originaljohn

This is a follow-up on an earlier thread. I am interested in purchasing my first new car and have the option to buy with cash. Should I go ahead and get a small loan (even though it will cost more in the long run) just to build up my credit history?

RoadRager

Depends on the rate. I'm getting 1.9% so I will finance and invest the money that I would've paid.

shadyraven

once you factor in your capital gains. I'm of the school of going without until you can pay all, or as close as possible to all, up front. Sounds like you can afford to pay this car off on delivery. If I were you I'd buy it outright, then pay myself back as if I had a car payment, only in this case the payment would be to me and I collect the interest.

kk13

Some considerations:

1) Alternative return: if you can get a higher return than your financing rate plus your income tax rate you should finance and invest the money. Example: if you pay 7%, you would need to make 10% since you have to pay 28% of the 10% in taxes. Remember that the 7% is set while you are just guessing you can get >10% so you should allow some margin for your confidence level. You don't have to adjust for income tax if you use a home equity line of credit since interest is tax deductible.

2) Rates for other loans: You should also consider if you think you would need this money any time during the repayment term and if you did what rate would you have to pay on that money. If you are positive you will not need the money you don't have to worry, but if you might you should consider whether you could get as good a rate as the car loan versus using a credit card at 19%.

3) Psychology of saving versus loan payments: For me it is much easier to make a payment versus voluntarily setting aside money to repay yourself. You always say you will set aside that money each month but it is very easy to say "I'll just skip this one month" and then at the end of five years to only have a fraction of what you would have had if you would have invested the initial purchase price.

April

if buying the car ? If so, buy on time, and invest the extra money in something that appreciates - cars usually depreciate. Same applies to leasing.

originaljohn

I understand the trade-offs of buying the car outright (and saving the interest) vs. using the cash to invest or avoid other loans. The break-even point is when the investment return equals the interest saved. The higher the investment retun beyond that point, the more reason to finance.

I guess April helped me to articulate the real issue: from the standpoint of a financier...how do i know if my credit needs building?

I've never financed a car -- only gotten used ones -- and this would be my first. I wonder whether I should finance specifically to build my credit in the event that I need the "depth of credit" for later (a future car purchase that I dont have the cash for, or a house perhaps).

Thanks so much for everyone's insights!

April

If you buy a fridge or other appliances, put it on credit, even though you can pay cash. Take 6 months to a year to pay it off, so that there is a history. Run your credit every year or so to check it. Don't have businesses run it too often as the repeated inquires can lower the score. Let them run a report, only when you intend to buy. If you want to negotiate at multiple places, run the credit yourself before you go, and take a copy with you. It should be 30 days current. When you close the deal, they will still need to run a report for their own records, but you will have saved yourself a few points.

Having a home helps, but remember that a home can't be driven away, so it isn't quite like buying a car;-)

originaljohn

Interesting. How about student loans? Thx!

April

They show up on the report and carry some weight. However, not as much as other items.

originaljohn

Hmm. OK. Thanks for the info