Car Finance: The Math on Why You Should Pay Cash for Your Next Car

Quite often, I get emails from readers asking about car finance. What is the “best” way to purchase a particular car that they want? They have their eye on some new model and want me to essentially tell them that it’s okay to purchase it.

When Is It Ok To Finance A Car?

I rarely do. Taking out a loan for a car is only a good move if (a) you’re buying your first or your second car and absolutely need one today to commute to work – and even then, you should be buying a used one or (b) you have enough cash to buy the car you want but you’re offered 0% or extremely low financing, making it cost-effective to take out the loan and then sit on your investment (a pretty rare case, but one we found ourselves in recently).

We fully own both of our automobiles and don’t intend to replace either one of them for years. Of course, we’re slowly saving up for their replacements at a reasonable rate, but we’re not paying interest – interest is working in our favor.

Car Buying Scenarios: New Car vs. Used Car

Let’s run the math so that you can see, in real dollars, how much is saved by paying cash. You have no cash at all, but you need wheels. What do you do?

Option 1 – Buying New Now

You go to the dealership and take out a $25,000 loan on a new car. That loan is offered to you at 6% for five years, meaning you have a monthly payment of $483.32.

You drive this car for seven years. Each month, you pay $483.32 as a car payment. After five years, you own the car, but you’ve paid out $28,999.20 for the loan – $3,999.20 of that being pure interest. You then start saving $483.32 a month for your next purchase – after two years, your savings account totals $11,715.68 ($11,599.68 in savings, plus $16 in interest).

At the seven year mark, you trade in your used car for $6,000 in trade in and also make an $11,700 down payment on your next $25,000 car. You’re still borrowing $7,300 to buy the car, which means monthly payments of $141.13 over the next five years, totaling $8,467.80 – $1,167.80 of that being pure interest.

At this point, you also need to save $285 a month so that you have $25,000 in cash ready for your next car purchase at the fourteen year mark – seven years after this one. $23,940 of the savings will be cash and the rest will be interest – $1,104.64.

So, after all of this, you wind up paying out $73,006.68 over the course of these fourteen years and find yourself with a new car at the end of it.

Now, let’s look at fourteen years starting in a different fashion.

Option 2 – Buying Used Now

You go to the dealership and take out a $5,000 loan to buy a used car that will work for five years. You make monthly payments of $483.33 each month. For the first year, $430.33 of it goes towards the loan payment, while the other $53 goes into savings. For the remaining four years, the whole $483.33 goes into savings.

At the five year mark, you have just shy of $25,000 saved and the trade-in on your junker puts you over the top. New car time, paid for in cash. You then start saving for your next new car in seven years, saving $285 a month.

At the twelve year mark, you replace that car and keep saving the $285 a month. At the fifteen year mark, you have a three year old car and $10,414.67 in savings.

Over the course of all of this, you’ve actually only shelled out $63,199.80 out of your pocket for these cars.

Comparing The New Car vs Used Car Scenarios

Here’s the real take-home message here: simply by buying a low-end used car at first in the second scenario and driving it until the owner could pay cash on a new car (at the five year mark), that owner saves $10,000. In other words, choosing to take out a loan for a new $25,000 car means that $10,000 is simply evaporating out of your wallet.

Remember that from here on out, both scenarios are going to be saving the same amount of money in their savings account to keep up with future car replacements, which essentially means that the money is a car payment.

I like to look at it this way: the owner of the second option is essentially paying himself $2,000 a year to drive a used car instead of a brand new one.

There are a few additional things to point out as well.

First, the insurance costs in the second scenario are lower as well. For those first five years, the person owns a used car which will have lower insurance costs than a new automobile.

Second, considering used cars in your buying decision can save you money. When you run the numbers on your car purchase, always include used cars, particularly ones from model years with a good reputation. Sometimes, those cars can save you significant money over the long haul through insurance savings, plus they allow you to retain some of your cash savings for your next car purchase.

Finally, having the money in the bank puts you in control. If you can buy the car in cash, you’re no longer worrying about your credit history or about whether a bank will offer you a good rate. You have your cash, you find the best deal, and you buy. Simple as that.

I’ll say this much: every time I run the long term numbers with regards to paying cash or taking out a loan for a car, I further reinforce my own plan to never again borrow a dime for a car (unless, as I mention above, I have the money in an investment that offers a better guaranteed return than the interest rate of the car loan).

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  1. Alison says:

    Where is the cash value for the bumper to bumper warranty on a new car (first three years), and when a used car needs repairs or the older new car (out of warranty) needs repairs.

    That takes money away from your future car savings, and with a lemon, or non-optimal used car scenario that could keep you in a hole.

    For my new car with warranty, i was guaranteed that the only payment i would need to make to that car was for the loan. That security in budgeting was highly valuable.

