Should You Pay Cash or Finance a Car?

Last week I mentioned that in accommodating our growing family, my wife and I decided to sell one of our cars. We have started the process of looking for an SUV that will be big enough to carry a baby and our 100 pound dog. Before starting the car buying process, I need to decide if I am going to pay cash or finance the car. For me the decision is a pretty simple one.

Most people will tell you how carrying debt is a bad thing and you should be debt free as much as possible. While this is true for the most part, I don’t buy into it 100 percent of the time. I have paid cash for every car that I have owned, but this time will be different. The reason is because I can make a profit on the deal.

We are looking to buy a mid-sized SUV and the cost will be somewhere in the $25,000 vicinity. Both my wife and I have excellent credit scores, so we qualify for the best rates. Currently almost all car manufacturers offer a 0 percent APR to qualified buyers. Outside of that, I have found quite a few credit unions that offer rates at 1.99 percent.

Take this for example, let’s assume that I am going to borrow $25,000 at 1.99 percent over five years. After running these numbers through an amortization schedule calculator I figure that I would be paying $438.08 per month and my total interest paid over the five years would be $1,285.08.

Now to make this work I need to figure out what I am going to do with the $25,000 in cash that I have on hand. I could do one of two things. I could invest it in different stocks and mutual funds or I could place it in a long term CD. The stock market can be very volatile, so I’d rather go for the safe bet and place the money in a five year CD.  After doing some research through BankRate.com, I found five year CD rates for 1.85 percent at CIT Bank or 1.74 percent at Ally Bank.

Since I now know that I can invest my $25,000 in a five year CD and earn 1.85 percent, let’s figure out how much interest I will have accrued at maturity. By using a compounded interest calculator, I figured out that I will earn $2,422.76 after five years. That means that instead of using the $25,000 to pay cash for a car, I would make a net profit of $1,137.68.

This is a good example of how you make a little extra cash in ways that you might not have thought possible. I realize that some people just don’t want to take on any debt and that is completely fine. Normally I wouldn’t either, but as long as you’re not looking to buy a home in the next couple of years, taking on a little debt to make a profit isn’t such a bad thing.

For those of you who are anti-debt is this something you would consider if you knew you’d make $1,000+?

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