 Use
stash to pay cash for car?
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 Dear
Dr. Don,
I'm looking to buy a brand-new car and the interest for the loan
is 5 percent. I have the cash to purchase it. I also have a Citibank
e-saving account that currently is giving me 5 percent interest.
Should I take the 5 percent interest loan for 36 months and or should
I pay cash for it? If you know of any place with 5 percent or lower
interest for the car loan, let me know.
Thanks,
-- Jeff Jalopy
 Dear
Jeff,
According to Bankrate's national
average, as of Aug. 2, the going rate for a car loan is 7.86
percent for a 36-month car loan, 7.92 percent for a 48-month loan
and nearly 8 percent for a 60-month loan. By those measures a 5
percent loan for 36 months is a good deal.
Since you can't deduct the interest expense on an
auto loan, your pretax interest rate is also your after-tax rate.
In contrast, assuming your savings account isn't a tax-advantaged
account, you will pay income taxes on the 5-percent interest earnings,
and your after-tax return on savings will be less than the cost
of the auto loan. That points to you paying cash for your car.
A low-cost loan from an automobile manufacturer is
usually in lieu of price discounts available on the car.
Bankrate has a rebate/interest rate calculator
that can help you decide whether to take the rate or the rebate.
I like to keep in mind the targeted federal funds rate, along with
the prime rate when I'm shopping loans. The fed funds target is
currently 5.25 percent and the prime lending rate is 8.25 percent.
Ask yourself why you're so special that the lender is going to give
you a rate a quarter-percent below fed funds and 3.25 percent below
the prime lending rate.
While an auto loan is a secured loan, the answer usually is that you're paying for it somewhere else in the transaction. That can be OK. Just don't think you can find a new car loan at a rate below 5 percent and not make up the difference somewhere else in the car purchase.
If you don't have an emergency fund and you're spending
all your savings to buy the car for cash, I'd suggest a compromise
where you keep some savings and finance the balance. How much savings?
Three to six months worth of living expenses is a rough rule of
thumb. A Bankrate feature, "Building
an emergency fund," has more on sizing and investing an emergency
fund.
You can also save a bundle by buying a late model
used car and letting someone else take the depreciation hit over
the first few years of car ownership. This approach isn't for everyone,
but it may significantly reduce your cost of ownership.
To ask a question of Dr. Don, go to the "Ask the Experts" page, and select one of these topics: "financing a home," "saving & investing" or "money."
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