Ask the Bitches: Should I Get a Loan Even Though I Can Afford To Pay Cash?

Let’s talk about the logistics of paying for large purchases. As in: When should I get a loan? And how big should that loan be? Should you ever forego a down payment or paying with cash even when you can afford it?

Unlike the suitcase full of dirty laundry you brought home from that conference three whole weeks ago… let’s unpack this! And our favorite way to unpack a problem is with a real-live question from a real-live reader with a real-live dilemma:

Hello sage bitches. My trusty old car is on its way out, and I’m going to need to get a new one soon. I do have enough money in savings to buy it outright without a loan (though it would put a… substantial dent in those savings), but some family members keep saying it might be a better idea to see if I can get a low-interest loan instead, because it “would be good to have paid off a big loan.” I do have a credit score of ~800, so it’s possible that I could get a decent loan, and I have heard a lot of vague things about how it’s good for your credit to have payed off a big purchase before, but something in me hates the idea of having to pay a higher total sum than I have to. Any advice?

An anonymous yet glorious citizen of Bitch Nation we’ll call Chickadee

In other words: “Should I get a loan just to improve my credit score even if I can afford to pay cash?”

Our answer…

In this case, step one is: IGNORE YOUR FUCKING FAMILY.

This isn’t a hard-and-fast rule. Sometimes family members have good financial advice! (Especially if their last name is “Buffett” and they live in the greater Omaha area.) Rather, our rule is to ignore financial advice from anyone who doesn’t take into account the nuances of your personal situation.

Chickadee’s family clearly doesn’t understand the full extent of their situation. They’re making a recommendation (“take out a loan!”) based on a faulty premise (“because you need to improve your credit!”). In reality, Chickadee has a perfect credit score! And it’s pretty hard to improve on perfect! (Though it has been done.) They don’t need to beef up their credit score. So therefore… do they really need to take out a loan?

This blind recommendation could be due to a lack of communication among family members. No judgment there—I generally don’t listen to a word my own father says unless it’s “adjust the stop on that table saw,” yet I still love that carpentry-obsessed oldster.

But it also could be something a little more worrying. I suspect that Chickadee’s family simply misunderstands the purpose of credit, and therefore, debt. After all, this stuff is complicated. Sometimes you just need an impartial juror!

Understand the point of good credit

Here are two ridiculously simplified tenets of personal finance:

  1. The point of having good credit is to get fair loans when you need them.
  2. The point of getting a loan when you don’t need one is to build good credit.

Chickadee has excellent credit AND can afford this car without a loan. So getting an auto loan right now would be a neutral move for their credit score. But more importantly, it would cost them extra money in interest on top of the price of the car. Completely unnecessarily.

If they couldn’t afford to pay cash, a loan would be clutch! And with a credit score of around 800, they’d probably get pretty great terms. Sure, they’d pay interest on the auto loan. But that’s the price they’d pay to borrow the money. Totally legit.

If, on the other hand, their credit score were a lowly 400, then taking out an auto loan could give them the opportunity to repair that score. The terms wouldn’t be as generous as they would be with a high credit score (i.e., they’d get a higher interest rate and therefore pay mo’ money). But repaying debt on time is a proven way to drive up your credit score.

We go into exhausting detail on how credit works here:

So does this mean Chickadee absolutely should not get a loan to buy a car? Well, that depends on this next bit.

Understand your personal risk tolerance

Say it with me now: personal finance is personal. That means that when it comes to situations like this, there is no one-size-fits-all-(or-even-most) solution.

Taking on debt is risky. It means you’re betting on your current financial situation remaining the same or even improving, but definitely not worsening. But there’s always a risk with debt that your situation will change for the worse. In that case, you might regret taking out such a large loan when you didn’t have to.

You also might regret spending all your savings when you could’ve gotten a loan. As the great philosopher and shrimp magnate Forrest Gump once said, “Shit happens.” And when it does, you might be grateful you didn’t spend every last dime on a car.

