A few years ago, I walked into a car dealership to buy my first new car. I saved enough money to pay full cash.
Two hours later, I walked out of the dealership with a car loan. Some people might call me crazy, but I think I made a smart financial decision.
Here’s why: I ended up financing my car with a 0.9%, 36-month loan, and the pros outweighed the cons.
Build Credit History
At the time I took out my car loan, I had a great credit score. That’s how I qualified for a 0.9% loan. What I didn’t have was a diversified credit history.
Prior to taking out my car loan, I only had a couple of credit card accounts. In order to continue building my credit history, I decided to add an installment car loan to my credit report.
The different types of credit you hold, also known as your credit mix, account for 10% of your credit score. I wanted to boost that 10% in case I ever wanted to buy a home in the future. (You can see where your credit stands by viewing two of your free credit scores, updated every 14 days, on Credit.com.)
That said, if I hadn’t qualified for the “super low interest rate” car loan, taking out a car loan just to increase my credit score probably wouldn’t have been worth the hassle or the interest payments.
Use The Cash Wisely
Arbitrage, or the act of taking advantage of pricing opportunities, allowed me to make money off my car loan. At the time, I had the cash that I was going to use to buy my car in a high-yield savings account.
I was earning 1.1% interest on my money, so even after taxes, I was still earning a little bit more keeping my money than paying the .09% loan interest.
I could have invested my money hoping for a greater reward, but I could have likewise risked losing the bulk of it. Instead, I played it safe with a savings account and risked losing money only to inflation.
Today, some car dealerships offer “0% interest rate” loans. If you could get one of those and stash your cash in a “1% interest rate” savings account at an online bank, for instance, you’d be making even more than I did six and a half years ago.
Keep Up Reserves
Other advantages? I had direct access to the cash and could use it if I had a dire emergency. If you are the type who would be the least bit tempted to use the cash on say, a shopping spree, then it might be best to pay cash for your car and be done with it.
Debt Can Always Be Paid
The best part about taking out a car loan with cash in the bank was that I could pay it off at any time. In fact, I got sick of sending in monthly payments a few months before the end of my car loan term. So I simply sent in the balance due and paid off the entire loan.
I could have done that at any point in time, or simply made the monthly payments until the car was paid off. The power was in my hands because I had the cash.
Debt Isn’t Always Bad
Not all debt is bad. Sometimes, if you’re able to score a great deal, debt can be used to bolster your financial position. As always, if you’re considering taking out a loan, you should shop around for financing. Don’t just hope that the dealership will offer you the best deal.
Local credit unions may be a smart place to start. The key to making this work is to be smart, avoid temptation and reassess your financial situation routinely. You can coast or hit the pedal to the metal.