‘I could either write a check or finance at a low rate’: Should I pay cash or finance a new car and keep my money invested for higher returns?

Hi Money Minder,

So, I’m ready to trade in my old 300k mile Honda Accord for a new Civic Type R at around $48k Out The Door. I’m debating whether to pay with a check or finance it through my local credit union at 5.99% for 72 months. I could stick the $48k in a High Yield Savings Account making 4.5%, which would bring my “real” interest rate down to 1.49%.

Some pros to this plan are that I can get gap insurance on the loan and have a larger emergency fund. However, there are some downsides, like the possibility of lower HYSA rates in the future and the hassle of dealing with a loan.

A little about me: I’m 27, married, in a single income household earning $230k annually. I’ve got about $120k in cash, $40k in my 401k (just graduated 2 years ago), $35k in federal student loans, and a $600k mortgage with $150k in equity.

I don’t necessarily NEED to keep the $48k, but it would be nice to have. I’m not sure what the best move is. Can you help me out with some advice?

Thanks,

Response from THE MONEY MINDER:

Hello There,

Congratulations on considering a new Civic Type R! It sounds like you have a solid financial foundation and are weighing your options thoughtfully. Given your income, cash reserves, and debts, it seems like you are in a good position to either pay for the car outright or finance it at a low rate.

While the idea of financing the car and potentially earning a higher return on your cash in a high-yield savings account (HYSA) seems enticing, it’s important to consider the risks involved. As you mentioned, interest rates may fluctuate, affecting the return on your savings. Additionally, having a loan means you are committed to regular payments, which may impact your cash flow.

Given your financial situation, paying for the car outright could be a more straightforward approach. You have the funds available, and eliminating a monthly car payment could provide peace of mind. It’s always beneficial to have a larger emergency fund, especially considering your single income and significant mortgage.

Ultimately, the decision boils down to your comfort level with debt, investment strategies, and financial goals. If you prefer simplicity and the peace of mind that comes with owning the car outright, writing a check may be the best option. On the other hand, if you are confident in managing a loan, investing the cash, and benefiting from potential returns, financing could be a viable choice.

Whichever path you choose, ensure it aligns with your long-term financial plan and goals. Feel free to discuss these options further with your financial advisor or partner to make the best decision for your circumstances.

Best of luck with your car purchase, and remember to always prioritize financial stability and security in your decision-making process.

Farewell from THE MONEY MINDER.