    Otherwise, wonderful calculations that really spells out what a car budget and savings can do for you. Thanks.

  2. Marsha says:

    We just bought a new car with cash and absolutely loved doing so. No financing, no trade-in–we were in total control. It’s a lot easier to figure out the best deal in this situation.

    Low- or no-interest financing can be a good deal, too, but frequently you must forgo a cash rebate to get the financing. We saved $2500 by paying cash, which is probably more than our money would earn in the next few years in a low-risk investment. And since we have no car payments, we can sock that $600/month away to build our savings back up.

  3. Courtney20 says:

    “a used car that will work for five years” – there are no guarantees that a used car will last X amount of time. At least with a new car you get a warranty (as Alison mentioned).

    But my main beef with this whole scenario is, why only 7 years? With average driving that’s less than 90,000 miles. Cars can easily get at least 120K; I just traded mine in with 160K. Why not buy new and drive for 10-13 years (no car payments for 5-8 years = $29-46K), instead of getting a $5000 car that will have no trade-in value five years later (if it makes it that long).

    The problem is not buying a new car; the problem is not driving it for a sufficient amount of time after it’s paid off. We buy new and drive them into the ground.

  4. Hannah says:

    Not to pick on Courtney20, but lately I have talked to a few people who insist that financing a new car is worth it because they will drive it into the ground. But if you finance the new car, you’ll be losing money on both interest and depreciation of the car. Don’t convince yourself that if you’re the first person to own the car, it will stay in such perfect condition that you’ll recoup those losses. Cars age, but at least if you’ve bought something you can afford you’ll be able to pay for the repairs when and if they happen.

  5. Courtney20 says:

    I did buy something I could afford – and it wasn’t $25,000 either (another problem with the assumptions). I also never said buying new would recoup the losses; you will NEVER recoup the loss on a car because it is a depreciating asset. What you can do, however, is buy new, take care of the car and drive it long after it’s paid off – it’s basically scenario 2 in reverse, but with the certainty of how the car was treated during the first $20K of depreciation.

  6. Jackie says:

    Why are these comparisons so often at the extremes. A $5000 used car only reliable for 5 years vs a brand new $25,000 car. Why not a middle ground, 2 year old car for $15,000 that will last nearly as long as the brand new car.

  7. Tracy says:

    Having bought both new and used, I really hope I never have to buy used again. The peace of mind and lack of repair bills for the new car were well worth it.

    My current car I bought new and paid off and like Courtney20, I plan to keep driving it for far over the 5-7 years in the above scenarios.

    Which I think is my own personal idea on buying a car – you don’t have to buy the ‘maximum’ car you can afford … and you don’t need all the bells and whistles. I far, far would rather buy an inexpensive new car than a more luxurious used car.

  8. Telephus44 says:

    I really dislike these articles because you can pick whatever set beginning assumptions you like and make math will work out in your favor. What if you picked a new car that only cost $13,000 and a used car that cost $8,000? What if you factored in repairs?

    Personally, I find have found that for us is buying a used car with 25K-30K miles on it, usually between $10K-$13K and driving it until it becomes too expensive to maintain is about worth it for us. Usually I can get 7-8 years and/or 120K miles out of them.

  9. Courtney20 says:

    Jackie & Tracy – I completely agree. My brand new car was under $18K out the door, including a 6-year 100K warranty. I got the same model car I was replacing, so I’m very confident of my ability to drive it for at least 10-11 years. And our insurance only went up $20 a month (which I believe will be offset by the improvement in gas mileage). Why not compare buying a Mercedes with buying a $500 junker every year, if we’re going to go to extremes? Like Tracy, I prefer to “purchase” a bit of peace of mind. I also hate car shopping so I try to do it as infrequently as possible.

  10. This is getting contentious! I think the new / used camps will never agree. Jackie probably has the best idea for compromise. My personal experience has been get one for $5,000 with less than $50,000 miles. They are not easy to find, but they are easy to afford and last a very long time with very little repairs or maintenance.

    Typically, a car that depreciates enough to be valued at $5,000 and still have such low miles has been gently handled, perhaps by a retiree.

    I cannot bring myself to pay interest on something that already costs. A car is not an asset. It’s a liability. It loses money every year, no matter what you do. You’ve got a better shot calling the lottery an investment. At least then your losses average only 50%. On a car, your losses will eventually be 100%.

    I can see the point of those who feel they are paying for peace of mind. The car is most likely to last 10 years if you drive it into the ground. That brings the extra cost to about $1,000 per year or $80 a month. $20 a week doesn’t seem like a lot to pay for peace of mind.

  11. Courtney20 says:

    Jessica – I don’t think it’s fair comparing the lottery to a car purchase. The car is not an investment, but it still has intrinsic value in terms of comfortable and safe transportation, allowing me to commute to my job and visit friends/family, regardless of what the actual dollar value may be. I agree with your last point – if we take the full term of our loan to make payments (and we almost certainly won’t) and drive the car for 10 years, we will have paid less than $7 a week (in interest) for that peace of mind – that, to me, is worth far more than ‘gambling’ on a used car.

