I went into debt to buy my new car even though I could have paid cash, and I know I made the right choice

Courtesy Eric Rosenberg

With excellent credit, you may be able to buy a new car with 0% APR financing. That can be a better deal than buying a car with cash.
It’s important to do the math and compare the various offers you get from the dealership or lender, including lower interest rates, rebates, and other incentives.
Never buy a car until you have researched the car’s value, new and used purchase options, and get pre-approved for financing at a competitive rate.
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Buying a new car is a big deal. Last month, I made the biggest purchase in my life outside of real estate. This new vehicle purchase was a long time coming and something we had budgeted for, but the financing came out even better than planned.

Thanks to my excellent credit, Toyota offered a 0% APR deal for the purchase. Even though we had enough cash saved up to buy the car outright, I wasn’t going to pass on this deal. Here’s a look at why it makes sense to borrow at 0% even if you can pay in cash.

Why I bought a new car

I’m not the biggest fan of buying cars. Vehicles are quickly depreciating assets that simply get you from one place to another. My primary car is a 2008 Corolla that I bought new in 2007. I don’t plan to replace it any time soon.

My wife’s main car was also a decade old. Her SUV was great for our family’s needs and paid off in full. It has been nice going so long without a car payment! But with our third child on the way soon, it was time to upgrade and get a family car with plenty of space for our growing family.

After doing a lot of research on new and used minivans and SUVs, we decided on a new Toyota Sienna. The local Toyota dealership offered a great deal on Father’s Day, so we said yes and took the car home.

The 0% APR offer

While I know I have excellent credit, I planned on a 3% to 4% interest rate on a new car loan. I did some shopping around before I went to the dealership and was preapproved for offers in that range.

But when we told the salesman we were serious about buying the van, he ran our credit through the system and came back with the 0% offer. We had a choice between 0% or a discount on the purchase, but knowing the time-value of money I knew we would be better off borrowing and paying the car off over five years at 0% APR.

Why 0% APR can be a good idea even if you have the cash

I’m generally debt-averse and don’t encourage buying new cars or getting car loans. I did a ton of research on the vehicle we wanted and based on what I was seeing, it holds its value well enough that you don’t save all that much buying a lightly used model. But when it came to interest, the 0% rate made this loan logical for these main reasons:

Preserve cash. The first benefit of buying the car with a loan was paying less cash up front. We put down a $10,000 payment plus my wife’s old car as a trade-in. But as someone who’s self-employed, it’s a good idea to keep more cash on hand (more so than for someone with a full-time job and a reliable paycheck). The loan meant we didn’t have to further drain our savings.

Earn interest. If you can earn a higher interest rate from a savings account than the loan charges, you are better off keeping the cash as long as possible. I’m earning interest on the cash I saved while paying no cost to borrow, so I know I’ll always come out ahead paying as slowly as possible. I can earn compound interest on my cash because I kept most of it.

Remember that $1 today is worth less down the road. If you can pay a dollar today or pay a dollar in the future, you are better off paying in the future. Thanks to inflation, a dollar in one, two, three, four, and five years is almost certainly going to be worth less than a dollar the day I bought the car. Delaying payments with no added cost gives you this invisible financial benefit as well.

The right choice for my family

My wife wasn’t thrilled to go from the SUV to a minivan — it definitely doesn’t have the same cool factor. However, for a family of five, it was the right choice for us. Now we have plenty of room, all of the latest safety features, and we were able to buy it with money we borrowed for free.

I have the cash to pay off the loan in full, but I’m not paying it a day early with the deal I got. Just 60 payments and I’ll be back to debt free, outside of my mortgage. But in some cases, debt just makes the most sense.

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