Why did I finance my car purchase instead of paying cash?

I recently bought a car which I had been planning for quite some time. Needless to say it was a used car purchase. I bought an extremely reliable Lexus GS 350 (2016) with all the bells and whistles to pamper any driver and I plan on keeping it for as long as possible.

Don’t bother buying new unless

You are a millionaire. A brand new stock 2020 Lexus GS 350 costs $55,450 with taxes and fees – which is 5.55% and doesn’t make you broke. If you make $100,000/year, it’s 55% of your income – so it’s best to buy used.

If you were however planning on buying a hybrid for the next 10-12 years, I’d recommend buying a brand new or extremely lightly used car – but that’s not the focus of this article.

What did it cost me?

After researching the market, checking out multiple cars at various dealers following the following guides:

• How to inspect used cars
• How to negotiate used cars

I ended up buying a former single owner leased 2016 Lexus GS350 with 35,153 miles on it. Thanks to it being a lease – it was serviced regularly every 5000 miles by Lexus Technicians and I’d say the car lived a rather luxurious life in Florida (prior owner’s location).

The purchase was not an easy decision and was six months in the making. Let me break it down for you and explain why I bought the car the way I did.

Preparing for two years

While it is a good rule of thumb to not spend more than 20% of what you make in a year on a car, I wanted a car I knew I would be able to afford if I were to buy it outright and that meant hardcore savings/investments.

I knew the car purchase would cost me close to $30,000 (price of a new Camry/Accord) so in June 2019 – after I started working, I started saving and investing every penny – living life frugally yet comfortably (no cutting corners).

My goal was to make a lumpsum downpayment on a credit card (for the sign-up bonus ofcourse) and pay that off ASAP. The remainder amount would be financed at the cheapest possible rate I could find. I started my credit card journey knowing all the cards I was accumulating were helping me build a strong credit profile which would help me get the lowest possible interest rate.

Thanks to all the credit cards I have (which I pay off daily), I had a strong diverse profile with over 190 on-time payments in 2 years. This helped me snag a 2.29% APR (on a new car) or 2.89% (on a used car) – the latter is the rate that I have currently.

Between June to December, I saved up/invested money aggressively in my high yielding savings account earning an average 2.20% APY and Dividend Growth Investment portfolio earning an average of 3.36% in dividends ( +whatever the capital gains might be). Combining both, I was in excess of what was needed to make the car purchase. I proceeded to withdraw part of my savings ( keeping the emergency fund untouched) and use that to pay off the credit card down-payment + cash.

I was lucky enough to convince the dealer to allow me to use my United MileagePlus Explorer card upto $4000 which helped me hit the sign-up bonus instantly (getting me 69,000 United Miles) and paid the rest in cash.

I took a loan for $20,000 at 2.89% for 36 months even though I technically had the necessary amount. The reason was leverage. I knew I’d make more investing the $20,000 in dividend payouts (and even possible capital gains) (re-invested back into the portfolio) than the interest which would cost me $903 for the 36 months.

Paying cash for the car would’ve lost me that earning/investing potential – hence I financed my car purchase. Note if you finance for less than 36mo or 36mo, the interest rate is unchanged. When you go over that 36mo mark, the rates start to go up and the monthly payments go down.

Budgeting

I knew my monthly payments would be $581 (setup auto-pay for $600) but it would still allow me to contribute to my savings, investments and monthly expenses. I leave my emergency fund untouched for worst case scenarios and so should you.

Should you finance or buy cash

I bought my first car (used) after working three jobs – it took me sometime to get there but I did. I bought what I knew I could afford and I bought it cash (because it wasn’t worth financing). That car costed $5200 and financing that would’ve actually cost me more money than I’d have saved. I sold it after a year and half of ownership (+20K miles) for $4200.

With this next used car – which cost close to $30,000, financing it at a 2.89% is actually enabling me to make more money thanks to the leverage it provides me. My advise to you would be to calculate potential savings/earnings/losses vs time to conclusively tell which is a better choice for you.

All I can say is DO NOT take a loan for 5+ years because you will end up owing and paying more than what the car is worth. I see people buy BMWs and Audis with 7-9 year payment plans which is just plain stupid.

There is a fine line between good debt and bad debt – not all debt is bad if you manage and leverage it correctly coming out ahead mathematically. In my case, if things got bad, I know I can still pay off the car at any given moment and or sell it to recoup most of my capital. If the car were to be totaled, I know my GAP coverage (from insurance) will protect me on the lost value of the car in payments.

If you’re a student working part-time jobs – my advice is NOT to finance a car – the interest rates will eat you up. If you just started working, buy a cheap car under $3000-$5000 which is reliable and will get you going until you’ve saved up enough to buy a better car. By then you’ll also have had the opportunity to understand your job security, build up savings/emergency funds/investments.

Take this advice from my experience – it’s better to lose with $3000 than to lose with $30,000. Debt is not good but it can be beneficial if leveraged correctly.

Do note, this article is not meant to show-off or be condescending – it is the thought process I applied instead of blindly following what other people told me. Take this as research if you’re considering buying a car and not as the only way to buy a car. Making an informed decision is your responsibility as it is mine sharing this experience with you.