    Incidentally my house has lost value every month for the last four years too. I still pay the mortgage :-)

  12. prodgod says:

    It’s all fine and good to recommend against ever financing a car purchase – that is unless you find yourself in sudden need of a car and not enough savings to pay cash at the moment. Some of us still have a few more years of digging ourselves out before we’re in such an enviable financial position, hence, the reason we’re reading this blog. Besides, my car is only 7.5 years old. I certain hope and expect to get many more years out of it.

  13. Andrew says:

    My first used car was 18 years old(made same year I was born), I bought it for $280(after currency conversion, I’m not in the US), it had a few problems, costing about $100, radio was stolen and replaced by insurance. Got 3 years heavy use out of it(I did 250k+ km), sold it when I immigrated(not to US) for more than $380. I was lucky with the radio replacement, but still, profiting on owning a car, go me!

    The third alternative is to go without a car. It’s great, I cycle 8 miles to work, so I keep fit and avoid petrol + insurance + MOT + car tax + repairs + car cost. I don’t know how that works with US public transport though. I’ve heard horror stories…

  14. Trent – the only thing missing is inflation. After 14 years that next new car won’t cost $25,000 again, it will likely be more like $50,000. This further strengthens the idea of buying a used car at the beginning.

  15. JuliB says:

    When I was younger, I had used cars, with nothing but PROBLEMS. I’ve bought new ever since (this is new car #2). My current car is going on 10 years old. I financed with a very low rate for 5 years (and yes, it was a 25K car 10 years ago). While I plan to keep it another 5-10 years, I will start saving again soon.

    BUT…. I will not bother financing a 5 year loan. I’d go with a 2 or 3 year loan instead. If you’re the type to put the money away monthly for a couple of years, you probably won’t take out the longest term loan you can afford…

  16. JOA says:

    I really think that this is one of those issues that is very personal to most people. We bought new because the car I wanted was only the second model year for the vehicle. Buying used would have been silly. My car note is $350/month, but we pay at least double every month. However, it is well within our means to do so since our only other debt is a mortgage. I think that this is how frugality gets a bad name. I’m fully aware of what I am losing by paying interest on 3 years of a car note, but I’ve decided that it’s worth it for me.

  17. cathleen says:

    I think this is not an either/or situation.
    Different situations offer different best choices.
    I’ve always kept my cars 10 years or longer.
    My current car is a Mercedes I paid cash for, have had for 10 years, just received a letter from my local dealership that they will give me a $15K trade-in on either a used or new car. And I didn’t pay too much more than that new! With a 6 year warranty. Never had one problem with the car and it’s held its value. That peace of mind is important it to me. YMMV and probably will!

  18. Ray says:

    This one is hard, because generally, buying a car IS a money pit. They ALL are. And I’m a car guy. I track all my car expenses. I do 99% of my own work.

    I firmly believe the smart money on cars is to buy a 1-3 year old car, keep it for two years and flip it. Why? New enough it doesn’t kill you in maintenance and repairs, and old enough it’s already almost half price of new. My math has shown that TCO or ROI this works. Of course, no one (me included) ever does this because buying and selling cars is a hassle and a gamble.

    I’ve owned 20 year old cars, I’ve owned new. $125 cars and a $40,000 car.

    One thing that hasn’t been factored in here is time: Where I live, the winters are brutal and the bus doesn’t come. I can’t get to work without a car. I also have two small kids – can’t go anywhere if the car is broken all the time. I recently paid extra to have my snow tires mounted on the car instead of doing it myself – I paid $40 for it, but it saved me from having to miss 2 hours of work and a lot of hassle.

  19. Beth says:

    @John #14 — I don’t think inflation is as bad as you say it is. I have a nine year old Toyota Corolla and the price for a new model now isn’t that different from what I paid for a new model nine years ago. I somehow doubt a Corolla will have doubled in price by the time I have to replace mine. (Though I do plan to buy used next time around — paying as much cash as possible).

  20. Matt says:

    Hey Trent great examples of taking a hard look at the numbers to make sure that you are optimizing your purchases and saving as much as possible. For everyone who is arguing for the purchase of a new car I would suggest a slightly used 1-3 year old car that has low milage. The warranty will still be good for part of the cars life and if you pick well the car will be like new. The best part is you let someone else take the depreciation hit for driving it off the lot new.

  21. Amateur says:

    The numbers would be closer when dealing with more realistic values. Most people would choose a sedan/minivan/compact suv for less than 25k, closer to 22k. Maybe this is a geographical thing, but I can’t find a car that would last 5 years with daily driving at 5k, cars in that price range are really used and would not be very reliable unless you or someone close to you knows cars to get it going. A good used car can be had closer to 10k – 12k, compared to 22k for a new one.

