Time to Buy a New Car - Should You Pay Cash or Take Out a Loan?

By Eric Jonitus

When it's time to buy that new car one question that always comes up seems to be: should you pay cash or should you finance the car? The best way to answer the question is to run the numbers. So we will use a couple of examples for the car buyer to help paint the picture.

First of all, rates and terms of loans always vary and these factors will determine your decision. In addition, the after tax rate of return on the cash you would use to buy the car is important. Here is a simple example the car buyer can use:

You are going to buy a new car and the amount needed is $30,000. Assume you want to take out a loan. Current rates are around 6.5% as of this date. If you use a 48 month term, your total car cost is $34,149. So, what would you have to do with the $30,000 cash to make taking out that loan advantageous as opposed to spending it all on that car?

Most investors would agree that an after tax return of 7% is obtainable over 48 months. If you use this figure and invest the $30,000, at the end of 48 months the money compounds annually to $39,662. The car buyer/investor comes out ahead taking out the loan and investing the cash! ($39662 – $34149= $5513.00).

If you run these examples with different rate scenarios, you will see that car loan rates have to get pretty high before this strategy no longer makes sense!

One last bit of advice. To make this scenario seem even more attractive, consider using a home equity line to pay for the car. Now the rate is tax deductible. Just make sure you compare the after tax rates of return on dealer loans with the current rates on lines of credit against your home before you make your ultimate decision.

We are a free classified website for buyers, sellers and dealerships in the Chicago and Chicago land area. To learn more, please visit http://www.chicagolandauto.com