buy car with cash. Mortgages has lower interest (A-lender).
Depends on the amortization. The sample I have shown above, you are effectively paying 7% for $40K even if your mortgage rate is at 2.44%

If you are close to paying off your mortgage, (IE last 5-10 years), then yes it may be cheaper.

The only time where paying cash for cars is cheaper vs paying down mortgage is if you are buying cars that has shitty borrowing rates (Used cars, exotics, high end cars).
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Jan 15, 2017
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The rate of interest is only one input that determines your overall costs. Length of the loan and additional fees are also inputs.

For a $40,000 auto loan:

With an interest rate of 2.99% for 96 months you will pay $5,024 in interest,
3.99% for 60 months and you will pay $4,188 in interest,
4.99% for 36 months and you will pay $3,151.63 in interest.
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skeet50 wrote: The rate of interest is only one input that determines your overall costs. Length of the loan and additional fees are also inputs.

For a $40,000 auto loan:

With an interest rate of 2.99% for 96 months you will pay $5,024 in interest,
3.99% for 60 months and you will pay $4,188 in interest,
4.99% for 36 months and you will pay $3,151.63 in interest.
And if you're good at investing, that 96 month loan even though it's about 1k more in interest is a way better deal than the 60 month finance. Should be able to take the difference in monthly payment between the two and make more in returns over the 5 years in the market.
[OP]
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Thanks for the advice. It looks like it can go either way.

Yes, I have just started my 25 year mortgage.

It's true that with mortgage rates still low, it's hard to imagine rushing to pay off such low rates, when you should be able to use the same amount of money and invest it for much greater returns. But likely, rates won't stay low for too much longer. And that would change the answer. But that is a whole other conversation.
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Skilas wrote: It's true that with mortgage rates still low, it's hard to imagine rushing to pay off such low rates, when you should be able to use the same amount of money and invest it for much greater returns. But likely, rates won't stay low for too much longer. And that would change the answer. But that is a whole other conversation.
Yes we are seeing historically low interest rate. But understand that 25 yr amortization incurred more interest payment than the typical 2-2.5% suggests.

Cash vs loan is really depends on how confident you are in getting returns with your cash that out performs the loan interest/cash rebate.

But you did say you are buying a small car and probably under $30K. Cash vs Finance also depends on how much discount you can pushed on the model you picked. It's not unheard of that you can get the max discount on finance and then pay it off about a month of 2 into the loan.
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CanadianConsumerYEG wrote: True. Will definitely need to crunch numbers to see what is better. My post was just simply stating that "0% financing" is just a more palatable way for consumers to accept a car loan.

If we want to really go in depth (and we're just talking about a car loan only), we can even argue that losing out on a $500 cash bonus is worth it, and to stretch that 0% financing as long as possible, if that means keeping the rest of your money in an index fund giving 6-7% over that financing period, which will probably net more money than the $500 initial savings.
There are times when 0% financing is offered & there is $0 cash bonus for buying with cash, in which case its a no-brainer to go with the financing & use your cash funds for something that can make you money. Why they offer no cash bonus in these instances, I have no idea
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May 16, 2017
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Xtrema wrote: Depends on the amortization. The sample I have shown above, you are effectively paying 7% for $40K even if your mortgage rate is at 2.44%

If you are close to paying off your mortgage, (IE last 5-10 years), then yes it may be cheaper.

The only time where paying cash for cars is cheaper vs paying down mortgage is if you are buying cars that has shitty borrowing rates (Used cars, exotics, high end cars).
Open mortgage or HELOC (which is a form of mortgage) that you make <additional> payments equivalent to whatever term loan you care to compare to.

Just adding to a conventional mortgage with amortization longer than a typical car loan would generally not be economically rational.
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robsaw wrote: Just adding to a conventional mortgage with amortization longer than a typical car loan would generally not be economically rational.
Yeah, but it seems to be there is a misconception out there that a 2% mortgage is cheaper than a 4% car loan without factoring in amortization.
Newbie
Apr 12, 2013
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Perhaps I'm missing the math here, but dont get why a 2% loan wouldnt be cheaper than 4%?
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GW1204 wrote: Perhaps I'm missing the math here, but dont get why a 2% loan wouldnt be cheaper than 4%?
Because the 2% loan is paid out over 25 years, instead of the 4% loan being paid out in (typically) 4 years.

The thought of paying for a car through a mortgage just makes me shake my head. Yeah, some people are disciplined enough to make a lump sum payment when they sell the car, but most people are going to take the selling price of the old car and use that as the down payment on the new car. So in the end, you could end up paying for your car for many years after you sold it. No matter what the interest rate, paying for something you no longer own just feels wrong.

I’d be much more inclined to use a HELOC to finance a vehicle. But what do I know. Do the math in a spreadsheet, know your own financial gotchas, and go from there.

C
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Apr 12, 2013
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I see thanks for clarify. I was just thinking to myself math wise this doesnt add up, comparing annual cost, 2% is always cheaper than 4%. But yes agreed physiological consumers may not make the best finance bet.
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Oct 25, 2020
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If you can get 0-1% finance I'd probably opt for that.

Most dealers prefer people who finance over cash customers. They can nickel and dime you in that stage of the process. Just be sure to say no to their gold paint protection plan and other list of add ons.
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GW1204 wrote: I see thanks for clarify. I was just thinking to myself math wise this doesnt add up, comparing annual cost, 2% is always cheaper than 4%. But yes agreed physiological consumers may not make the best finance bet.
Read up on how amortization works. Especially why CMHC no longer cover 30 year amortization.

The TLDR version is, the longer the amortization, the lower the monthly payment but you owe the bank more interest, especially the 1st 10-15 years of amortization period.

We as Canadian can't claim mortgage interest against income come tax time for primary residence unlike the US. So there is really no incentive to make banks/lender richer.
Newbie
Apr 12, 2013
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Amortization affects your monthly payment amount but your interest cost is the same. Yes having a longer term on the loan means you pay more interest in total (no-brainer you'd pay more interest if you had the loan for 25 years rather than 5 years). I'm just speaking from annual cost of borrowing, apples to apples, 2% is cheaper than 4%.
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T.O. Lotto Captain
You add purchase price + borrowing cost.

Then compare

Purchase price - any cash incentives

See which one is cheaper.

One caveat… a disciplined well diversified investor can easily average 10% annual gains over the long term. So if youre that type, you lose opportunity cost. In this case financing the car makes more sense.

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