A few months ago, I explained why my husband and I make extra payments on our 15-year home loan at 1.99%. Not surprisingly, the internet lost their minds, and I received some angry and aggressive emails from readers (all men) who said I was doing things wrong. That's despite the fact that I am already financially independent at age 45.
One would think that someone being financially responsible, debt-free (aside from a very small mortgage), and economically set in their mid-40s would satisfy readers, but I guess you just can't make everyone happy all the time.
I wrote about how my husband and I paid cash for a new SUV even though the dealership was offering 0% APR financing. This truly upset some readers who must really love car loans. One person even emailed me 1,000 words on how not taking advantage of a 0% auto loan is financially irresponsible, which was pretty funny but not surprising considering America's obsession with debt.
Regardless, I'm very happy with my decision to not take out a car loan, just like I'm happy to prepay my low-rate mortgage each month so it's paid off in the next 4½ years. Here's why paying cash for a car (if you can afford it) can make a lot of sense.
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Saying no to car payments and debt
In my eyes, the offer for 0% financing for an SUV isn't free money — it's a ball and chain of debt we have already decided we don't need in our lives. We haven't had any kind of loan other than a mortgage (or any credit card debt) for most of our adult lives, so I am not going to start borrowing money now.
In addition to debt freedom, I prefer avoiding the drag on my monthly take-home pay a car payment requires. My husband and I are self-employed with a highly variable income, so I don't want to commit to making monthly payments for the next five to seven years. And since I had the $30,000 I needed to buy the new SUV we wanted (after taking our nice trade-in into account), I was more than happy to avoid debt and pay cash for the new SUV instead.
The bottom line: Just because you can borrow money doesn't mean you should. At the end of the day, there are all kinds of 0% APR offers out there through car dealerships, retail stores, buy now, pay later companies, and more.
Heck, you have probably read you can now make zero-interest payments on DoorDash orders through a BNPL company called Klarna.
Should you? I think not.
Spending what you can afford
Another sneaky fact about auto loans is that they make it far easier for consumers to buy cars they can't actually afford. They do this by spreading out the cost of the car over a period of three to five years and potentially longer. According to Experian's State of the Automotive Finance Market report from Q4 2024, the average loan for a new car lasts for almost 68 months. And remember, that's just the average. Yikes!
According to the report, the average new car payment is $742 a month, which is stunning when you consider people are making that payment for such a long timeline.
While auto loans make it easier for consumers to spend more than they really should, the same cannot be said when you pay for a car in cash. And when you have the money in the bank to pay for a car outright, you're much more likely to shop for vehicles within your ideal price range to begin with.
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Rocket Money appWhen you might want to finance a car instead
While it made perfect sense for me to pay cash for a new SUV, there are situations where it might make sense for you to do something different. That's perfectly OK, and it underscores the fact that personal finance is always personal.
For example, you might want to finance a new or used car if:
- You need a car but don't have the cash to spare. If you need a new or used car and you don't have any savings to speak of, an auto loan can help you get behind the wheel. Also, it doesn't make sense to use up your limited cash if you don't have ample emergency savings or any funds set aside for a rainy day.
- You want to use your excess funds for investing or other goals. It can also make sense to finance a car at a low rate (or 0%) if you want to use your cash reserves to invest for the future. This is especially true if you need to catch up on retirement savings or college savings, or if you're behind on achieving other financial goals.
- You need to build credit. A major downside of paying cash for a car is the fact you won't get the chance to build credit with the purchase. While there are more affordable and free ways to build credit for the future, making on-time payments on an auto loan can definitely help.
Don't know where to start? Consider a financial advisor.
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