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Kevin from Minneapolis recently called into “The Ramsey Show” with a question many people with solid finances might ask: Should I pay cash for a car or keep that cash and finance it?
Kevin explained that he and his wife have a household income of $200,000, a net worth of around $700,000, and $75,000 in savings, enough to purchase a $30,000 to $40,000 certified pre-owned SUV. But he wondered if it made more sense to finance the car at a low interest rate and leave the cash in a high-yield money market account.
“I see some long-term benefit,” Kevin said. “Maintain a 4.5 to 5% savings account and also have the cash available if absolutely necessary.”
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One of the show’s co-hosts, Jorge Kamel, fell in numbers. “I don’t think you’re going to earn 5% on a savings account, and I think your used car loan is going to cost you more than that over the life of the loan,” he said.
On the other hand, co-host John Delony stepped in with a different kind of return on investment: peace of mind. “The return on investment I and my wife look for in shopping now is peace,” he said. “I’ll give up 2% of an extension here and there just to put my head on the pillow at night and fall asleep.”
Kamel also warned that financing a car can put buyers in a difficult situation if they ever need to sell it. “You can’t be underwater with a car you paid cash for,” he said. “If I needed to sell it for any reason, wanted to sell it, I could lose $10,000 within two years (if it’s financed).”
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While Kevin felt that financing could offer flexibility, Delony reminded him that signing a loan doesn’t actually allow you to “keep your money”; Now it’s from the bank. “You can hold it and pay them handsomely for the privilege of holding it, but it’s still theirs.”
Kamel echoed that point, adding that avoiding debt altogether creates breathing room for future decisions. “Living with the greatest margin possible will always be the best,” he said.
Both hosts agreed that Kevin and his wife were doing a fantastic job financially. Still, they advised him not to back down from the idea of possibly gaining a little more interest elsewhere.