Precious Roy wrote:
If you have good credit, buying a car with cash is a bad idea. First, there is no GAP insurance for when you pay cash. If you get hit and the insurance company totals it, you could end up losing a lot of money. Insurers are much more inclined to total vehicles these days as collision repair costs have gone way up. So, you pay $50k in cash for a vehicle. It gets hit. Your insurer pays you ACV of $30k. You are effectively out $20k. If you were financing, GAP would cover some or all of that. Second, inflation is your friend when you take on debt. I bought a car in 2019 and the payments are $450. Inflation has made those payments smaller over the past 5 years. And inflation has been higher than my interest rate. While interest rates have been higher for auto loans, the market is starting to come back to normal and manufacturers are coming out with subvented rates that are very low. And finally, people just don't have the ability to save up that kind of cash. So, financing is just the way to go for most everyone.
I will say that of all the things you can spend your money on, a car is by far one of the biggest money pits. Many years back, you would get more bang for your buck if you bought an import or a higher end vehicle. I remember my dad's Buick Century had an AM radio and no AC. When we went to the mountains in NH, the engine would all but be redlining on steep grades. Today, just about every vehicle on the road has a nice entertainment system, all the acceleration you would ever need and AC. And a lot of safety features are becoming standard. So, when you buy something fancy, you are just getting a bunch of junk that no one really needs and will probably require expensive repairs at some point. So, people effectively throw money down the drain to have a giant Suburban when a minivan at almost half the price will fit your little Cayden, Carson, Caswell, Cassidy, and Corinthia just as well. Same for the overly engineered transmission on a BMW versus a more dependable transmission on a Toyota. And the list goes on of expensive upgrades that really do nothing.
But the worst part of auto financing is subprime lending. The people who can least afford an auto payment have a monthly payment on a 2014 Buick Enclave that someone with good credit has for a 2024 Lexus. Most states allow lenders an "add on" interest rate that lets them go above the 18% usury max. With a 24% interest rate, a loan of $25,000 ends up with a monthly payment that is the same as someone who buys a vehicle for almost $40k at 2.9%.
You can get GAP insurance if you are paying in cash if you are worried about that, but most people who pay 50 grand cash for a car aren't concerned about being out some money due to a car being totalled. In my opinion, it is never a good idea to finance a vehicle, unless you absolutely have to. It's easier to negotiate the final sales price when paying cash, and you end up paying less in the long run not paying the interest on loan payments. Having a paid off car, no matter the brand, is a status symbol. There is nothing more douchey than having a luxury brand car with a huge note. And no, cars are not the biggest money pits...houses are.