    If a person had the money for the brand new car at 22k, would he/she be better off buying used (12k) and investing the 10k difference for 5 years? Try to run those numbers.

    Of course, there is no discussion if a person cannot buy a brand new car in cash or afford the monthly payments easily.

  22. Steve says:

    Another brilliant article using numbers to “prove” what the author had in mind before he wrote the first word.

  23. Steve in W MA says:

    if you are going to buy new and drive it to the ground, in 7 years you are going to have a 7 year old car like every other 7 year old car and will be driving it for another say 10 years after that.

    Why not cut to the chase and buy a 5 or 7 year old car for under $5000 and just keep it?

    Or, in my case, a 7 year old car for $3200 that runs reliably for in excess of 12 more years.

    Buy the right car and it will last you nigh on 20 years without many problems. Many early generation Toyotas and Hondas (Accords and Civics) are pressing the 20 year service mark without significant repair costs. I’m pretty sure that more recent models from those manufacturers will have similar reliablity and longevity records.

    It helps if you buy a manual transmission car, as they both get better gas mileage and are relatively bombproof compared to an auto tranny.

    total number of times I have been stranded by my car: 3 times.

    once, 5 years ago: dead battery. I went to autozone and bought a new one for $80.
    another time: woiuldn’t start on a rainy day. I got to where I was going using other means and it started fine the next day, which was dry and sunny. Cause: worn distributor cap. I fixed it for $40 on that sunny day.

    last time: last night. Cause: the negative battery terminal was loose and the starter motor couldn’t pull the full 150 amps through the connection. I got it started with a jump and drove to Autozone where the guy behind the counter tested the battery and alternator for free and informed me that both were fine and sold me a lead shim to shore up the negative battery terminal connection.

    As to a car lasting 120K: Mine has 225K and I know many in the same model year range that have 300K and 400K on the original motors.

  24. Steve says:

    Also, if someone can sell me one of these cars that has depreciated 50% just by driving it off the lot, I’ll come over and get it right now.

  25. Kate says:

    I find the way Americans look at cars to be quite different to other places I have lived. Four years ago I bought a 1994 Toyota Corona for $4500. Where I live a 1994 car is not considered particularly old – this is a mid-range, mid-price car entering middle age. I don’t know anyone here who has ever bought a new car(and I grew up in a high socio-economic group).
    From what I understand, in the states my car would be considered a ‘beater’ and probably have about 150k miles on it. Mine has 80k km (roughly 50k miles on it).
    What do you all DO to your cars to make a fifteen year old car old? Drive them repeatedly into walls? The thought of replacing a car after five years (even if you bought it used) seems silly to me.
    Here’s how I would buy a car. 1) save 5 grand. 2) Buy car 3) Drive car for 15-20 years, putting away a couple of hundred bucks a year for next one. 4) Sell car to a teenager for a couple of hundred bucks 5) Buy another car.

  26. Steve in W MA says:

    By and large, people who don’t really know cars suffer from a kind of irrational fear of things going wrong with them because when something goes wrong they feel helpless because of their lack of knowledge and stressed to have to rely on an outside party (a mechanic) who they fear may take advantage of him. As a result, many people (including some of my friends) buy new because of the perceived peace of mind issues, and feel they are getting a deal. Which is fine with me even though I think they are mistaken.

    By and large, a bumper to bumper warranty on a well selected and researched car is actually fairly worthless. Most well manufactured cars will go 6-10 years with nothing but standard scheduled maintenance–making the value of the bumper to bumper warranty largely a psychological sales technique to the nonmechanically knowledgeable. Motors are very good these days, and so are transmissions, especially if you stick to standard transmissions. If you have a failed CV axle it costs–what?–$200 to have it replaced at an independent shop? That’s less than the price of some jackets.

  27. kristinelevy says:

    I have never financed a car, or bought a new car. Every car I have owned was the last stop before the junkyard. I even bought one car at auction for $272 dollars (yes, that’s two hundred and seventy-two dollars.) It was a fire chief station wagon with fancy read and white filigree al over it. I never once carried a dime of debt for a ride to work.

    I find any problems were easily dealt with by a cheap AAA membership, and knowing a trustworthy mechanic who will work on my car in his driveway.

    Our current cars are a 2000 Ford Escort XLS I got in 2004 for 5000- all fees included. And a 2001 Toyota Camry XLE we got last year for 5000. Both in cash, both great cars. both maintained. (The Camry replaced a 95 Escort that cost 1200 and lasted us 3 years.)

