Dear Liz: Is it better to buy a car with saved money or finance the $25,000 needed? In my case I will have to sell stocks. Maybe this is a good time to do that since things look like they are taking a turn in the stock market.
Answer: Borrowing money can make sense when the asset you’re buying is likely to increase in value. For example, a mortgage could allow you to purchase a home that will appreciate over time, and a student loan could help increase your earning power.
Borrowing money makes less sense when you’re buying something that’s all but guaranteed to lose value, such as a car. Many people don’t have enough cash to pay for a reliable vehicle, of course, so financing is their best option. If you do have a choice, however, cash is best.
Selling stocks can help you raise cash, of course, but probably will incur a tax bill. Also, stocks are meant to be a long-term investment, and you really can’t time the market. Yes, your shares may decline, but they could also rise, and historically they have done so over time.
If you don’t have cash savings but do have stocks that aren’t earmarked for another cause, such as retirement, then you might consider selling enough stocks to pay for the car and the tax bill. For your next car, though, consider saving up for the purchase in a high-yield savings account.
Xak says
Used car dealerships balk at cash payments. And is it safe to make a cash payment for a vehicle to a private party? What is the recommended way to use cash, would that be a a cashier’s check from a bank? Will a bank take cash for an amount that a car would be (assuming it’s one where you have an account)?
Liz Weston says
We’ve never had trouble paying cash for cars at a dealership (although of course they’d rather profit from the financing). We’ve paid with personal checks but the dealership may also accept cashier’s checks or a wire transfer. For private party sales, you can meet at the bank to exchange cash or use cashier’s checks, wire transfers or payment apps.
Gerald James Walsh says
Dear Liz: My sister is at it again. I’ve written to you about her before and you published my letter with your sage advice. (That I put to good use!)
Sis offered to store my car while I travel extensively in Thailand as a newly, semi, quasi retired person.
At first she planned to leave the car covered on the street where she lives. Then later she then told me of an offer to leave my nice German car in her friend’s garage for a small fee arrangement unspecified.
I told her I often watch People’s Court and these kind of storage arrangements can and do end up in court.
Should I make a clean sweep of this custodianship?
Liz Weston says
Consider consulting an insurance agent about that arrangement vs. commercial car storage.