Saturday, May 16, 2009

Cash or Credit? Own or Loan?

What are the correct answers to these questions? Really? Do you know?

With the economy in turmoil and "classes" popping up all over to assist families with their finances, the phrase "cash only" is being repeated everywhere as the solution. Is it?

Well, it depends. And, that is dependent on you and each individual situation.

For example, if you are someone who is disciplined with your money, cash only is not a necessity to managing and saving money for your family. So for me, I will always use credit or take out a loan if it will make me money. Why not? I want to keep as much of my families money for us and our future.

To me, the bottom line is...well...the bottom line. When I run the numbers, which decision saves my family the most. Then, that is obviously the decision for me.

So, I wanted to explain all this with an example.

Last week, my husband and I purchased a new car for our family. Well, I should say we leased a new car. And, frankly, it wasn't the plan. But, plans are meant to be changed if they aren't working out, right?

So, we picked out a car after months of shopping. We found one we liked and we felt it was a good deal.

First, I must start by saying we have saved up to pay cash for this car. And, we planned to sell our Ford Taurus to put towards it as well.

So, my husband is at the dealer with me on the conference call ( taking 3 kids to a dealer is NOT fun ) and they are running numbers for us. My husband and I both having worked ( well, I guess he still does ) in Finance wanted the numbers run EVERY which way.

In my mind, just because cash seems to be the best option, I want proof. Before I hand over thousands upon thousands of dollars, I want my estimates in writing for us to see.

So, we had them run it as a lease, a loan and paying cash.

To begin, with cash we could have gotten a couple thousand off. Yay! It was looking like this might be the way to go.

Next, they ran the loan. Well, they couldn't give us 0% ( had to ask ), so obviously, that would have cost us more.

Next, was the lease. They told us how much we had to put down ( fees, etc included ), our monthly payment and then I wanted to know the purchase option price at the end of the lease.

So, here was the breakdown for us.

We did not have to take thousands out of our bank account now. It could sit there for 3 years ( the term of the lease ) and just have a bit of it taken out each month to pay the lease payment.

Meanwhile, since we have High Interest accounts, the money will now be earning interest for us. at the current interest rate. I calculated we will make approx. $1,000 in interest on that money over the next three years. Bonus!

Next, when we added the upfront payments, all the monthly payments for 36 months and the buyout price at the end.....are you ready? It comes out to be $4,000 cheaper! Yes, cheaper! Plus the money we have sitting in our bank accounts now earning interest. That is an impact of $5,000 to us.

So, it was a no brainer. The lease was a much better deal than paying cash for the car upfront!

At the end of the 3 years, we will own the car just like we would have today, except now we have an extra $5,000 in the bank and still got to drive the car just as long.

So, before you automatically assume cash is always the way to go, do some research.

Here is one other quick car buying example from my lifetime. When my husband and I bought our first car, we were also going to pay cash for that one. Well, we go to the dealer and they were running a $1,000 rebate on new car purchases. But, then we found out it was only for those with loans.

I was NOT very happy about this. Why was I being penalized for paying cash upfront? Ugh! So, I then asked them if we could take the loan out on the car, and if there were any stipulations on how long before I could pay it off. Well, there weren't!

So, sure enough, we took out a car loan for that purchase. We got our $1,000 off and then our first bill arrived in the mail. What did I do? I sent a payment in for the full value of the car and bought it in full one month later and for a $1,000 cheaper.

Research, research, research!

So, I am happy to say we are now proud Lease owners ( well, owners in 3 years ) of a brand new family car!



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23 comments:

Donna@www.frugaldonna.blogspot.com said...

I agree with researching your options. We did the same thing several years ago with a lease. When it ended we bought the suv outright and now have no payments. Sounds like you got the best deal!
As far as other things...I prefer cash to credit cards. We do use cards to keep up our credit but we pay off what we charge each month.

Jen said...

It pays to crunch the numbers! What a great example. I never would have thought that leasing could save you money, but with the buyout at the end, it makes sense. I'll consider this an option the next time we are shopping for a new car--or we'll crunch the numbers.

