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Paying cash for a car

Dear Dr. Don,
We live in New York City and don’t own a car. We are moving to Tampa, Fla., this summer, where having a car will be a must. In anticipation of the move we have saved $49,000 to purchase a new car for each of us and to cover the car insurance for the first six to 12 months. The money is currently earning 2.3 percent interest in a savings account.

We have no credit card or any other kind of debt, our 401(k) contributions are maxed out and we have a generous six months emergency account. With savings rates so low and the stock market’s recent history we think paying cash for the cars is a wise choice. What do you think?

Thanks,
J&G Motors

Dear J&G,
Congratulations on having your financial affairs in such good order and an early welcome to the Sunshine State. At the current national average of 7.88 percent for a 48-month auto loan, you’d spend about $7,600 in interest on two four-year auto loans totaling $45,000. Although you may be able to get a lower rate in Tampa, the point to consider is that you’d have to earn a higher after-tax return on your investments to come out ahead by financing your cars.

To my mind the best thing about buying a new car is that you’ll know exactly how it has been maintained and driven from the day you drove it off the lot. You pay a big price for that knowledge in how the car’s value depreciates over the first few years. Bankrate’s Auto Decision Tools can help you decide on buying new vs. used and Bankrate’s basics discusses the new vs. used decision in greater depth. Edmunds has a True Cost to Own calculator that estimates the depreciation over the first five years along with the other costs of car ownership.

Buying one new car and one used car is a reasonable compromise if you decide that taking the depreciation hit on two cars is a concern. Lease finance companies will offer certified used vehicles with extended warranties that can mitigate your concerns when buying a used car. This Bankrate feature has more information about certification programs.

Since you’re new to buying cars, hiring a buyer’s agent could help you save some money on your car purchase. Haggling with a car dealer over price is a hassle, but you’ll leave money on the table if you don’t invest some time in finding out dealer costs, incentives, and rebates available on the cars that you’re thinking about buying. An earlier column provides more information on getting the best price on a new car.