If you have LOW risk tolerance…

Get a loan for part of the cost.

If you don’t want to completely liquidate your savings, you can pay for the car partially with cash up front, and get a small loan for the rest of the cost of the vehicle. That’s a perfectly reasonable and cautious choice!

Whether you pay for half, or two thirds, or 25%… that’s up to you, my friend. Your personal level of risk tolerance will determine how much of your savings you want to send merrily off into the clutches of the car dealership. And, therefore, how large of a loan you’ll need to complete the transaction.

Note that I did NOT recommend getting a loan for the entire cost of the car. Down payments are important, y’all!

If you have HIGH risk tolerance…

Pay for the purchase entirely with cash.

It’s the cheapest way to finance your vehicle and it’ll save you the most money over time. After all, you’ll be paying exactly what it says on the price tag (plus tax—THANKS OBAMA), without a single cent of interest.

Besides, you’ve already proven you’re a talented saver! If you keep saving at your current rate, you’ll build back what you spent on the car in no time. Sure, you run the risk of regretting liquidating your entire savings fund when some unforeseen emergency pops up before you’ve padded your pockets with Benjamins again. But if you have a high risk tolerance, that’s a risk you’re willing to take!

Both are valid choices. But you should make that choice based on your personal risk tolerance where your savings are concerned, not based on “how it’s good for your credit to have payed off a big purchase.” Because your credit is great.

Good luck to Chickadee and all our darling baby bitchlings who are deciding on loans! Here’s more of what we have to say about making choices like this and buying a whole ass car:

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7 thoughts to “Ask the Bitches: Should I Get a Loan Even Though I Can Afford To Pay Cash?”

  1. Perfect timing on this advice! I’m in almost the same situation as Chickadee, except I’m getting ready to go to grad school and need to decide whether to pay off my car loan with the cash I have now, or save that cash to deal with tuition payments. It’s definitely a decision of risk tolerance and figuring out which option is going to cost me more via interest rates in the long run.

  2. This is almost the same situation I found myself in this month – however I didn’t bother to ask my family for their input :). I had my parked car totaled suddenly by a hit and run driver (likely impaired) and needed to make a decision quickly regarding buying a new car. And since the used car market is nearly as bad as the housing market right now, I had to be ready to move quickly once I decided what car I wanted to buy. I did some preliminary investigating to decide what was available, how much I felt okay spending and what might be worth a higher price tag (or not). After I found only 3 cars within 80 miles that fit my criteria I also expanded to look at the online dealers that will, ship cars to me.

    I had the cash available in saving to make the purchase but was also considering an auto loan to free up some of that cash to invest in the market with the premise that I’ll likely get (much) more than a 4% return on that money over the next three years (note that past performance is not a guarantee of future performance).

    Just before making an inquiry to Carvana about a vehicle, I remembered Craig and his list and figured I should check to see if I got any additional local options. Low and behold I found a listing for the exact model I was looking for, but higher trim option and $1500 less than the nearest local dealers vehicle, and not red. I’m not sure why I felt strongly about not buying a red car. The thing is that I had to be ready to pay with a cashiers check, in full and I knew I needed to move fast. The seller was showing it to another potential buying the next day.

    Even though I had the cash, it wasn’t all at one bank!! I had most in my high yield savings, a good amount in my USAA checking but the only way to get a cashiers check THAT DAY, was through my local bank account with only 1/5 of what I needed on deposit at the time. I learned that to get a auto loan I would need the VIN and other details of the vehicle so I ended up getting a personal loan from the bank. The interest rate was not good (9%!!??) but as I did not intend on carrying the loan it wasn’t a big deal and this allowed me to walk out that afternoon with a cashiers check that day for the full purchase price.

    After leapfrogging my money between my different bank accounts I was able to pay off the loan within a week with about $15 in accrued interest for the convenience. I really appreciate that I was able to get access to the money that I needed through my credit union so quickly and easily.