    I have never, nor will ever, pay more than I hand over in cash for a car. I cannot even understand accepting car loans as an acceptable overhead. Housing, heat, phone, sure. But vehicle? People have too much pride wrapped up in the tin box with wheels that carries them from here to there. It helps to think of it as a glorified enclosed scooter, not a climate controlled living room with wheels.

    I suggest buying in Dec. when used cars are about to be a year older, and dealers want them off the lot. Also, you MUST have a mechanic YOU bring in to check it out before purchase. Costs about 50 bucks. And be willing to get by using the bus or one car for a while while you look. The ability and willingness to walk away has always been my best negotiating tool.

  28. K says:

    You forgot the math that says:

    Buy a new car with zero miles and a 6 year bumper to bumper warranty for $17,000.

    vs.

    A 2 year old (same model) car with 70,000 miles for $16,400.

    That’s the choice I had 5 years ago and it was pretty obvious what to do. I agree that car loans are never a good idea (even the 0% offers get you on a higher purchase price) and that you should pay cash, but a new car gives you total control over the history and use of the car, since the way you drive the first couple hundred miles are really important for the life. Also, the warranty and the longer life are worth a lot.

    Your math makes sense, but you need to do the math in each situation because one answer isn’t right for everyone.

  29. kristinelevy says:

    Opps! 20 Ford FOCUS XLS, not Escort.

  30. Patty says:

    Great math Trent, Let me add one thing for those readers paying off a loan as we read along.

    When the loan is completed, continue to make the car payments to an account that is not easily accessible. Before long you’ll be on your way to a “new” car without having to borrow.

    I purchased my current car when it was 5 yrs old with 50K miles on it for $7k. Heck I wrote a check and I still feel great. It’s five years and one battery, four tires, a strut, and next week brakes later. Cost of ownership is almost nill. By-the-way, I’m saving the anticipated repairs in that less that accessible account, it’s now a tidy sum!

  31. Anna says:

    @#25 Kate: I don’t know where you are, but you have to consider how sprawled a typical American town is. In some areas of the country, an hour long drive would not be considered unreasonable and there are no other transportation options. This doesn’t apply to everybody, of course, but it wouldn’t be that hard to put 150k miles on a car in 16 years. That’s roughly 9000 miles per year, which isn’t even that much.

  32. Anitra says:

    @31 Anna: I agree. In fact, my husband puts close to 30k miles per year on his daily commuter car. Although this 9-year-old car is still going strong at 150k miles now, we suspect that with this kind of use, it will only be another year or so before we need to replace it with something newer.

    But that’s a more extreme case. Our “family” car is newer (only 5 years old), but still has about 95k miles on it; we drive it about 7k miles/year. We expect it to last at LEAST 5 more years, probably more like 8-10 before we replace it.

  33. Melissa says:

    Most normal people don’t have the money to buy any car with cash, in this day and time. A more helpful post would have been how to get a loan for a car, smartly. New or used for that matter. Just saying….

  34. @Melissa-or, an article on how to save up enough cash for a car.

    My husband and I have been frugal from day one but have never had enough income to buy a car with cash (we’ve always paid off our loans ASAP, though, usually quite a bit early).

    For the first time in our lives now, we’re working on saving up enough to buy a replacement van with cash. It’s going to take 3-4 years total, so it’s definitely a temptation to be discouraged or to give up!

  35. deRuiter says:

    You can buy a car for cash. My early cars were always used and bought with cash, used costs less. Babied those cars, while saving what for others would have been the car payment each month. Bought new van for cash and drove it into the ground, you can get 179,000 miles out of a Chrysler mini van if you change the oil regularly, I did. Or 188,000 miles as I did out of the second one, all the while putting away money each month towards this third one. For the third van, negotiated excellent price and was ready to pay cash. Dealer offered $1000. further discount if we would finance half of the vehicle. We went over the contract, discovered that there was no penalty for early cancellation by prepayment, bought with half van financed, paid first month’s payment, and then paid off loan. We cleared ALMOST $1000. saved this way, we were only out the interest on the one month’s loan which had to be deducted from the thousand dollar bonus for financing the van. It’s always good to explore every option!

  36. Mark Gavagan says:

    Really? No allowance for repairs over 5 years for a used car costing $5,000?

    I’d assume $1,000 per year for repairs as a point of departure.

    It could end up being higher or lower over 5 years, but at least the used car scenario is no longer a repair-free fantasy.

