Is borrowing money to buy a car smart or is it something you do only when you “have no other choice”? Everyone looks at buying cars, and having a car note, a little different.
For me, the first time I wrote a check to buy a car was an incredibly cool feeling (although there is definitely some pain that goes with writing a big check like that). :-) It was a very important turning point for me on my path toward financial independence. I write about that moment in my post Buying Your Next Car with Cash.
That post created a number of different comments in several LinkedIn forums. (Click here to connect with me on LinkedIn).
Lisa asked this question:
“Aren’t car loans pretty cheap? I’d rather keep my liquidity.”
Her response is a very common one. It is basically saying that if I can get a low interest rate then why shouldn’t I keep my cash and use the “cheap” money.
Here is the response I provided to her question:
“Great question Lisa. Here are my thoughts on that question.
- I agree with having liquidity. I like the Dave Ramsey approach of always having at least 3 to 6 months of cash on hand.
- If buying a car with cash would drive a person’s cash to zero, my assumption is they are probably spending too much on the car because they don’t have enough money.
- Buying the car with debt means you pay the purchase price plus interest. Buying with cash means you just pay the purchase price. The second option is the one that is the cheapest. And you don’t have any monthly payments.
- I’m a debt free kind of guy.
- Most people end up buying more car when they don’t have to feel the pain at the time of the purchase. You get the benefit (the nice car) and the pain (parting with the cash) happens over time and in small amounts. This is a big killer of a person’s net worth over time for many people.
- “Cheap” financing can usually be converted into some other form of benefit from the dealer.
- I don’t subscribe to the view that it is wise to borrow money and invest it as the path to creating wealth.
- In general, I think a commitment to saving money in order to buy things pays huge dividends for a person throughout their lifetime.
- I am also a pay the house off fast kind of guy.
- I believe in the Dave Ramsey view that personal finance is 80% “personal” and only 20% “finance”. Trying to play low rates is the 20% part of personal finance. Making smart decisions and saving for purchases is the 80%.
I recognize most people view things a little different than I do. That’s OK.
I like my personal balance sheet to be heavy on assets (especially income producing assets) and zero debt. Thank you for joining in the discussion.”
Maybe the next car you buy should be paid for with cash. Give it some serious thought.
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