  3. Chickadee might also be able to negotiate a lower price on the car by paying in cash upfront, rather than taking a loan, which would be a cost savings over and above the interest they did not pay! I had good luck with email/telephone negotiating for cars before even setting foot in a dealership. Lots of good advice on how to do this through Google! (Works especially well for folks who aren’t cis het men! The line I used over and over was ‘make it worth my while to come to your dealership and see this car’ and between a combination of email/phone + in-person, overall got $1000 taken off the vehicle price)

  4. We’re having a BIG home repair done. I could afford to pay cash for the whole thing, but it would wipe out my OH SHIT savings fund completely. But they are offering a 18-months-same-as-cash (interest charged if you take longer, of course) loan. My monthly operating expenses won’t let me take out the whole cost and pay it back in 18 months, but they CAN absorb the repayment of about 1/3 of the cost. Voila: I keep some of my OH SHIT money for an emergency, AND I get to use somebody else’s money for free for a year and a half. WIN-WIN.

  5. It’s also important to consider the interest rate you can get for the loan relative to what you’re getting in your HYSA (your many thousands ARE in a HYSA, right???). I know rates have changed dramatically, but when I bought my car, my interest rate for the loan was 1.9% and I was getting 2.5% for my HYSA. It would’ve actually cost more to pay in cash in terms of lost interest, but if you’re looking at <1-2% net difference in what you’re being charged vs what you’re being offered, my vote is to take the loan and have the security of the liquidity.

  6. Well I don’t speak French, but…I’m with Piggy on the “IGNORE YOUR FUCKING FAMILY” line for this hahaha. I’m not sure we’ve talked as much about the car though.

    1) Chickadee will be buying a depreciating asset. Regardless of what the interest rate is, taking out a loan to get it will set Chickadee back financially even more. I read somewhere that the value of a new car drops like 10% the moment you drive it out the shop door. Is buying the car a financial decision? How does the money lost on depreciation and interest compare to the potential credit score gains? Is getting a car absolutely essential? Are they using it to get to work to earn dough or to just get around? These questions obviously depend on Chickadee’s personal circumstances.

    I know some things we buy with loans aren’t always as bad if they end up being an investment that makes you money (like those rare plants you bought to propagate in your home then sell online don’t count lol) or improves your earning power (like, dare I say it, student loans).

    2) Car repayments can affect Chickadee’s credit score in a good way AND in a bad way. If disaster strikes and Chickadee doesn’t have enough funds to cover the emergency, this could compromise their ability to meet the car loan repayments and then ironically end up damaging their credit score anyway. Late repayment fees and penalty rates on the loan might also come into the picture at the same time they’re dealing with said hypothetical emergency. IMO that’s a pretty steep cliff to potentially fall from.

    3) Does Chickadee know that credit scores can also be built up in other ways? E.g. Utility, phone, medical, insurance, rent bills, etc. I haven’t looked more into this, but I’m sure Google’s got the answers 🙂

    Also I appreciate what Piggy’s written on risk tolerance, but I feel like this has got more to do with why Chickadee wants to get the car and and why they want to get a loan in the first place.
    P.S. Someone please tell me if I’m starting to sound like an overly-sensible, risk-averse grandma…

  7. Interesting. I heard (but to be honest did not do any research into the truth of) that when you pay off a home loan/mortgage it can actually HARM your ability to get other credit. Which struck me as totally ridiculous and bullsh*t but that doesn’t mean that it’s not true. From that perspective, paying off a large purchase would be hurting your credit. Though that might be exclusive to the condition that you don’t also have a steady paycheck coming in at the same time… like you’re FIRE’d and have paid off your mortgage and want to get a new one. Still doesn’t make sense, but it’s maybe marginally less ridiculous?
    I’m not a huge fan of paying interest but liquidity is awesome, and so a loan could make sense to keep some of your emergency fund free. Full disclosure: I have a fairly low risk tolerance!
    But you are in a good situation, and good luck with the choice you pursue!

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