  37. Cheryl M says:

    Wow, this sure generated a lot of comments! I can’t even imagine paying that much for a car. We did the math on the Prius and it wouldn’t save us enough money in gas to make up for the extra cost for our household. Our last 2 cars have been Dodge Intrepids, bought as 5 year old vehicles with less than 40,000 miles, for around $10,000. Both have been paid off, and we’re saving for our next car. We’ve never had more than one car payment at a time. Payments were $250 a month, now I am saving that. Right now they are at 95,000 and 135,000 miles, hoping they last a while longer. I don’t feel bad about using our oldest car to teach our kids to drive, don’t mind the lower taxes, and get most of our repair work done cheap at the local tech school. I guess you have to find what works for you on a practical level, and not get sucked in by the commercialism and new car allure. I personally enjoy a car I can get beach sand in without freaking out about ruining the new car, and the kids can eat in. On vacation, we rent a minivan so there are no “old car” travel worries. But if you are in the new car school, there are a lot of good new cars out there in the $13,000 range, aren’t there? Not sure why Trent picked the $25,000 number but it was an interesting post.

  38. Jane says:

    “I have never, nor will ever, pay more than I hand over in cash for a car. I cannot even understand accepting car loans as an acceptable overhead. Housing, heat, phone, sure. But vehicle? People have too much pride wrapped up in the tin box with wheels that carries them from here to there. It helps to think of it as a glorified enclosed scooter, not a climate controlled living room with wheels.”

    I agree, and very well said. But I will say that we pay more than you do for a used car, mainly because I HATE shopping for a car. I want to do it in my life as little as possible. Also, we have young children, and I really need a reliable car. So, when we pay cash for a car, we budget over $10,000 and usually buy a car that is only a few years old. Thankfully this doesn’t have to occur very often.

    Melissa, I consider myself to be a normal person, as are most people on this blog. We are a single income home with two kids, and we just paid cash for a car. And we don’t make anything close to six figures. It can be done. You just have to adjust your expectations for what car you will get.

  39. Melissa says:

    Jane, I am sorry, normal wasn’t the correct word to use. I didn’t mean to offend anyone. But the problem isn’t in the expectations of the car, its the available cash you have to pay for one. Having $10,000 saved up to buy a car would be wonderful, but its just not going to happen for alot of people. We are a one income family also, and everyday living is just expensive. The little bit of money we do manage to save, usually gets eat up with an emergency. And we are very frugal, and always have been.

    So if you have the money, this is the way to go, for sure.

  40. Ward says:

    I have bought new and used, but will alwasy buy used from now on. I won’t pay more than $5000 for a car, I just reseach which cars have the best reliability record. My current car was $4000 and I have driven it for 4 years and it currently has 400K km (250k miles) on it and still going strong. There have been some repairs, but nothing out of the ordinary, and even with those costs included, it is still much less than a car payment and were paid out of my emergency fund (that’s what it’s there for), and so I have not paid a dime of interest on my car.

  41. Randy says:

    We have gone the used car route for a number of years and it has generally worked well, though with one expensive lemon, so when I helped my daughter buy a car last year we started with that in mind. I was surprised that the “spread” between new and used cars seemed to have narrowed since the last time I was in the market for a car.
    There are relatively inexpensive new cars that can be had for cash without saving 25,000 first.

  42. Jonathan says:

    Unfortunately I did not have time to read all of the comments. Many of the ones I did read, however, focused on buying New vs Used, rather than paying cash vs taking out a loan, which is what the article is actually about. In Trent’s 2nd example he suggests a used car as a way of putting ones self in a position to pay cash for the purchase of a new car down the road. There are certainly other approaches that could be taken to achieve this same result. The point is, however, that it is beneficial to put ones self into the position of being able to pay cash for a car, regardless of whether you prefer to buy new or used.

  43. Golfing Girl says:

    I know that lemons exist, but quite frankly that is the exception to the rule. I’ve always driven used cars and simply factored in an occasional repair. My 95 Jeep with 158K miles has been paid off for almost 10 years and the repairs over those 10 years have totaled $1,500. So what I’ve saved on insurance and taxes over that time have easily paid for the repairs. I plan to drive it another 50K miles and I have $12,000 sitting in ING for when I need another used car to replace it.
    Trent, you did a great job of illustrating a scenario (there are others, yes, but you can’t cover them all!).

  44. Courtney20 says:

    Jonathan, the title of the post says “doing the math on paying cash for cars” but the post starts out with the assumption that “You have no cash at all, but you need wheels” and both scenarios have you taking out a loan (one for a new $25K car, and one for a used $5K car). So I think the question really is new versus used.

    Randy, you’re right – a ‘slightly used’ car is often barely less expensive than a new car. To meet Trent’s example of a $5000 car on KBB’s website I had to go all the way back to a 1999 Honda Civic with approximately 123K miles. Fine if that’s what you want – but safety has come a long way in the past 11 years too. A 3-year old car of the same model and options I just bought comes up as less than $3000 under the new car pricing.

  45. Jonathan says:

    @Courtney20 (#44) – I will admit, I was surprised to see that Trent used a loan in both of his examples. I see your point about this making it seems more about paying cash vs getting a loan. Trent seemed to be taking a less “drastic” approach to getting oneself into the position of paying cash for a car than some others, such as Dave Ramsey. Ramsey suggests never taking out a car loan and scraping together a few hundred dollars to buy a really cheap car, then slowly working your way into better and better cars as you save money. Trent’s suggestion of taking out the $5k loan just seems to be an attempt to appeal to a wide range or people than Ramsey’s plan, since its apparent that a lot of readers would not be comfortable driving a $500 car.

