Why I Financed My Car Purchase

NOT my car
NOT my car

About two years ago, I did what many financial gurus would tell you is the worst financial decision you can make: I bought a new car. Now, we could sit here and argue back and forth all day about why I chose this route over getting a used or certified pre-owned car, but I think the decision was right for me at the time. (I’m sure this will be the topic of future posts as well!).

NPR recently reported some statistics which showed that Americans are taking on riskier and more expensive loans to finance fancier and more expensive cars. Taking out a car loan, even when you can buy your car outright with cash, isn’t necessarily a bad financial decision. Here’s why I chose to finance my car and put my money elsewhere, instead of on a big down payment.

First off, my money was better spent elsewhere. When I purchased my car (about $12,500 after my trade in and other incentives), I still had about $25,000 in student loan debt. The average interest rate on these loans hovered just above 6% over a 10 year term.  The car loan I got through the manufacturer was about 2% for a 5 year term. Even if I could afford to buy the car with cash (I couldn’t), it made more sense to pay down my higher interest loans first.

It also made more sense to finance because it would improve my credit score. We recently wrote about how your credit score is determined and ways to improve it. One aspect of your score is the diversity in the types of credit you hold. Adding a car loan will help improve your score in that regard. This is, of course, assuming that the you can comfortably fit the car payments into your budget. Keep in mind, the amount of debt you carry can actually have a negative impact on your score. Make sure you can balance the loan with your existing payments and are not taking on an unreasonable amount of debt.  You don’t want a new car to hurt your score more than it helps.

heres-the-keys

The final reason I financed my car was the great dealer incentives I received. The dealership I purchased through offered $1500 cash back for financing through them. They also offered an additional $400 off of the principal balance as a recent college graduate. For those of you doing the math at home, that means the incentives they offered were worth more than the total interest I would pay over the life of the loan! Additionally, the dealer offered perks such as free state inspections and the occasional free oil change.

Some people may not agree that financing a car is ever a wise financial move. And maybe it doesn’t work for everyone. If you cannot afford the payment, it is always better to find something within your budget. Give us a shout out in the comments with your thoughts. Do you agree with what I did? Did you buy a new or used car after college? What has and hasn’t worked for you?

4 thoughts on “Why I Financed My Car Purchase

  1. Millard Fillmore April 9, 2015 / 12:58 AM

    CARS ARE NOT INVESTMENTS! According to Edmunds.com, you are going to lose about 21 percent of your car’s value in the first year alone. The second year isn’t much better, as they disintegrate another 15% or so in value. After two years, you have just vaporized $4,500 into the thin air of depreciation. That is $2,250 a year or $188 per month (umm like 90% of your monthly payment is being flushed down the proverbial toilet). Holy smacks! What were you thinking?!

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    • Michael April 9, 2015 / 4:02 AM

      I NEVER said this was an investment.
      Also, it’s tough to see how I’m “vaporizing” money or “flushing it down the…toilet”. I have a reliable, efficient means of travel which I need to get to and from my job every day. I also get the peace of mind of not worrying about unexpected maintenance. That’s what I’m getting I’m return for my payment every day.
      I don’t plan on selling the car for at least another 8 years, so depreciation doesn’t matter to me. I also don’t know how you calculated $4500 for that value, but my car is currently worth more than the remainder of my loan, so I’m in a good spot financially.

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  2. Bruce April 9, 2015 / 7:32 AM

    How much additional gain do you really get with a car loan when you are already building credit with existing student loans and paying off a credit card every month to take advantage of their rewards programs?
    Going off of the first post, a significant amount of value is lost in the first few years through depreciation. It would make more sense to purchase a lightly used/certified preowned car at a much lower price compared to the new car price so that you do not pay for the significant depreciation if you insist on buying a new car. With regular scheduled maintenance most cars will perform with high reliability. Sure it costs more to maintain but it is still less than the monthly payments on the car loan. The money saved for this could be saved for better investments or be put towards additional payments towards student loans. I agree building credit is important but with the regular payments you are making, I think it is much more important to allow your money work for you in paying of current debts and saving much more money in the long run.
    The temptation of a new car is very high, I would sure like to go out and get a nice Cadillac but my other financial goals are more important than a shiny car. Still, I would not spend the extra for a new car when an equally reliable car can be purchased for thousands less and with only several thousand miles on it.

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    • Michael April 9, 2015 / 9:15 AM

      First I just want to say I’m definitely not advocating everyone buy a new car, just that they finance a car purchase if the interest rate and terms are agreeable and within their budget. Any large purchase such as a car or home must be considered on a case-by-case bases, and making blanket statements about these purchases is usually very difficult.

      That being said, in my case I was deciding between new and certified pre-owned. When I shopped around, I found all the CPO cars to be either more expensive models (limited vs base model) or higher mileage than I wanted (over 40,000). This meant that getting anything in the 20,000 mile range ended up not being much cheaper than just buying a new base model car, assuming I could negotiate a good price on the car.

      Also, I mentioned dealer incentives. Dealers would usually rather sell you a new car than a used one, so they’ll try to give you a good price and offer you more on a trade in to get you in that car. As long as you play the haggling game with them and do your research ahead of time, it can pay off big time. They make their money on maintenance plans and warranties which they will try very hard to sell you.

      In my specific case, I shopped around, held out for a great price, negotiated the value of my trade in, and walked away with a low payment on a good, reliable car which will easily last me 10 years. Though I could have afforded it at the time, I definitely did not buy a Cadillac. Like I said, I paid $12,500 after trade in and other offers. I consider that to be very reasonable for a new car finance at 2%.

      That’s just me though. I don’t want to deal with unexpected maintenance or unreliability that can come with a used car, and i was willing to pay a premium for that. In the end, I saw value in getting a new car for that reason. Many people would take a different approach and buy new. In the end, I want my car to start every morning and get me safely to work, and I was willing to pay a little more for that.

      In terms of credit score, it probably won’t bump your score more than 10-20 points up. However, sometimes, that’s all you need to get a lower interest rate on a mortgage or personal loan.

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