Buy a car outright or finance?

Submitted by ederamon t3_z8bbbp in personalfinance

First time in this sub so please be gentle-

I'm 26 y/o and just graduated with my PhD. I've been driving a hand-me-down 2003 Nissan Altima for a good 8 years or so. It's a good car, gets me from point A to point B, but I'd like something I feel safer in (especially in snow). I've been planning on getting a car basically as soon as I sign on to a job (which I'm hoping is quite soon). I'm expecting a huge salary jump (from $35k/yr to >$120k/yr). Also, I've got a decent savings (about $42k including my TD account). I also have no debt, although my cost of living has gone up a bit recently. I'm looking to spend roughly $25k on a new 2023 Impreza. Given all of this info, does it make sense to buy a car upfront, or to finance it? I haven't shopped the rates much, but what I have seen is roughly 4% APR. I keep most of my savings invested in the S&P, which yields approximately 8% a year. So in theory, it would make sense to finance. But part of me doesn't want to have to borrow money if I don't have to. What makes the most sense financially?

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TLDR; looking to buy a $25k car with $42k savings alongside likely a >3x salary increase. Pay upfront or finance?

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KoastPhire t1_iyar5i8 wrote

Get your promotion first before you buy. Don't buy in anticipation of getting a job.

Stick to the 20/4/10 rule. 20% down, no more than 4 years finance, and all car relates cost are less than 10% of income.

Let your money that's currently down in the S&P, grow.

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sonnyfab t1_iyash0o wrote

If you can finance at 4%, then after you've started the job, that is a rate worth taking the financing. I haven't seen many 4% car loan offers lately though. At a rate higher than 5%, I'd recommend just paying for the car out of savings. (Mathematically, an 8% speculative return isn't worth as much as a 5% guaranteed return.)

You may need to finance the car for 1 payment period because a lot of new car incentives are through the dealer financing and not the dealership directly, but just ensure that there is no prepayment penalty and you can pay the car off when you get the first statement.

Edit: Also, unrelated to your question, make sure you have a 6 month emergency fund in a savings account beyond what you are spending on this car since you say most of your savings is in the stock market.

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sonnyfab t1_iyaumj4 wrote

Replying to ederamon (#785,306)

4% is typically the dividing line recommended on this sub. Pay off debt above 4% aggressively. Keep debt below 4%. Obviously there's got to be some gray area where the "personal" part of personal finance comes into play.

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Yukycg t1_iycjava wrote

I normally buy with “cash” unless there is a favorable finance offer.

Here is my argument, is it “not recommended or not smart” to buy Apple stock that give me a guarantee 4% every year? And you are suggesting me to buy cryptocurrency because it can do 400% in return?

In theory everyone should buy Crypto instead because it has better return than Apple stock and S&P?

If a stock still gain 4% even S&P tank 10% this year, don’t you want to buy this stock instead? It is all come down to how much you can handle the volatility.

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