  46. Jonathan says:

    @Randy (#41) – Just out of curiosity, were you comparing the same Make/Model car with similar features?

  47. Steve says:

    You make a good argument yet there are a few flaws in your thinking. Considering our balmly winters, a $5000 used car will cost 6-10 x more in repairs than a new car will. In fact, if you add $2000 per year to the used vehicle purchase decision, your big financial savings evaporate quickly.

    I might suggest that to think of your vehicle as an investment is backwards thinking. If I told you that you could give me $25000 and in 5 or 7 years I would give you $7000, you would think me crazy. Therefore, we do need to think of our vehicles as transportation. There is a cost to transportation. Is it $18000 over 5 or 7 years – I bet is all of that and more. So why not pay only what you need to pay to have the reliable mode of transportation that you need; lease it. There is also a simplistic side to this.

    Most people do not have the financial strength to save money after they don’t have to make payments – it makes sense to do that – but they don’t.

  48. Callie says:

    We bought our first Volvo in 97. It was an 86. We paid $2500. We drove it for 9 years until it broke down in the used car lot where we got a used cargo van. We live in an area where there are plenty of Volvo mechanics, so repair costs were relatively low. We bought or second Volvo (another ’86) in 2001 for $1700. We drove that until it was worthless, but still running. That was 8 years. We donated it to an organization that teaches mechanics to high risk youth and bought a used Civic to save on gas. We’ll drive that car till it dies. Hopefully by then we’ll be able to buy a used electric car. I will never buy a new car, but I’m glad some people are silly enough to do it, because that’s why the car companies keep making them. I wonder though what innovations we’d come up with if we had to keep the cars we have now running forever?

  49. Tamara says:

    When I was younger and living in the same city as my parents I always had “junker” cars that were cheap to buy because if they broke my dad (a mechanic) could fix them for me and it would only cost me the price of the parts.

    When I moved away from home I decided to buy new. My car was only $13,000 (a far cry from the $25,000 example) and I had a 0% financing option at the dealership. this also included 3 years of warranty. It was absolutely worth it for me to get a car that was only slightly more than double the used car price Trent uses to have 3 years of warranty coverage and 0% financing. I would not have been able to get a 0% loan from a bank or from the dealership on a used car. I don’t know what the rate would have been , but even on a 5,000 used car, over 3 or 4 years I would have been paying interest to bring it up to 7,000 or 8,000 dollars and I would not have had a 3 year warranty.

    I think everyone needs to look at their own situation and the extremes Trent uses in his example will not work for everyone.

  50. Courtney20 says:

    Well Callie, I’m glad enough people are silly enough to buy used cars, because otherwise there wouldn’t be much of a market for them either and I wouldn’t be able to trade in my well-used car for a new one to get better gas mileage, more safety features, and a comprehensive warranty. It sounds like the silly new car buyers and the silly used car buyers have a perfectly agreeable mutual arrangement to me.

  51. Evita says:

    It does not take a genius to understand that financing a $25,00 car will cost way more than financing a $5,000 car!

    With his assumptions, I think that Trent is comparing apples to oranges here…… In what way is a $25,000 new car comparable to a $5,000 used car?

    And a used car will always cost more in repairs than a new one . These repairs were not factored in Trent’s calculations. Finance costs are not the whole story.

  52. Des says:

    RE: Mark Gavagan #36

    $1,000 a year for repairs on a $5k car seems excessively high to me. If you chose your car well, I would say half that at the upper end. We’ve paid maybe $1,000 in repairs in the whole 10 years we’ve owned our used car. This is the only car I’ve owned as an adult, but my parents had similar experiences with all the used Toyotas they owned.

  53. Tyler says:

    I’m concerned with the logic on the second new car purchase…why would someone take a 60-month loan for $7300 @ $120 a month, when they have already established a higher cashflow is feasible? A shorter term loan will lead to less paid in interest over the life of the loan, a lower interest rate ON the loan and a faster payoff date using the $500 per month rate.

  54. Todd says:

    Trent always mentions that life is a matter of spending money on what you value. My wife and I love a new car every ten years as a “reward” for working hard, and that is simply something we value. For that, we have to give up other things.

    My wife and I each have fairly new cars, but never more than one 5-year car payment. When her car turns five years old, I get a new car. When mine turns five years old, we trade in her 10-year-old car and she gets a new car. We’re both 50 so we’re each on our third new car. (She got the first new one at age 25; I got mine at 30. So she gets a new car in years when our ages end in five and I get one in years when our ages end in zero.) This works well for us. We always have only one car payment, and neither of us drives a car that’s more than 10 years old.

