One of the biggest rules in personal finance is to buy a used car with cash. You hear stories about how your car loses value as soon as you drive it off the lot. That used car has already seen its biggest depreciation and borrowing just makes it all worse.
But what if it makes sense to buy a new car with debt, as long as you acknowledge what you’re doing and you have other plans for your money?
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Miranda’s strategy for buying a car
We talk about how Miranda manages her vehicle purchases:
Buy a car with low-cost financing (60-month loan)
In 2001, 1.9% APR
In 2021, 2.49% APR
Keep the money she would have used to buy a depreciating asset in the stock market, where it earns more than what she’s paying on the debt
After 8 to 10 years, use the car as a trade-in for the “down payment” and finance the next car at a low rate
It’s important to note that this approach works best if you can get a good rate. However, in some cases, you need the car for work and might need to finance a used car at a higher rate just to get access to the transportation you need.
Sarah has also used a loan to get a car. It was more convenient and easier than getting a cashier’s check from the bank. Her approach was to pay off the loan within a few months. But she maintained flexibility to get the car and keep the loan if the money ended up being needed for something else.
Lifestyle factors
We talk about lifestyle factors that might influence how you buy your cars.
If you like getting cars more frequently, leasing might not be a bad option.
If you expect to drive the car for a short period of time but want to sell it, buying it with cash can make sense.
Think about how you use your cars: work, travel, family, etc., and make a plan that fits with your lifestyle.
Carefully evaluate whether financing a car works (or is required) in your situation.
Financial resources
We encourage people to check out the following resources before getting a vehicle:
CFPB page on auto loans: https://www.consumerfinance.gov/consumer-tools/auto-loans/
CFPB page on buying vs. leasing: https://www.consumerfinance.gov/ask-cfpb/what-should-i-know-about-leasing-versus-buying-a-car-en-815/
Big thank you to Ashley Barnett for sharing her story! Check out her LinkedIn profile if you’re looking for a top-notch content director or check out her Hit Publish course for writing better content.
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