Amy @ Finer Things said...

Hmmm, I can totally see your point if driving a new vehicle is important to you. Would love to see the research on a 2-3 year old vehicle, once it's value has dropped the typical 50% or so. That has been the "way to buy" for us. Cash on a used (excellent condition) vehicle.

Anonymous said...

That is really cool! You never cease to inspire me.

I'm curious if you run the numbers for how the insurance payment will be impacted on a car you own vs a car you lease and if you figure that into your research?

Emily (Laundry and Lullabies) said...

Hey, I just wanted to let you know that your "mefile" advertisement is too wide for your sidebar. It covers up some of your text and makes it hard to read your content. Might want to fix that. :)

Business Mommy said...

If I was as organized as Carrie, then I wouldn't even pay for insurance. I would file the papers with the state and put the money away in a savings account to use in case of an accident instead of insurance. I don't know the details, but I looked it up at one point. I'll do it when I have enough savings, but it's a big amount. Still, I think it's better to do that and not have to pay a monthly fee on something that you don't need if you're able to cover the cost if an accident does happen. Not only would you be saving the money from not paying insurance, you would be earning interest on the balance.

But like I said, not sure about the details. Look it up if you're in the kind of situation to where you could afford to set aside a large amount of money like that.

Andrea @ Mommy Snacks.net said...

Carrie, I think you're so smart!!! Great post! :)

Anonymous said...

I have to agree with Amy on this one. We, too, pay cash for 2-3 year old vehicles in basically new condition for much less than what a lease on a new vehicle costs. Lot's of 'smart' gals out there; just different priorities! :)

$5 Dinner Mom said...

Thanks for sharing this breakdown for us! We are in the market for a new minivan. This was great to read!

Thanks girl!!!

Erin

Rachel from Texas said...

Thank you very much for sharing this. I have always assumed that paying cash for a car is the cheapest. We will be trading in my husband's car at the end of this year or sometime next year and I will have to remember to consider all 3 options. Hopefully I'll get lucky like you did in both of your situations :)

Carrie @ Moneysavingmethods.com said...

For all those talking about used cars, those were what we had been looking at over the last month.

We test drove and had it narrowed down to 2 different styles of 2005 cars.

The problem? They came with no warranty and this new car came with a 10 year warranty ( that is ALOT of maintenance charges you can save over 10 years )

On top of that, this new car...also the same class, size ( we needed to fit 3 car seats across the back of a car ) came to the exact same price ( with the lease deal ) as the 2005 cars.

Again, a no brainer on which way to go. Spend the same amount for a used car with no warranty..or a limited warranty or a new car with a 10 year warranty.

This is another example. Don't always assume used cars are cheaper. Not the always the case.

If you are willing to look at all cars in the same size range and go beyond a certain brand, you can often find great deals on new cars.

Another key? If you find a new car on the market ( the car we bought is a brand new car on the market ), you can get better prices. And, especially on leases often times, because they don't know yet what to value it at when you get to the end of the lease. Thus, deals can be had.

Definitely shop both used and new when looking. Dont' assume used or cash is always the best deal.

You may find it is, but in our example...we had actually bid on the used 2005 car on eBay ( yep..we were brave ) and didn't win the bid in the last few minutes.

And, thankfully, we didn't. This worked out much better for us.

Kelly said...

You also have negiotiating power when the end of your lease is up. For example, if your agreement says that the car is worth $10,000 at the end of your term (3 years in your case), you can call the bank and offer them, say, $9250 for it. They can either accept it, or counteroffer. In most cases it is more expensive for them if you turn the car in at the end of your agreement. So they are better off accepting a reduced price. (Just put on your poker face and don't let them know that you plan to buy it anyway!) :)

Carrie @ Moneysavingmethods.com said...

Emily,

What are you viewing my website in?

I may need to look, because in Explorer it doesn't overlap my text and is hidden behind the text.

Let me know.

Is anyone else having trouble viewing?

Carrie @ Moneysavingmethods.com said...

Kelly,

You are SOO right. I meant to write that in my post.