    It might not be the smartest financial thing, but we rarely spend money on repairs and it makes us both happy. That’s what it’s all about for us.

  55. jim says:

    @14 John : “Trent – the only thing missing is inflation. After 14 years that next new car won’t cost $25,000 again, it will likely be more like $50,000.”

    Actually the average price of new cars has been going DOWN lately. Of course it will go up again in the future, but not as fast as inflation. In the past 30 years or so car prices have been going up about 1% a year.

  56. Mark Gavagan says:

    @52 Des:

    Thanks for reading my comment and sharing yours.

    Your experience of only $1,000 in repairs over ten years (presumably for a car costing about $5,000 to purchase) seems exceptional.

    Congratulations.

    You’re right that choosing the right car is critical, but I still wonder about what the right assumed annual repair figure is over 5 years, since there are so many things on a car that are so expensive to repair.

    Enjoy the day.

    -Mark

  57. Callie says:

    @Todd That’s a great example of value. We all value something different and that’s the bottom line isn’t it? Honestly, if you can afford it, why not?

  58. Matt says:

    I’m quite surprised at the number of people who seem to equate a used car with a maintenance money pit.

    As with any consumer purchase, a brand new car has some chance of being a lemon or maintenance nightmare. And while a comprehensive warranty protects you financially, you’re going to suffer the stress and waste a lot of time for dealing with the maintenance issues. Not all warranties give you a loaner car while yours is in the shop. Some dealers have complimentary escort services, but some might leave you to fend for yourself (cab, bus, friend, a rental, etc).

    Likewise, some dealers/manufacturers have “certified” used cars, on which they offer warranties (at an extra cost of course).

    In other words, I don’t think there’s a hard line between “new” and “used”; it’s not as black-and-white as it perhaps once was. Sure, buying brand new with a warranty is easy: come in, sign papers, drive away in your new car. On the other hand, if you spend some time researching models and years that have good reliability stats, and are willing to do some negotiating (including walking away), then you can certainly end up with a good deal. And isn’t this true for non-trivial purchases in general, that any time you’re prepared to spend a significant amount of money, you perform due diligence and understand what you’re getting into?

    Also, it’s debatable whether or not Trent’s examples are realistic or cherry-picked. But either way, you can still use his methods as an example for researching your own situation.

    The fact is, if you finance, you spend more money (with a few exceptions of course). So for most people, the first way to save money is to avoid financing. If you don’t have enough cash on hand to buy outright a car you feel is safe and reliable enough, then you should still shop for the lowest purchase price possible. When financing, the lower the purchase price the less overall you’ll pay in finance charges.

    While it may be an exaggeration to say “driving a brand new car off the lot reduces its value 50%”, there is some truth to the fact that you generally pay a premium for that new car smell. There are deals to be had in the used car arena, and with due diligence, you lower your chances of a lemon.

  59. Megan says:

    My husband and I learned the hazards of buying new when we purchased our last car. It was worth $16,000 and cost us $20,000 because we didn’t have any money to put down (huge mistake #1), didn’t come in with our own financing (huge mistake #2), and we didn’t consider the total cost of the vehicle, just the monthly payments during discussions with the sales person (huge mistake #3).

    We plan to have the car for a long time and as soon as we finish paying off our credit card debt we’ll start aggressively paying off that car loan, but it still rankles that we owe more on our shiny new car than it’s worth.

    I will never, ever, EVER get a loan for a car again, unless I absolutely must have transportation and it’s my only option for getting a car.

  60. I am a used car advocate. I have only bought 1 new car in my life and I paid over $30K for it. My wife encouraged me to buy new after having some tough experiences with 2 used cars in a row. The new car was a 2005 Honda Pilot SUV. The following year my wife wanted a SUV so we bout a 2003 Honda Pilot SUV for about $17K. Its nearly identical to my car–even the color. Our kids have trouble knowing if they are in Mommy’s or Daddy’s car. Yet we paid about half price!!! I will always buy used. I may not pay with cash, but I will by used (and definitely will not lease).

  61. I am a used car advocate. I have only bought 1 new car in my life and I paid over $30K for it. My wife encouraged me to buy new after having some tough experiences with 2 used cars in a row. The new car was a 2005 Honda Pilot SUV. The following year my wife wanted a SUV so we bought a 2003 Honda Pilot SUV for about $17K. Its nearly identical to my car–even the color. Our kids have trouble knowing if they are in Mommy’s or Daddy’s car. Yet we paid about half price!!! I will always buy used. I may not pay with cash, but I will buy used (and definitely will not lease).

  62. michael bash says:

    ” … model year with a good reputation.” What about the reputation of the previous driver? They’re not all from Pasadena. AND why is the good used car for sale?

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