Should I Finance or Pay Cash for a Car? The Smart Money Decision

Car shopping just got more complicated. With new car prices averaging nearly $50,000 and financing rates hitting 6-8%, the age-old question of financing versus paying cash has never been more important to your financial future.

Let's be real, buying a car is probably the second-biggest financial decision you'll make after buying a house. Yet most people put more research into their next vacation than they do into whether they should finance or pay cash for their next ride.

In a recent episode of Fox Hill Wealth Management's "Wealth Wisdom" podcast, financial experts Bill Ryan and Eric Benz broke down this crucial decision. Their insights might surprise you, especially if you've been following the "pay cash for everything" crowd on social media.

The Current Car Market Reality Check

Before we dive into financing strategies, let's acknowledge the elephant in the room: car prices are absolutely wild right now.

• New cars: Average price pushing $50,000

• Used cars: Average price around $25,000 (yes, really)

• Financing rates: 6.35% average for new cars, higher for used

But here's the thing about averages - they can be misleading. Manufacturers are still offering promotional rates to well qualified people in order to move inventory. Honda, for example, is currently offering 1.99% on specific models like the Ridgeline for the first 24-36 months. The Odyssey? 3.99%.

These deals exist because, frankly, some cars aren't selling well. And that creates opportunities for smart buyers.

The Liquidity-First Philosophy

When Bill was asked about his approach to car financing, his answer was refreshingly practical: "I'm real big on liquidity."

Here's his reasoning: If using cash to buy a car would wipe out your emergency fund, don't do it. Period.

"I don't want you to decimate your emergency savings just to buy a car," Ryan explains.

"You take that financing option, even if the interest rate is a little higher, because it gives you more options."

This isn't about being afraid of commitment; it's about keeping your financial options open. Cars are depreciating assets that you can't easily tap for cash in emergencies. Your investment accounts? You can access those in two days if you need to.

The Math Behind the Decision

Let's run some numbers that might make your head spin (in a good way):

Scenario: You're considering a $50,000 car

Option 1: Pay cash

• Immediate cost: $50,000

• Your emergency fund: Potentially depleted

• Investment opportunity cost: Whatever that $50,000 could have earned
  

Option 2: Finance at 4% and invest the cash

• Monthly payment: ~$747 for 5 years

• Total interest paid: ~$6,000

• If you invest that $50,000 at 10% annual returns: You'd make about $59,000 over five years
  

The math is pretty clear, but there's more to consider than just numbers.

The "Expensive Hobby" Reality

Ryan puts it bluntly: "It's an expensive hobby if you want that nice car."

He ran the numbers for listeners: Buy a $10,000 cash car instead of financing something fancy, and invest that $747 monthly payment at 10% returns. After five years, you'd have an extra $59,000.

"That's just the compounding for the first five years," Justin Obey notes in the podcast. "We all know that compounding gets better and better over time."

But here's where Fox Hill's approach differs from the hardcore "drive a beater forever" crowd - they acknowledge the human element.

When Financing Actually Makes Sense

The Fox Hill team isn't advocating for financing every car purchase. Their advice is more nuanced:

Finance when:

• You can get a low promotional rate (under 4%)

• You won't deplete your emergency fund

• You're still contributing to retirement accounts

• The monthly payment fits comfortably in your budget

  
  

Pay cash when:

• You have substantial emergency savings left over

• The financing rate is unusually high

• You're buying a reliable used car you'll drive for 10+ years

The Safety Factor Nobody Talks About

Eric Benz brought up something that pure "financial optimization" discussions often miss: modern safety features.

"The technology and safety features in new cars—at least anecdotally for our family—made it worth it," he shares. "Automatic braking on the highway literally saved my life."

Features like:

• Automatic emergency braking

• Lane departure warnings

• Blind spot monitoring

• Advanced airbag systems

These weren't available in older vehicles, and you can't put a price on safety, especially for families.

Negotiating Like a Pro

One key insight from the podcast that many people overlook: those financing terms are negotiable.

"The rates you get are negotiable, and a lot of times the dealer has weight they can toss around to make it happen," Obey explains.

"You could say, 'I'm not buying the car unless you give me a 4% rate,' and for the person with the right credit, they'll do it."

The Hidden Costs Everyone Forgets

Before you make any decision, factor in the "extras" that can blow up your budget:

• Insurance: Much higher on new/expensive cars

• Excise taxes: In Massachusetts, you could owe $800-1,200 annually

• Sales tax: Can add thousands to your final cost

• Maintenance: Luxury vehicles cost more to service

"Other than your house, it's your biggest expense," Ryan notes. "If you can somehow keep those costs down and put it to an investible asset for you, that will compound to the point where you can buy six of them later on."

What About Leasing?

The team touched on leasing too: "The person who wants to get a new car every three years should probably just lease."

But they're quick to add the reality check: "If it's a thousand dollars a month lease, it adds up. If you avoid that and invest in the market—it's a significant opportunity cost."

The Bottom Line: It's About Your Bigger Picture

The Fox Hill approach to car financing isn't about following rigid rules—it's about making decisions that align with your overall financial strategy.

The winning formula:

1. Keep your emergency fund intact

2. Don't sacrifice retirement contributions for a car payment

3. Buy the most reliable, safe car you can afford

4. If you finance, get the best rate possible

5. Drive it until the wheels fall off (safely)

   
   

Remember, every dollar you don't spend on car payments is a dollar that can compound in your investment accounts. Over decades, this approach can literally make you hundreds of thousands of dollars wealthier.

Listen to the Full Episode:

This article covers the key insights from Fox Hill Wealth Management's deep dive into car financing decisions. For the complete discussion, including specific negotiation tactics, current market opportunities, and detailed scenarios, listen to the full "Wealth Wisdom" podcast episode.

Listen now on Spotify, Apple Podcasts, or YouTube

Want to run the numbers for your specific situation? Fox Hill's financial advisors can help you model different scenarios and see how your car-buying decision fits into your broader financial plan.

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Remember: The goal isn't to never enjoy nice things—it's to make smart decisions that let you enjoy even nicer things later while building real wealth along the way.