Other times, the manufacturer will actually offer a lower price.

We had friends lease a Ford Explorer the very first year they came out ( yes, that has been awhile).

And, just like the car we got, since it was new on the market, they didn't know what to value it at the end of the lease.

They got it WAY off. They then called them at the end of the lease and asked them if they would buy it for $3000 less that their end of lease purchase price.

They had over estimated what they thought they could get for a used Ford Expedition.

So, you are absolutely correct. As in all things, call to check and see if you can get a better price at the end.

We may save even more than the $5,000! Thanks for the reminder, Kelly!

Carrie @ Moneysavingmethods.com said...

You are right, insurance does cost a bit more usually for leased cars...as often they view those who lease as higher risk drivers ( I think that is what they say...I guess they figure we won't be as careful with a car we don't own ). :-)

They don't know my husband.

Anyway, it does come to approx. a couple hundred more a year. So, figure that into your cost.

For us, over 3 years, it will a little over $500 more to insure.

So, that $500 still doesn't make up for the difference in what we saved. I figured our interest in the bank is more than covering the higher insurance.

BUT...great point!

When you run all your numbers, run the insurance, too, as that is a fee you are paying.

ALSO, check with the company you are leasing thru to make sure they include gap insurance ( it should be imbedded in your monthly payment ), but double check!

You don't want to have to pay for that in addition.

Carrie @ Moneysavingmethods.com said...

Emily,

I moved it over to my right side bar. Does that help? At least if it overlaps for you now, it should be into the outside border.

Let me know.

Thanks for giving me a heads up, too, I would have never known some were having trouble reading my posts.

Diana said...

Wow, that's really amazing, Carrie! I'm very impressed with your financial skills--I have always loved to talk money but very few of my female friends can "keep up" so I rarely get to have those fun conversations with them. You by far, blow me out of the water, though! :) Thank you for sharing your wisdom.

Kelly said...

Carrie,

Very interesting post! Thanks for sharing!

The problem of your ad overlapping the text is gone for me - I use Firefox. Thanks for fixing it! :)

Nicole said...

Thanks for sharing your experience. We are in the market for a new/used vehicle and never would have even considered leasing before reading this. I will definitely be crunching numbers for all available options.

kelly said...

mefile "fix" makes a big difference, thanks!

Connie Petertonjes said...

New versus used is definitely a consideration. When Craig and I were buying a car soon after we got married, we were dead set on buying a 2-3 year old used car. The problem with the used cars we were finding at the time...most of them were ones coming off leases and they were loaded with all kinds of options...leather seats, fancy equipment...things that honestly, we would never have paid for if we were buying new. So, we decided to check on new cars on the same model but without all the expensive options. We got our Honda Civic way cheaper new than the same car 2-3 years old. Sure, it didn't have a bunch of fancy options, but we are "no frills" transportation kind of people. And, we are still driving that car today. It has over 200,000 miles on it.

When we bought our van, the opposite was true. We ended up finding an incredible deal on a 3 year old used Odyssey with really low miles. We couldn't pass it up. We were actually set to buy a new vehicle and ended up buying used at the last minute!

It pays to check BOTH options when shopping for a car!

Joshua and Megan said...

Thanks for a great post, Carrie! My husband and I are a few years away from buying a new/other car, but I'll keep this in mind for when we start looking. I was having trouble with the sidebar advert too (I use firefox) but it's fixed now - thanks!

Shawna said...

Way to go on working the numbers!

I've done all three: leased new, bought new and bought used. I think each has its advantages/disadvantages.

One big disadvantage of buying new or leasing is the hefty excise tax you'll, at least here in MA. For example, in 2005, I leased a new car with a sticker value of $35k. My first year's excise tax was $800! Second year was $600 and third year was about $300.

Fast-forward to 2008 when I bought a used 2006 vehicle (for a steal due to high gas prices!) with an original sticker price of $60k. My first year's excise tax was $300 and this year's was $200.

BTW - my insurance didn't change for any purchase since we need full collision coverage here in MA if we don't own (ie. no loan) the vehicle.

 
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